Q4 2021 KKR Real Estate Finance Trust Inc Earnings Call
Speaker 1: Good morning and welcome to the KKR Real Estate Finance Trust Inc. 4th Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero.
Good morning, and welcome to the KKR Real estate Finance Trust, Inc. Fourth quarter 2021 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
Speaker 1: After today's presentation, there will be an opportunity to ask questions.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
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Please note this event is being recorded.
Speaker 1: I would now like to turn the conference over to Jack Switala. Please go ahead.
I would now like to turn the conference over to Jacks with Paula. Please go ahead.
Speaker 1: Great, thank you operator. Welcome to the KKR real estate finance trust earnings call for the fourth quarter of 2021. We hope that all of you and your families are safe and healthy.
Great. Thank you operator, welcome to the KKR Real estate Finance Trust earnings call for the fourth quarter of 2021, we hope that all of you and your families are safe and healthy as the operator mentioned this is Jack Switala today I'm joined on the call by our CEO , Matt Salem, Our President and C O O patch.
Speaker 2: As the operator mentioned, this is Jack Switala. Today, I'm joined on the call by our CEO , Matt Salem, our President and COO, Patrick Madsen, and our CFO , Mustafa Negadi.
Rick Mattson and our CFO Ms Stephanie Gotti.
Speaker 2: 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.
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.
Speaker 2: This call will also contain certain forward looking statements which do not guarantee future events or performances.
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-K for cautionary factors related to these statements.
Speaker 2: Please refer to our most recently filed 10-K for cautionary factors related to these statements.
Speaker 2: Before I turn the call over to Matt, I will provide a brief recap of our results.
Before I turn the call over to Matt I will provide a brief recap of our results.
Speaker 2: For the fourth quarter 2021, we had gap net income of $35.2 million, or $0.59 per share. Distributable earnings this quarter were negative $2.9 million, or negative $0.05 per share, due to $0.55 per share in realized losses on loan write-offs this quarter.
For the fourth quarter 2021, we had GAAP net income of $35 $2 million or <unk> 59 per share.
Distributable earnings this quarter were negative $2 $9 million or negative <unk> per share due to 55 per share and realized losses on loan write offs this quarter.
Speaker 2: Book value per share as of December 31, 2021 increased to $19.37, which includes the cumulative CECL impact of $0.39 per share, as compared to $19.09 per share as of September 30.
Book value per share as of December 31, 2021 increased to $19.37, which includes the cumulative Cecil impact of 39 per share as compared to $19 nine per share as of September 30th.
Speaker 2: This increase in book value is largely driven by a CECL reversal benefit, along with an accretive equity offering in October of 2021. This is the seventh consecutive quarter in which we have grown book value per share.
This increase in book value was largely driven by seasonal reversal benefit along with an accretive equity offering in October of 2021.
This is the seventh consecutive quarter in which we have grown book value per share.
Speaker 2: Finally, in mid-January, we paid a cash dividend of 43 cents per common share with respect to the fourth quarter.
Finally in mid January we paid a cash dividend of <unk> 43 per common share with respect to the fourth quarter.
Speaker 2: Based on yesterday's closing price, the dividend reflects an annualized yield of 8.1%. With that, I'd now like to turn to the next slide.
Based on yesterday's closing price the dividend reflects an annualized yield of eight 1%.
With that I'd now like to turn the call over to Matt.
Speaker 3: Great. Thank you, Jack. Good morning, everyone, and thank you for joining the call today.
Great. Thank you Jack good morning, everyone and thank you for joining the call today.
Speaker 3: K-Rip delivered record originations this quarter, closing on 18 loans for $1.8 billion to cap off a record year of $4.8 billion.
Tariff delivered record originations this quarter closing on 18 loans for $1 8 billion to cap off a record year of $4 8 billion.
Speaker 3: In 2021, we grew our portfolio by approximately 35% from $5 billion to start the year to $6.8 billion as of year end.
In 2021, we grew our portfolio by approximately 35%.
From $5 billion to start the year to $6 8 billion as of year end.
Speaker 3: I'll highlight four major drivers contributing to our increased activity.
All right I'll highlight four major drivers contributing to our increased activity.
Speaker 3: First, the size of our real estate credit team is now 53 professionals, an increase from 24 pre-COVID, and our senior investment team has grown. We now have eight senior originators with deep borrower and broker relationships. In 2021, we originated 37 loans, 24 of which
First the size of our real estate credit team is now 53 professionals and increase from 24 pre Covid and.
And our senior investment team has grown we now have eight senior originators with deep borrower and broker relationships.
In 2021, we originated 37 loans.
Four of which were to repeat borrowers.
Second word.
Speaker 3: We've grown our suite of CRE lending products across KKR and can offer a host of solutions to our clients.
We've grown our suite of CRE lending products across KKR. It can offer a host of solutions to our clients.
Speaker 3: fixed rate, floating rate, and core to value add. This broader product suite helped drive over 14 billion.
Fixed rate floating rate and core to value add.
This broader product suite helped drive over $14 billion in.
Speaker 3: total KKR real estate credit originations in 2021, which has led to broader and
In total KKR real estate credit originations in 2021.
Which has led to broader and deeper relationships.
Speaker 3: K-REF is well positioned to capitalize on this increased connectivity with the first priority in the allocation waterfall for senior floating rate commercial real estate loans.
<unk> is well positioned to capitalize on this increased connectivity with the first priority in the allocation waterfall for senior floating rate commercial real estate loans.
Third.
Speaker 3: We've leveraged the KKR platform to further diversify our capital.
We've leveraged the KKR platform to further diversify our capital base.
Speaker 3: including upsizing existing facilities, such as our CLO and Term Loan B, at attractive terms.
Including upsizing existing facilities, such as our CLO and term loan b at attractive terms raising.
Speaker 3: raising bespoke fully non-mark to market financing, and strategically increased our permanent equity base.
Raising the spoke fully non mark to market financing.
And strategically increased our permanent equity base.
Speaker 3: through issuing fixed-for-life preferred shares and raising accretive common equity.
Issuing fixed for life preferred shares.
And raising a accretive common equity.
Fourth and finally, we.
Speaker 3: We've benefited greatly from being embedded within the broader KKR organization.
We benefited greatly from being embedded within the broader KKR organization.
Speaker 3: We have unique access to economic views from our global macro.
We have unique access to economic views from a global macro team.
Speaker 3: which are particularly valuable to us in a changing interest rate environment.
Which are particularly valuable to us in a changing interest rate environment.
Speaker 3: and real-time market and property level data from our real estate private equity.
And real time market and property level data from a real estate private equity team.
Speaker 3: And from an alignment perspective, KKR has been our largest shareholder since inception and owns 23% of our shares today.
And from an alignment perspective.
<unk> has been our largest shareholder since inception and owns 23% of our shares today.
Speaker 3: These factors help drive originations higher than $1 billion in both the third quarter and fourth quarter.
These factors helped drive originations higher than $1 billion in both the third quarter and fourth quarter.
Speaker 3: And we expect a similar pace of origination going forward.
And we expect a similar pace of originations going forward.
Speaker 3: Still, with record growth, our credit DNA remains very much the same. Forty-six percent of our...
Still with.
With record growth our credit DNA remains very much the same.
46% of our portfolio is in multifamily.
