Q1 2022 KKR Real Estate Finance Trust Inc Earnings Call
[music].
Good morning, and welcome to the KKR Real estate Finance Trust, Inc. First quarter 2022 financial results Conference call.
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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 first quarter of 2022 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 Patrick Mattson and our CFO Kendra Decius.
I would like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor relations portion of our website.
This call will also contain certain forward looking statements, which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements.
Before I turn the call over to Matt I'll provide a brief recap of our results.
For the first quarter of 2022, we reported GAAP net income of $29 $8 million or <unk> 47 per basic share and 46 cents per diluted share.
Distributable earnings this quarter were $29 $8 million or <unk> 47 per share covering our <unk> 43 per share Q1 dividend.
Book value per share as of March 31, 2022 increased to $19 46, which includes the cumulative seasonal impact of 33 per share as compared to $19.37 as of December 31st.
This increase in book value was driven by strong portfolio performance, coupled with an accretive equity offering in the first quarter.
This is the eighth consecutive quarter in which we have grown book value per share.
Finally in mid April we paid a cash dividend of 43 cents per common share with respect to the first quarter.
Based on yesterday's closing price the dividend reflects an annualized yield of eight 7%.
With that I would now like to turn the call over to Matt.
Thanks, Jack and good.
Good morning, everyone and thank you for joining us today.
Let me start today's call by welcoming welcoming can introduce you to the <unk> team as our Chief Financial Officer.
Kindred has a kick here a veteran having joined the firm in 2006.
And most recently served as the managing director and Kkr's Finance group.
We often talk about the benefits of kiosks integration within KKR.
Which range from sharing views with our macro and real estate equity teams.
Differentiated financing by partnering with KKR capital markets.
We also benefit greatly from a deep bench of talent.
Having kendra join our leadership team is a great example of that.
Now turning to the first quarter KBR delivered strong financial results with distributable earnings of 47 per share.
Covering our <unk> 43 per share dividend.
And we grew our book value for the eighth consecutive quarter.
We also had a strong investing quarter originating nine senior loans totaling $844 million.
Bringing our total funded portfolio to a record $7 25 billion.
Up 36% on a year over year basis.
Multifamily loans represented 55% of our Q1 origination commitments.
It continues to be the largest property type in our portfolio.
In addition to multifamily.
We're placing emphasis on other strong performing property types, demonstrating the highest rent growth.
Which includes industrial and life Sciences.
These property types represented 18% and 15% of our first quarter originations respectively.
In the first quarter increase.
Increased volatility and heightened geopolitical risks created a more conservative lending environment.
Spreads in the senior secured CRE lending market widened slightly by.
By approximately 25 basis points relative to the fourth quarter.
We are lending with more conservative terms and structure.
We believe our lending strategy offer strong risk adjusted returns in this environment.
Our focus on first mortgage loans secured by high quality real estate owned by institutional sponsors.
Rides a defensive investment.
With significant equity cushion.
And our returns also benefit from a steepening.
The front end of the yield curve.
Pipelines remained strong with an increase in activity from larger sponsors.
Speaking of balance sheet solution to avoid the.
The volatility in the single asset single borrower the MBS market.
The increases in market rents.
Have also created more transitional lending opportunities for KBR.
As sponsors need more time to convert convert in place rents to market.
This has been particularly pronounced in the multifamily and industrial sectors.
In short.
Now is a good time to be making loans and we are well capitalized to do so with over $750 million of liquidity as of quarter end.
As we look at our pipeline, we continue to see strong activity and have approximately $1 3 billion of loans either closed or under exclusivity.
Subsequent to quarter end.
Throughout 2021.
We generated mid teens ROE as rates declined due to our in place.
Great floors on our loan portfolio, while our liabilities in large part we're not subject to rate floors.
As those loans with higher floors have repaid.
We now feel our earnings are.
Neutral to minor increases in rates and based on the forward curve, we would expect earnings become positively correlated with rate increases in the second half of this year.
Finally in Q1, we received $282 million driven by for repayments.
Given our strong origination volumes and modest repayments our growth trend continued with net funding of $462 million.
We expect to continue to match, our repayments with attractive origination opportunities.
And feel we are well positioned in the current lending environment.
With that I will turn the call over to Patrick.
Thank you, Matt and good morning, everyone.
I will focus today on our efforts on the capital and liquidity front.
Some updates on our watch list and the progress, we're making around the LIBOR to so for our transition.
We had a very active first quarter across the entire capital base on.
On the liability front.
There are three notable transactions.
All of which enhanced our market leading liability structure.
First we successfully priced a new $1 billion CRE CLO in February .
The CLO issuance, which allowed us to continue to grow our brand in the market.
Supported by a 100% multifamily properties and achieved an investment grade advance rate of 80, 475%.
This CLO priced at a running cost of capital of sulfur plus 171 basis points.
And features a two year reinvestment period.
Second in March we Upsized the bespoke.
Fully non mark to market facility from $500 million to $750 million.
Which features three years of availability and match term financing.
And finally also in March we upsized, our existing revolving credit facility from 335 million to $520 million.
We extended the maturity date with a new five year term.
And subsequent to quarter end, we further increased the size of the revolver to our target $610 million.
These achievements increased our fully non mark to market financing to 79% as of quarter end.
With the remaining 21% balance only subject to credit marks.
We also made significant progress on the equity front.
First we raised $151 million in net proceeds through a follow on issuance of our series a preferred shares at a fixed for life cost of six 5%.
Additionally, we raised $134 million of net proceeds through a common equity offering.
Which is accretive to book value by <unk> 11 per share.
This increase of $285 million in permanent equity.
<unk> decreased our total leverage ratio from three seven times as of year end to three two times at quarter end.
We are continuing to deploy proceeds from this recent equity offering.
We'd expect leverage to increase back to the target in the mid to high Threes times range over Q2 and into Q3.
Our liquidity position remains very strong and exceeded $750 million as of quarter end.
This total included over $170 million in cash.
$520 million and Undrawn corporate revolver capacity available to us as of quarter end.