Speaker 3: 28% in office, of which 91% is Class A.
28% and office of which 91% as class a.
Speaker 3: We made 18 loans in the fourth quarter, totaling $1.8 billion.
We made 18 loans in the fourth quarter totaling $1 8 billion.
Speaker 3: 13 were in the multifamily segment representing 64% of the fourth quarter origination.
13, when the multifamily multifamily segment, representing 64% of the fourth quarter originations.
Speaker 3: Two were in office and life science each, representing 18 and 14% respectively.
Two were in office and life science, each represented representing 18% and 14% respectively.
Speaker 3: And we originated one hospitality loan for 66 million, representing 4% of fourth quarter originators.
And we originated one hospitality loans for $66 million, representing 4% of fourth quarter originations.
Speaker 3: These loans were underwritten in attractive, low double digit, weighted average IRR, which is in line with our target returns pre-COVID.
These loans were underwritten at attractive low double digit weighted average IRR, which is in line with our target returns pre COVID-19 .
Speaker 3: In the fourth quarter, we received $680 million in repayments across six loan repayments and three partial paydowns.
In the fourth quarter, we received $680 million in repayments across six loans across six loan repayments and three partial pay downs.
Speaker 3: We messaged the market that the back half of last year would have higher repayments.
The message to the market that the back half of last year would be higher would have higher repayments.
While always difficult to predict.
Speaker 3: We now expect a more normal repayment rate of around $2 billion per year.
We now expect a more normal repayment rate of around $2 billion per year.
Speaker 3: with a modest weighting toward the first half of 2020.
With a modest weighting towards the first half of 2022.
Speaker 3: Since the beginning of COVID, our earnings have benefited from LIBOR floors. However, these floors are transitioning through repayments and portfolio growth.
Since the beginning of Covid.
Earnings have benefited from LIBOR floors. However, these sports are transitioning through repayments and portfolio growth.
Speaker 3: Our new originations have floors set close to zero.
Our new originations have floors set close to zero.
Speaker 3: In the coming few quarters, we expect income to become positively correlated to increases in short-term interest rates.
In the coming few quarters.
We expect income to become positively correlated to increases in short term interest rates.
Additionally.
In the midst of the rate environment.
Speaker 3: We are constructive on the senior secured loan market backdrop.
We are constructive on the senior secured CRE loan market backdrop.
Yeah.
Speaker 3: We have already seen robust activity in January and have nearly 900 million of loans either closed or under exclusivity subsequent to quarter end. static
We have already seen robust activity in January and have nearly $900 million of loans, either closed or under exclusivity subsequent to quarter end.
Multifamily loans comprise much of our pipeline.
Speaker 3: but we expect to be active in some of the gross segments such as life science and industrial, which now represent 9% and 4% of our portfolio respectively.
But we expect to be active and some of the growth segments, such as life science, and industrial which now represent 9% and 4% of our portfolio respectively.
Speaker 3: I want to close by saying that what has been a record quarter and year, our portfolio is stronger than it has been since
I want to close by saying that in what has been a record quarter and year.
Our portfolio is stronger than it has been since the start of Covid.
Speaker 3: The Portville is 100% performing, 100% floating rate, with a rated average LTV of 68%. At the beginning of the pandemic, the Portville area is
The portfolio is 100% performing.
100% floating rate.
With a weighted average LTV of 68%.
At the beginning of the pandemic, we placed seven loans on our watch list.
Speaker 3: And today, only three risk-for rated loans remain, and each of those has positive momentum.
And today only three risk four rated loans remain in each of those has positive momentum.
Speaker 3: Lastly, on the personnel front, I want to take a moment to thank our CFO , Mustafa Negati, who will be leaving us in early March to pursue other opportunities.
Lastly on the personnel front.
I want to take a moment to thank our CFO .
Got it.
He will be leaving us in early March to pursue other opportunities.
Speaker 3: Mustafa has been an integral part of our team and has made significant contributions since joining in 2018. We wish him well in his future endeavors. With that, I'll leave it at that.
The staff has been an integral part of our team and has made significant contributions since joining in 2018.
And we wish him well in his future endeavors.
With that I'll turn the call over to Patrick.
Thank you, Matt and good morning, everyone.
Speaker 1: I'll first touch on our capital base, which has grown over the course of the last 12 months to support our $6.8 billion dollar funded portfolio as of year end.
I'll first touch on our capital base, which has grown over the course of the last 12 months to support our $6 $8 billion funded portfolio as of year end.
Speaker 1: On the liability side, we executed on a $350 million re-pricing and add-on to our Term Loan B in the fourth quarter.
On the liability side, we executed on a $350 million repricing, an add on to our term loan b in the fourth quarter.
Speaker 1: reducing our cost of capital relative to our inaugural issuance by 175 basis points.
Reducing our cost of capital relative to our inaugural issuance by 175 basis points.
Speaker 4: And just last week, we priced a $1 billion CRE CLO supported by 100% multifamily properties.
And just last week, we priced a $1 billion CRE CLO supported by 100% multifamily properties.
Speaker 4: with an investment grade advance rate of 84.75%
And investment grade advance rate of 80, 475%.
Speaker 4: This is our third CLO and our second issuance within the last six months.
This is our third CLO in our second issuance within the last six months.
Speaker 4: This transaction will result in approximately $850 million of new, matched term, non-mark-to-market, and non-recourse liabilities.
This transaction will result in approximately $850 million of Nu matched term non mark to market and nonrecourse liabilities.
Speaker 4: increasing our percentage of non-mark to market liabilities back above 75%.
Increasing our percentage of non mark to market liabilities back above 75%.
Speaker 4: CLO price to a weighted average running cost of capital of term SOFR plus 171 basis points before amortized fees and expenses.
The CLO priced to a weighted average running cost of capital of terms Sofer, plus 171 basis points before amortized fees and expenses.
Speaker 4: related going forward, we expect all our new loan originations and associated financings will be so for base.
Relate it going forward, we expect all our new loan originations and associated financings will be software based.
Speaker 4: While existing loans, financing facilities, and future borrowing on existing financings may remain in LIBOR until June 2023, 2021, the
While existing loans financing facilities and future borrowing on existing financings may remain in LIBOR until June 2023.
Speaker 4: we are actively managing the live or to SOFR transition with the goal of mitigating basis risk.
We are actively managing the LIBOR to software transition with the goal of mitigating basis risk.
Turning to other areas of our capital structure.
Speaker 4: In January , we raised approximately $155 million of gross proceeds through a follow-on issuance of our Series A preferred shares at a fixed-for-life cost of 6.5%.
In January we raised approximately $155 million of gross proceeds through a follow on issuance of our series a preferred shares at a fixed for life cost of six 5%.
Speaker 4: This permanent capital helps support a funded portfolio of $6.8 billion as of year end.
This permanent capital helped support our funded portfolio of $6 8 billion as of year end.
Speaker 4: which grew by over 950 million in Q4 on a net base.
Which grew by over $950 million in Q4 on a net basis.
Speaker 4: This raise along with the issuance of approximately 125 million in common equity in October 2021.
This race, along with the issuance of approximately $125 million in common equity in October 2021.
Speaker 4: which is a creative to book value by 22 cents per share.
Which is accretive to book value by 22 per share.
Speaker 4: helped grow our permanent equity capital base to approximately 1.5 billion today.
Helped grow our permanent equity capital base to approximately one 5 billion today.
Speaker 4: I also want to touch on the positive momentum we are experiencing with respect to our watch list.
I also want to touch on the positive momentum we are experiencing with respect to our watch list.
Speaker 4: The current portfolio has a risk rating of 2.9 on a 5 point scale. A slight improvement from 3.0...
The current portfolio has a risk rating of two nine on a five point scale.
Slight improvement from three <unk> last quarter.
Speaker 4: and notably, 94% of our loans are now risk-rated, three or better.
And notably 94% of our loans are now risk rated three or better.
Speaker 4: an improvement from 91% last quarter and from 84% as of year end 2020.
It was an improvement from 91% last quarter and from 84% as of year end 2020.
Speaker 4: At the beginning of the pandemic, we placed seven loans on the watch list. And today...
At the beginning of the pandemic, we placed seven loans on the watch list and today only three remain.
Speaker 4: Most recently in January , our Brooklyn-based hospitality loan, which was originated in January 2019, was repaid in full through a property refinance with a money-setter bank.
Most recently in January our Brooklyn, based hospitality loan, which was originated in January 2019 was repaid in full through a property refinance with a money Center bank.
Speaker 4: In December , we took title to the Portland retail property, which we had discussed on our
In December we took title to the Portland retail property.
Which we had discussed on our Q3 call.
Speaker 4: to capitalize the property through a joint venture with our partners at Urban Renaissance Group, or URG.
To capitalize the property through a joint venture with our partners at Urban Renaissance Group, where you RG and.
Speaker 4: and are beginning the planning phase for the revitalization process of Lloyd Center.
And are beginning the planning phase for the revitalization process of Lloyd Center.
Speaker 4: URG is a full-service institutional real estate company with a local Portland presence and specializes in reimagining, developing, and managing Class A commercial real estate.
<unk> is a full service institutional real estate company with a local Portland presence and specializes in re imagining developing and managing class a commercial real estate.
Speaker 4: On the equity side of our business, we have a long-standing relationship with URG.
On the equity side of our business, we have a long standing relationship with <unk>.
Speaker 4: where we own a $2.5 billion, $2.6 million square foot portfolio of Class A office across the Puget Sound region.
We own a $2 5 billion dollar $2 6 million square foot portfolio of class a office across the Puget Sound region.
Speaker 4: From an accounting perspective, we were more than adequately reserved for this loan on a gap basis.
From an accounting perspective, we were more than adequately reserved for this loan on a GAAP basis with a seasonal reserve of $40 3 million as of Q3.
Speaker 4: with a Cecil reserve of $40.3 million as of Q3.
Speaker 4: on a 109.6 million dollar outstanding principal balance.
One $809 $6 million outstanding principal balance.
Speaker 4: As a result, in Q4, we recognized an $8.2 million gap gain from the Cecil reversal with respect to this loan. We are looking at the
As a result in Q4, we recognized an $8 2 million GAAP gain from the seasonal reversal with respect to this loan.
Speaker 4: We also realized a 32.1 or 54% per share loss on this loan through distributable earnings.
We also realized a $32 one or <unk> 54 per share loss on this loan through distributable earnings.
Speaker 4: contributing to negative 5 cents per share in Q4DE.
Contributing to negative <unk> <unk> per share in Q4 <unk>.
Speaker 4: We are seeing positive underlying trends with our remaining watchlist loans. For example, on our New York luxury condo loan,
We are seeing positive underlying trends with our remaining watch list loans for example, on our New York luxury condo loan.
Speaker 4: which had an initial loan balance of $240 million, has now paid down to $40 million through unit sales.
Each had an initial loan balance of $240 million has now paid down to $40 million through unit sales.
Speaker 4: Only six units remain to be sold, three of which are under contract.
Only six units remained to be sold three of which are under contract.
Speaker 4: Lastly, K-REF finished the quarter with a strong liquidity position of approximately 530 million.
Lastly, KBR finished the quarter with a strong liquidity position of approximately $530 million.
Speaker 4: This total included over $270 million of cash and $200 million in undrawn corporate revolver capacity available to us.
This total included over $270 million of cash and 200 million and Undrawn corporate revolver capacity available to us.
Speaker 4: We also had $235 million of unencumbered and unpledged loans as of quarter end that can be leveraged to provide additional liquidity.
We also had $235 million of unencumbered and unpledged loans as of quarter end that can be levered to provide additional liquidity.
In summary, our record originations quarter capped off a record year with $1 8 billion in originations last quarter and a solid start to the year with $900 million closed or under exclusivity since year end.
Speaker 4: In summary, a record originations quarter capped off a record year with $1.8 billion in originations last quarter and a solid start to the year with $900 million closed or under exclusivity since year end.
Speaker 4: It grew the funded portfolio by over $950 million in Q4 to a record $6.8 billion.
We grew the funded portfolio by over $950 million in Q4 to a record $6 8 billion.
Speaker 4: compares to $5 billion at the start of 2021. All while maintaining our high credit
Which compares to $5 billion at the start of 2021.
All while maintaining our high credit quality standards.
Speaker 4: We expanded our permanent equity base to approximately $1.5 billion.
We expanded our permanent equity base to approximately $1 5 billion.
Speaker 4: raising $120 million in accretive common equity in October 2021 and approximately $155 million in gross proceeds of preferred stock last month.
Raising $120 million in accretive common equity in October 2021, and approximately $155 million in gross proceeds are preferred stock last month.
Speaker 4: And finally, book value increased by 28 cents per share in Q4 and was the 7th consecutive quarter of book value per share growth.
And finally book value increased by 28 per share in Q4 and was the seventh consecutive quarter, our book value per share growth.
Speaker 4: Thank you for joining us today and now we're happy to take your questions.
Thank you for joining us today and now we're happy to take your questions.
Speaker 1: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Speaker 1: At this time, we will pause momentarily to assemble our roster.
At this time, we will pause momentarily to assemble our roster.
Speaker 1: And the first question will come from Jade Romani with KBW. Please go ahead.
And the first question will come from Jade Rahmani with K B W. Please go ahead.
Speaker 5: Thank you very much. Can you talk to where you see levered ROEs in the business if they're consistent now versus prior period? And also, you know, what, if any, uh,
Thank you very much can you talk to where you see levered ROE is in the business.
It now versus prior period and also you know what if any.
Speaker 5: rough commentary you could give toward sequential earnings trajectory. One of your peers did talk about NII outlook based on timing of originations and repayments, noting that this quarter for KREF distributable EPSX items was around 50 cents, still in excess of the dividend, but yields are coming in. So just if you could talk through levered ROEs and maybe something around earnings trajectory.
Rough commentary you could give toward sequential earnings trajectory one of your peers did talk about.
You know NOI NII outlook based.
Based on timing of originations and repayments, noting that this quarter for K RAF distributable EPS ex items was around 50% still in excess of the dividend, but yields are coming in so just if you could talk to the level Levered ROE and maybe something around the earnings trajectory.
Speaker 3: Sure, Jade. Thanks a lot for the question and thanks for joining the call today. It's Matt. Let's take that first part.
Sure Jade. Thanks, Thanks, a lot for the question and thanks for joining the call today, it's Matt.
Let's take that first part.
I think returns are.
Speaker 3: generally in line with what we saw pre-COVID on an ROE basis. So let's think about that as
Generally in line with what we saw pre Covid on an ROE basis, So, let's think about that as well.
Speaker 3: 11 to 13 percent range. So pretty healthy and keep in mind that the constituents of that return is largely at the asset level and spread at this point in time with most of every new loan we're making has a SOFR floor of
11% to 13% range.
So pretty healthy and keep in mind that the constituents of that.
Return is largely at the asset level and spread at this point in time with most of it.
Every new loan we're making is has so for floor of.
Speaker 3: somewhere around zero. And so you will benefit, those REs will benefit from future increases in rates. So that's where we see kind of the spot market. And I think that's been consistent over the course of the last few weeks.
Somewhere around zero.
So you will benefit those rfps will benefit from future increases in rates.
So that's where we see kind of the stock market and I think that's been consistent over the course of the last.
A few quarters.
Speaker 3: The market is relatively stable on both the asset and the liability side right now. And then as that translates into earnings...
No market is relatively stable on.
Both the asset and the liability side right now.
And then as that translates into earnings.
Speaker 3: We're not going to give projections at this point in time, but I think we've messaged to the market a couple of things. One that as our LIBOR floors roll off and we reset the portfolio at a zero LIBOR so forth floor, that that earnings is going to come back down in line with what it was on a pre-COVID basis.
We're not going to give projections at this point in time, but I think we've messaged to.
To the market.
A couple of things one.
That as our LIBOR floors roll off.
And we reset the portfolio at zero LIBOR. So fourth floor that that earnings is going to come back down in line with.
What it was on a on a pre COVID-19 basis.
Speaker 3: And I think we still see that and expect that to happen. So that's maybe the negative side of the equation. I think on the positive side of the equation as we message in the prepared remarks.
And I think we still we still see that and expect that to happen.
So that's maybe the negative side of the equation I think on the positive side of the equation as we message it in the prepared remarks.
Speaker 3: the portfolio is going to become positively convex to short term increases in interest rates.
The portfolios that would become positively convex to short term.
<unk> and interest rates.
Over the course of the next quarter.
Speaker 3: a quarter or two, so you can get some of that to grow from.
Quarter, two so you can get them to grow from.
From that side of things.
Speaker 5: Thank you. Just on the credit side, how would you describe the quality and characteristics of post COVID, post, you know, March 2020 origination versus the preceding period? Is it consistent? Are there any changes? I know you've increased exposure to industrial life sciences, multifamily remains a core focus. Beyond that, anything more specifically you could provide on the top credit might be comparing.
Thank you.
On the credit side, how would you describe the quality.
And characteristics of post Covid.
Post the March 'twenty 'twenty origination fees.
Exceeding period is it consistent are there any changes I know you've increased exposure to industrial life Sciences.
<unk> family remains a core focus beyond that any anything more specifically you can provide on just how credit might be comparable.
From a pre COVID-19 basis Jade.
Speaker 5: Yeah, the loans you're doing now, clearly the production level has repeatedly increased. You know, the platform has grown the type of deals you're looking at, it's probably a lot broader than before. So, you know, how would you characterize credit characteristics?
The loans Youre doing now clearly the production level has materially increased.
That form has grown.
Lots of deals Youre looking at probably a lot broader than before so.
Or would you characterize credit characteristics.
Speaker 3: OK. I would say let me let me approach it in a couple of different ways. Let me approach it on the equity side and on the credit side. I think largely speaking the market
Okay.
I would say well, let me let me approach it in a couple of different ways I'm going to touch on the equity side and on the credit side.
I think largely speaking the market.
Speaker 3: is very favorable now. I would say more favorable than certainly the quarter or two preceding COVID.
<unk> is very favorable now I would say more favorable than certainly the quarter or two preceding COVID-19 .
Speaker 3: from a fundamental lending perspective. First of all, on the equity side, the fundamental backdrop there is very strong, and clearly you're seeing rent increase.
From a fundamental lending perspective.
First of all on the equity side the fundamental backdrop, there is very strong and clearly youre seeing.
<unk> increases.
Speaker 3: and the favorite property types.
And in the favorite property types.
Speaker 3: You're seeing a lot of demand for real estate from capital allocators. I think that there's a lot of tailwinds in terms of people seeing the market.
Seeing a lot of demand for real estate from a capital allocators.
I think that Theres a lot of of tailwind in terms of people.
People seeking.
Speaker 3: yield on real assets as inflation hedges and that's driving transaction volume.
Yield on real assets.
As inflation hedges and that's driving transaction volumes and that increase in transaction volume is filling all of our pipelines and so if you look at our activity in the fourth quarter. If you look at some of our peers activity in the fourth quarter, it's really a function of all that demand all that activity.
Speaker 3: And that increase in transaction volume is filling all of our pipelines.
Speaker 3: And so if you look at our activity in the fourth quarter, if you look at some of our peers' activity in the fourth quarter, it's really a function of all that demand, all that activity going on on the equity side of the business as we help fund that transaction volume.
Im going on.
On the equity side of the business as we help fund that transaction.
Volume and then I think you shift to the other side of the equation you can think about credit.
Speaker 3: And then I think you shift to the other side of the equation, you think about credit, and on the credit side, you think about credit, and then you shift to the other side of the
On the credit side I.
Speaker 3: I think partially because we have these big volumes coming through, it's a very balanced trade right now. And LTVs are reasonable.
I think partially because we have these big volumes coming through it's a very balanced.
Trade right now and Ltvs are reasonable.
Covenants.
Speaker 3: cash flow sweeps, et cetera, are consistent with previous quarters. We're not feeling the weight of capital. We're not feeling the weight of the search for yield on the market currently. So there's lots of transactions to look at, and the market, I'd say, is very balanced in how it's approaching lending today. I saw you have yours up there, Michael.
Cash flow sweeps et cetera are.
Consistent with previous quarters, we're not feeling the weight of capital we're not feeling the weight of the search for yield on the market. Currently so theres lots of transactions to look at.
And the market I'd say is very balanced in how it's.
Approaching.
Lending today.
Okay.
Thanks for taking the questions.
Thank you.
Speaker 1: The next question is from Tim Hayes with BTIG. Please go ahead.
The next question is from Tim Hayes with B T. I G. Please go ahead.
Speaker 6: Hey, good afternoon, guys. Congrats on a nice quarter. First question here, just about, I guess, one more about acid sensitivity. I know you've made a lot of comments around it, Matt, but do you have an estimate of how much of the portfolio needs to turn over before you're in a position to benefit from?
Hey, good afternoon, guys congrats on a nice quarter.
First question here, just about I guess, one more about asset sensitivity I know you've made a lot of comments around it Matt.
Do you have an estimate of how much of the portfolio need the turnover before you are in a position to benefit from.
Speaker 6: you know, call it like a 50 basis point rate hike. I'm just curious if any internal modeling you can share with us, or even if it's just kind of like at what point, and I think you mentioned over the next couple quarters, but just any way to triangulate that a little bit more based on the pipeline and the repayment activity you see when you think you'll be in a position to benefit from a modest hike in short term rates.
You know call it like a 50 basis point rate hike and just curious if any internal modeling you can share with us or even if it's just kind of like at what point and I think he mentioned over the next couple of quarters, but just any way to triangulate that a little bit more based on the pipeline and the repayment activity you see when you think you'll be in a position to benefit from our model.
Take in short term rates.
Speaker 3: Tim, thank you for joining the call and thanks for the question. I think that we have a better feel for the timing than we do for the sensitivity right now and that's just because of course we can run the math, but it's a multivariable equation and you're really trying to guess repayments.
Tim Thank you for joining the call and thanks for the question.
<unk>.
I think we have a better feel for the timing than.
And then we do for the sensitivity right now and that's just because of course, we could run the math, but it's a multi variable equation and you're really trying to guess repayments yeah originations.
Speaker 3: and it's kind of a delicate modeling exercise that ultimately probably creates a little bit more uncertainty around really what the impact could be. That being said, I do think we have a lot of confidence that in the next quarter or two that...
Originations and it's kind of a delicate modeling exercise that ultimately sure Chris.
You know a little bit more uncertainty around really what the impact could be that being said I do think we have a lot of confidence that in the next quarter or two that we will be positively you'll get back to those to those interest rates just look at the portfolio growth look at the repayments.
Speaker 3: we will be positively convex to those interest rates. Just look at the portfolio growth, look at the repayment since COVID. The portfolio is repositioning very quickly and has already obviously come a long way. We need a little bit further to go.
Since COVID-19 like the portfolio is repositioning very quickly.
And it has already gone obviously come a long way, we need a little bit for them.
Speaker 3: see in some of the charts that we put in the earnings supplement that that's come down a lot that sensitivity so we expect it to turn in the first or second quarter wish I could give you more but it's a little bit of a guessing game
You can see in some of the charge that we put in the earnings supplement that that's come down a lot that sensitivity. So we expect it to turn in the first and second quarter I wish I could give you more but it's a little bit of a guessing game.
Speaker 6: Yeah, that's helpful. I just wasn't when you said I guess next quarter or two, I wasn't sure if you meant kind of like end of one queue early two queue or end of two queue early three queue, but it sounds like it's the former there, which is good. So thanks for clarifying there. And then, you know, a question I probably asked before and I asked some of your peers, I mean, you guys have done a lot of work on this.
No. That's helpful. I just wondering when you said I guess next quarter or two I wasn't sure. If you meant kind of like end of <unk> early <unk> or end of <unk> early <unk>, but it sounds like it.
Former there which is good so thanks for clarifying there.
And then.
Question, I, probably asked before and I asked them to your peers I mean, you guys have gone.
Speaker 6: a lot at the broader KKR platform. And you recently bought a residency transitional lending platform. You've gotten deeper in single-family rental over the summer on the equity side. So I'm just curious as KKR, you know,
A lot at the broader KKR platform and you recently bought a resi transitional lending platform you have gotten deeper in single family rental.
The summer on the equity side. So I'm, just curious is and KKR.
<unk> company makes more moves and get deeper in some of these asset classes that havent been nutritional focus for K RAF and your lending portfolio what type of benefits that could bring you in if theres opportunities for you to kind of expand your scope there.
Speaker 6: more moves and get deeper in some of these asset classes that haven't been a traditional focus.
Speaker 6: for KREF and your lending portfolio, you know, what type of benefits that could bring you, and if there's opportunities for you to kind of expand your scope there.
Speaker 3: Yep, I think that's a great question, Tim, and something we think about every day. I think what it mostly translates back into, well, first and foremost, is market connectivity. And the easiest way to think about it is the equity side of our business has grown substantially and has multiple vehicles it's investing for now across opportunistic and core plus. Thomas inbox and having the perspective of Kerry or what he seems to have been doing completely differently as all frontal pleaded Cutler.
Yeah, I think that's a great question, Tim and something we think about every day.
I think what it mostly translates back into.
Well first and foremost as market connectivity.
And the easiest way to think about it is the equity side of our business has grown substantially.
And has multiple vehicles, it's investing for now across opportunistic and core plus.
Speaker 3: and is transacting, as you mentioned, in lots of different property types now. So we are a much more relevant...
And as transacting as you mentioned in lots of different property types now.
So we are a much more relevant.
Speaker 3: counterparty for banks, for brokers in the market, for operating partners.
Counterparty for.
For banks.
For brokers in the market for operating partners.
Speaker 3: And that translates, I think, into better looks and, you know, that just that connectivity with the overall markets. That would be one, just relationships are much deeper and broader across the overall real estate business. Number two would be as we start to invest in equity in some of these segments, we perhaps want to end.
And that translates.
Think into better looks and that just that.
Activity with the overall overall markets that that that would be one just relationships are much deeper across the overall real estate business number two would be.
As we start to invest in equity in some of these segments, we perhaps weren't in.
Speaker 3: Historically, that gives us obviously the market data and the diligence and gives us more confidence to transact on the debt side as well. And so I think a couple examples of that would be like SFR, right, where we have a sizable history there and we translated some of that into our lending book. Not a huge position for us, but we certainly are active in that space.
Historically.
That gives us obviously the market data.
And the diligence.
And it gives us more confidence to transact on the debt side as well.
And so I think a couple of examples of that would be like <unk> right, where we have a sizable history there.
And we've translated some of that into our lending book not a huge position for us, but we certainly are active in that space.
Speaker 3: But even more simple things like industrial, where we're living in the industrial space, we own millions of square feet there. We've been in active market for some time now. But just the size of our portfolio gives us
But even more simple things like.
Industrial.
Where we're lending on the industrial spreads we own millions of square feet. There we've been active in that market for some time now, but just the size of our portfolio gives us so much market data.
Speaker 3: so much market data that it really allows us to lean into opportunities because we have that additional information or insight that perhaps some of the competitors.
It really allows us to lean into opportunities because we have that additional information or insight that perhaps some of the competitors do.
Speaker 3: don't have. Lastly, I'll just say geographically, we have a global platform, a global real estate equity platform as well, and we are actively building a team in Europe .
Don't have lastly, I'll just say geographically.
Yeah, we have a global platform, a global real estate equity platform as well.
And we are actively building a team in Europe . So I would expect us to be active and again same business model. It's a collaborative business model, it's an integrated business model across debt and equity.
Speaker 3: So I'd expect us to be active and again, same business model. It's a collaborative business model. It's an integrated business model across debt and equity. So I expect us to be active in Europe over the course of the year.
So I expect us to be active in Europe over the course of the year.
Speaker 6: And can you just remind me kind of this, where you're at with that, um, that initiative in terms of building up the team in Europe and are you acquiring. Kind of existing infrastructure slash teams that are already based there. Or like, how is that, or is it being built out organically?
And can you just remind me kind of just where you're at with that.
That initiative in terms of building up the team in Europe and are you acquiring.
Kind of existing infrastructure slash teams that are already based there were like how is that or is it being built out organically.
Speaker 3: No, so we've hired, we basically hired someone to lead that effort for us. His name's Ali Imron, he came over from LaSalle. He's here working with us today in London. And we're in the process of building out his team. And so when we get the team in place, then we'll start lending.
No. So we've we basically hired someone to lead that effort for US is named Ali Embrown. He came over from <unk>.
Lasalle he's here working with us today in London.
And we're in the process of building out his team and so when we get the team in place then we will start lending.
Got it got it okay, well thanks for taking my questions. This morning.
Thank you Tim.
Speaker 1: The next question will be from Stephen Laws with Raymond James. Please go ahead.
The next question will be from Stephen laws with Raymond James. Please go ahead.
Speaker 1: Hi, good morning. I wanted to touch on just your graph. It looks like the exposure to Florida roughly doubled sequentially. Can you talk about your origination pipeline there? Is it existing borrowers taking you to Florida, or is it you guys winning new relationships there? Talk about the strength in that market, please.
Hi, good morning.
I wanted to touch on just geographic it looks like the exposure to Florida roughly doubled sequentially can you talk about your origination pipeline there.
So the existing borrowers taking you to Florida or is it you guys, winning new relationships there kind of.
Talk about the strength in that marketplace.
Speaker 3: Sure, Steve, thank you for the question. I think that obviously floor is a market that's easily identifiable as a growth market with lots of positive fundamental tailwinds.
Sure Stephen Thank you for the question.
I think that obviously, Florida is a market that.
It's easily identifiable as a as a growth market.
With lots of positive fundamental tailwind.
Speaker 3: And I think this is a good example of how synergistic some of the other pockets of capital we have.
And I think this is a good example of how synergistic some of the other pockets of capital.
We have.
Speaker 3: for K-Ref. So by way of example, we've really increased our lending on the insurance segment of our business outside of K-Ref, specifically through our affiliate Global Atlantic. And that's given us a lot more...
For K RAF So by way of example, we've really increased.
Our lending on the insurance segment of our business outside of K RAF.
It's typically through.
Our affiliate global Atlantic and Thats, given us a lot more.
Speaker 3: borrow relationships of folks that borrow a lot on the core, core plus side, and a lot in multifamily space that we didn't historically have some of those touch points because we didn't have the right cost of capital. And usually these sponsors are borrowing across.
Borrow relationships of folks that borrow.
A lot on the core core plus side and a lot in multifamily space that we didn't historically have some you know some.
Some of those touch points, because we didn't have the right cost of capital and usually these sponsors or borrowing across.
Speaker 3: while they're predominantly Core Core Plus borrowers, they do have some needs for a pay ref type of loan. And so that's really driven a lot of our activity, some of the increased activity that we have is increased client base.
While there are predominant predominantly core core plus borrowers they do have.
Some some needs for a <unk> type of loan.
And so that's really driven a lot of our activity. Some of the increased activity that we have is this increased client base.
Speaker 3: And so I think you see some of that in what we did in Florida this year. Some of those newer clients were very active in the multi-family segment of the market within Florida and we were able to transact with them and on the K-Ref front as they were acquiring properties and you just think about the
I think you see some of that and what we did in Florida. This year. Some of those newer clients were very active in the multifamily segment of the market within within Florida, and we were able to transact with them and on the cable upfront.
As they were acquiring properties.
You just think about that.
Speaker 3: the growth and the demographic growth in Florida, we clearly set the self up very well for a multifamily equity and lending investment. So really it was driven by new client base, the multifamily originations that we had, and then obviously a market that's supportive of that.
The growth.
And the demographic growth in Florida, we clearly sets itself up very well for our multifamily.
Equity and lending investment so really it was driven by new client base.
The multifamily originations that we had.
And then obviously a market thats supportive of that theme.
Speaker 1: Great, thanks for that. And then to touch on unfunded commitments, you know, that's kind of increased over the past year, probably by design. But can you can you talk a little bit about what's driving that? Is it a shift in mix? Are you doing some things with more deferred financing involved? Kind of what's driving the increase there?
Great. Thanks for that and then touch on unfunded commitments you know that's kind of increased over the past year.
Probably by design, but can you talk a little bit about what's driving that is it a shift in mix or you're doing some things with more deferred financing involved kind of what's driving the increase there.
Speaker 3: Yeah, I can sort out and then Patrick, feel free to jump in with anything that I missed.
Yeah, I can start out and then Patrick feel free to jump in with anything that.
That I Miss.
Speaker 3: It is by design. I think when we think about some of the business plans that we're lending on, some of the market opportunity that we're seeing.
It is designed by design I think when we think about.
Some of the business plans that were lending on some of the market opportunity that we're seeing.
Speaker 3: it comprises a larger piece of future funding, the most obvious being construction lending.
It comprises a larger piece of future funding the most obvious being construction lending.
Speaker 3: So if you look at what we've done on a post-COVID basis, we have done a little bit more construction lending, most of which has been in the industrial segment of the market. So clearly, when we think about future funding, there's a number of things we think about, cash drag, liquidity constraints, and then how quickly the...
So if you look at what we've done on a post COVID-19 basis, we have done a little bit more construction lending most of which has been in the industrial segment of the market.
So clearly when we think about future funding, there's a number of things we think about.
Cash drag liquidity.
Constraints and then how quickly the.
Speaker 3: capital gets allocated into the loan. I think from an industrial perspective.
Capital gets allocated into.
Into the into the loan.
And I think from an industrial perspective.
Speaker 3: The construction period is typically very short, and so you get capital into the ground relatively quickly. But that's really what's driving that number. I think we're in the band of where we'll be going forward. Of course, it'll bounce around from quarter to quarter, but it's in the range of what we would expect over the next few quarters.
The construction periods typically very short and so you get capital into the ground relatively quickly.
But that's really what's driving that number I think we're in the.
The band of where we'll be going forward of course, it will bounce around from quarter to quarter, but it's in the range of what we would expect.
Over the next few quarters.
Great I appreciate the comments.
Thank you.
Speaker 7: And the next question will be from Don Fandetti with Wells Fargo. Please go ahead.
The next question will be from Don <unk> with Wells Fargo. Please go ahead.
Speaker 1: Yes, Matt, I was wondering if you could talk about on your CLOs, are you seeing the same buyers or investors today that you saw pre COVID? And how much depth do you think there is to that market to handle sort of, you know, like, say, credit widening, hiccups, things of that nature?
Yes, Matt I was wondering if you could talk about on your Seo lows are you seeing the same buyers or investors today that you saw pre COVID-19 and how much debt do you think there is to that market to handle sort of you know like say.
Credit widening hiccups and things of that nature.
Speaker 4: Hey Don, good morning, it's Patrick, I'll take that one. I think as we think about the CLO market today, obviously last year was a huge year in issuance. The segment is really...
Hey, John Good morning, it's Patrick I'll take that one.
I think as we think about the CLO market today, obviously last year was a huge year in issuance. The segment has really grown significantly over the last couple of years.
Speaker 4: grown significantly over the last couple of years. You know, as part of that, we've seen a widening of that investor base throughout this time. I think if you sort of fast forward to today, and we see the deals that are getting done, I think we largely see that same investor base buying. I think the big difference that we're witnessing in the first part of this year is,
As part of that we've seen a widening of that investor base. Throughout this time I think it would be sort of fast forward to today and we see the deals that are getting done I think we largely see that same investor base buying I think the big difference that we are witnessing in the first part of this year.
Or is the demand and the size allocation that some of those large buyers were previously taken has been reduced and I think the question will be is that a short term phenomena or you know will that persist over the longer term, obviously to get to the type of.
Speaker 4: the demand and the size allocation that some of those large buyers were previously taken has been reduced.
Speaker 4: And I think the question will be, is that a short term phenomena or will that persist over the longer term? Obviously, to get to the type of gross CLO volumes that we had last year, those buyers have to be bigger in the space where you have to grow the investor base. But I think we're seeing a little bit of a pullback in the market just given some of that demand.
Yeah.
Gross CLO volumes that we had last year those buyers have to be bigger in the space, where you have to or you have to grow the grow the investor base, but I think we're seeing a little bit of a pullback in the market just given some of that demand.
Speaker 4: Not that people are exiting the market, but that people aren't buying as much.
Not that people are exiting the market, but that people aren't buying as much.
Speaker 3: Okay, thanks. One thing I would add to that also is that, you know, we really take advantage of that market opportunistically and we've got
Okay. Thanks, Matt one thing I would add.
Add to that also is that we really take advantage of that market Opportunistically and we've got.
Speaker 3: so many other options within KREF. I think you've really seen us be a leader through Patrick and through our capital markets team developing these bespoke non-mark to market facilities. Of course, we're the leader in terms of that, that component of our liabilities. So for us, it's not necessarily a material thing, whether that market is attractive or not, because I think we have a lot of other outlets to go to. But...
So many other options within payroll, but I think you've really seen as being a leader through Patrick into our capital markets team.
Developing these bespoke non mark to market facilities of course, we're the leader in terms of that.
That component of our liabilities.
So you know.
For us, it's not necessarily a material thing whether that market is attractive or not because I think we have a lot of other outlets to go to.
But.
Speaker 3: Clearly we watch it as an indication for return on equity for the competitive set.
Clearly, we watch it as a as an indication for a return on.
For for the competitive set.
Thank you.
Speaker 7: The next question will be from Rick Shane with JP Morgan. Please go ahead.
The next question will be from Rick Shane with J P. Morgan. Please go ahead.
Speaker 2: Hey guys, thanks for taking my question this morning. Look, it's interesting, almost two years to the day before all of COVID and everything that's happened, we would have been talking a lot about CECL reserves. And the good news is that we're kind of going back now to where we were hopefully two years ago, and you're going to drive some good growth, we're going to have some good loan growth, we're going to have normalization of reserves. So, thank you.
Hey, guys. Thanks for taking my question this morning.
Yeah.
Interesting almost two years to the day.
Before all on Covid and everything that's happened, we would've had been talking a lot about seasonal reserves.
The good news is that we're kind of going back now to where we were hopefully two years ago and you're going to drive some good growth we're going to have some good loan growth, we're gonna have normalization of reserves.
Speaker 2: with all of the information that you have gathered over the past two years and sort of thinking about CECL reserves from an actuarial perspective, how many basis points roughly when you add $100 million of loans, for example, should we expect in terms of incremental reserve? Because it's going to be an important part of the story over the next few years.
With all of the information that you have gathered over the past two years.
Sort of thinking about seasonal reserves from an actuarial perspective.
How many basis points roughly when you add $100 million of loans. For example, should we expect in terms of incremental reserve because it's going to be an important part of the story over the next few years.
Speaker 8: Hi, Rick. This is Mustafa. I'll take this one. So, with respect to the CECIR reserve, obviously, the model of EBUism, you know, as well as our peers, broadly speaking, is highly dependent on the macroeconomic environment.
Hi, Rick this is almost all.
I'll take this one so with respect to the reserve obviously, the Moslem with ABB was in you know.
That's what I was all he is broadly speaking is highly dependent on the macroeconomic environment.
Speaker 8: And one of the key factors there is kind of the CRE price and the...
And one of the key factors there to kind of the CRB price index.
Speaker 8: projections over the next few quarters. So also the property type has an impact on what the fiscal reserve would be. So it's kind of hard to pinpoint a fiscal reserve in terms of business points.
Projections over the next few quarters so.
Also the property type hasn't you know I mean in fact on what he said reserve would be so it's kind of hard to pinpoint I see some reserve in terms of basis points to for.
Speaker 8: for new originations. That said, I mean, if you have seen historically, and looking at the quarter-over-quarter change in our CECE reserve, I think we ended Q3 with about 110 business points or so of CECE reserve on our standing principal balance of our loans. We ended Q4 with about 37 business points. The significant reduction was result of the...
New originations that said I mean, if you have seen historically.
And looking at the quarter over quarter change in our seats. The reserve I think we ended Q3 with.
About 110 basis points or so Oh six of reserve when outstanding principal balance of our loans. We ended Q4 with about 37 basis points that the significant reduction was a result from a result of the.
Speaker 8: the $40 million of reversal on TESOL for the Lloyd loan that we wrote off in Q4. So you can see most of our reserve historically had been attributed to...
The $40 million of a reversal on seasonal for the Lloyd's loan that needle at all.
Q4, so you can see most of our reserve historically had been attributed to <unk>.
To watch this loans.
Speaker 8: So we expect, so I guess to answer your question, besides the MEKO environment, which is one of the key factors that impacts our CSER reserve, any significant changes other than that would be attributed to any changes in our watchlist.
So we expect so I guess thanks for your question.
Besides the macro environment, which is one of the key factors that impacts our seats a reserve.
Any significant changes other than that would be attributed to any changes in our watch list loans.
Speaker 8: We expect in a stable microeconomic environment, we expect the CSER reserve on performing loans because the deal was better, would be in the range of...
We expect the kind.
In a stable macroeconomic environment, we expect the <unk> reserve on performing loans they can deal with.
Better would be.
And the range of.
I don't want to put numbers, but maybe.
Speaker 8: call it 20 to 50 business points, depending on the macroeconomic environments.
20 to 50 basis points, depending on the macroeconomic environments.
Yeah.
Speaker 2: It does, and obviously we understand the difference between the specific reserve and the general reserve, and I'm thinking about this more from a general reserve perspective.
It doesn't and obviously, we understand the difference between the specific reserve in the General Reserve and I'm thinking about this more from a general reserve perspective.
Speaker 2: I am curious, so the 20 to 50 basis points is a pretty wide range.
I am curious so the 20 to 50 basis points is a pretty wide range and probably I think we're our expectation is somewhere in the middle of that if you were to go back to your day, one General reserve what was it.
Speaker 2: and probably I think we're our expectation is somewhere in the middle of that. If you were to go back to your day one general reserve, what was it and what...
And what.
What changes your thinking to the extent and fine I understand portfolio mix and all sorts of different nuances. These loans already a socratic, but this is an actuarial measure and if we think generically what has changed in your thought process on the generic on the general reserve from day one.
Speaker 2: changes your thinking to the extent, and fine, I understand portfolio mix and all sorts of different, there are nuances, these loans are idiosyncratic, but this is an actuarial measure. And if we think generically, what has changed in your thought process on a general reserve from day one to February 2022.
Two.
February 2022.
Speaker 8: Yeah, if you look at, if you think about the general reserve that we had in 20...
Yes, if you looked at if you think about the general reserve that we had.
When he.
Speaker 8: pre-COVID and the first quarter or the initial 1-1-2020, our thief's reserve was
Equal bids in the first quarter or what.
What are the initial 112020.
Well, let's see if the reserve what was.
Speaker 8: 109 business points. So it was not significant. Pre-COVID, post-COVID obviously, us and all of our peers have increased the teacher reserve significantly as a result of the...
Under the main.
It means points. So it was it was not it was not.
Significant.
Pre COVID-19 .
The school, but obviously us in all of our peers have you cleaned that keeps our reserve significantly as a result of the.
Speaker 8: As a result of the impact of COVID on the macro environment.
As a result of the impact.
The impact of Covid on the macro environment.
Speaker 8: So again, it's very highly sensitive to the macroeconomic environments and it's hard to pin points, you know, a range, you know, or a number, but.
So again, it's really highly sensitive due to the macroeconomic environments.
And it's hard to pinpoint.
<unk>.
You know what or or a number but.
Speaker 8: It is just hard. It is just hard. I can tell you that, you know.
And it's just hard it's just hard I can tell you that you know.
Speaker 8: Day one, pre-COVID, our CSA reserve was lower than, you know.
They want people that our reserves are.
Well it was lower than you know.
Speaker 8: Q1 2020 and right now we're reaching a phase where our CISA reserve is more stable.
Q1, 2020, and right now were reaching a piece, where we see some reserve is more stable.
Speaker 8: giving the macroeconomic backdrop. So as long as this continues, we expect it to be at that stage that I alluded to earlier.
Given the macroeconomic backdrop.
So as long as this continues and we expect it to be.
Previously that I eluded to them yet.
Thank you very much.
Speaker 7: And once again, if you have a question, please press star then 1.
And once again, if you have a question. Please press Star then one.
Speaker 7: Question is from Steve Delaney with JMP Securities. Please go ahead.
The next question is from Steve Delaney with JMP Securities. Please go ahead.
Speaker 1: Thank you. Good morning, everyone. So I wanted to ask a question about leverage. In the fourth quarter, we saw it move up to 3.7, really on the strength of about $800 million in net fundings in the quarter. And now, you know, Patrick's presented us with FL3. And so you now have CLO financing of, what, $2 billion, and that looks to be about 40% of total funding.
Thank you and good morning, everyone. So I wanted to ask a question about leverage in.
In the fourth quarter, we saw it move up to $3 seven on really on the strength of about 800 million and net fundings in the quarter.
And now you know Patrick's presented us with F L. Three.
And you.
So you now have CLO financing of what $2 billion and that looks to be about 40% of total funding.
L. Three looks like initial and it's you've got two years reinvestment I think but at five five times leverage right.
Speaker 1: and you've got two years reinvestment I think, but five times leverage, right? With an 84% advance rate. So my question is this, with the commercial mortgage rate industry, we sort of were accustomed to thinking about leverage three, three and a half times.
84% advance rate. So my question is this you know with with the <unk>.
Mortgage REIT industry, we sort of we're accustomed to thinking about leverage three three and a half times, but it looks like to me for this year when we update the models and roll. It forward. It looks like the K Rep May average something you know.
Speaker 1: But it looks like to me for this year when we update the models and roll it forward.
Speaker 1: Looks like the KREF may average something north of four turns, a leverage, just because of the benefit of the higher advance rates on the non-recourse CLOs. Could you comment on that and whether you would, if we come out with a model or something that shows four, four and a quarter times debt to equity, are we thinking about that wrong?
North of four turns of leverage just because of the benefit of the higher advance rates on the non recourse CLO could you comment on that and.
Whether you would you know if we.
Come out with a model of something he says shows for four and a quarter times debt to equity or you know are we or are we thinking about that wrong.
Speaker 4: Sure Steve, good morning. Thanks Patrick. It's Patrick, so I'll take that. Good morning. So a couple of comments there. One, recall when we do this.
Sure Steve Good morning, it's Patrick So I'll I'll take that good morning.
So a couple of comments there.
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You recall when we do the CLO.
Speaker 4: It's not new debt that we're adding. Obviously, we're taking loans from other places. So we're pulling those off of repo facilities. We're taking those off of other warehouse facilities when we put that on. So we've got that net. Obviously, as you're pointing out, the leverage, the advanced rate that we're getting, just given the profile of our asset.
Not new debt that we're adding and obviously, we're taking loans from other places. So we're pulling those off of repo facilities, we're taking those off of other warehouse facilities. When we put that on so we've got that net obviously as you're pointing out the leverage the advance rate that we're getting just given the profile of our asset.
<unk> is yeah, it's pretty it's pretty high it's close to 85% the offset to that is that if you look at and we do highlight this number our unencumbered assets.
Speaker 4: is pretty high, it's close to 85%.
Speaker 4: The offset to that is that if you look at, and we do highlight this number, our unencumbered asset
Speaker 4: by taking a little bit more leverage there in the CLL, we can dial back the leverage that we're taking on other assets in the portfolio. So we've got some other assets that effectively are unencumbered as a result of that.
By taking a little bit more leverage there in the CLO, we can dial back the leverage that we're taking on other assets in the portfolio. So we've got some other assets that effectively are unencumbered.
As a result of the city.
Speaker 4: The other factor to consider, just as you think about.
The other factor to consider just as you think about.
Speaker 4: going from fourth quarter to first quarter, we did raise preferred stock in the first quarter. So that's obviously equity that's going to offset that. But that 3.7 really represents kind of the fairway for us.
Going from fourth quarter to first quarter, we did raise preferred stock in the first quarter. So that's obviously equity that's that's going to offset that but that $3 seven really represents kind of the fairway for us as well.
Speaker 4: is we're thinking about target leverage being in that, you know, mid to high threes. And just to be clear, that's inclusive of all of our financing, including the CLOs. So when we show that total leverage number, we're including the CLOs, we're not excluding it.
We're thinking about target leverage being in that mid to high threes and just to be clear that's inclusive of all of our financing, including the CLO. So when we show that total leverage number we're including the CLO was we're not excluding it.
Speaker 1: No, understood. Yeah, I knew that was inclusive. Okay, what I'm hearing you say is while you get the benefit of higher leverage, you know, on the multifamily loans and the CLOs, on an overall aggregate basis, you're going to use the additional net cash from the CLO refinancing to just pay down other debt, of course, but just to have more unencumbered assets. So that's helpful because I think...
No understood Yeah, I knew that I knew that was inclusive okay. What I'm hearing you say is while you get the benefit of higher leverage you know on the multifamily loans in the C O lows.
On an overall aggregate basis.
We're not going to you're going to use the additional net cash from the CLO refinancing just to just pay down other debt of course, but just to have more unencumbered assets. So that's that's helpful. Because I think.
Speaker 1: If we didn't adjust for that, we would end up with something higher than your run rate of 3.7.
If we didn't adjust for that we would end up with something higher than your kind of your run rate of three seven.
Speaker 1: So I appreciate that, thank you. Joe, you're welcome.
So I appreciate that thank you sure you're welcome.
Speaker 1: That's all for me, and I just would say, Masafa, all the best in the future. We've enjoyed working with you. Thanks.
That's all for me and I, just would say massawa all the best in the future. We've enjoyed working with you. Thanks.
Thanks, a lot appreciate it.
Speaker 7: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Jack Switala for any closing remarks.
Speaker 2: Great, thanks everyone for joining today's call. Feel free to reach out to me or the team here with any follow-up questions. Take care.
Great. Thanks, everyone for joining today's call feel free to reach out to me or the team here with any follow up questions take care.
Speaker 7: The conference has now concluded. Thank you for attending today's presentation. You may now...
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker 9: The.
Okay.
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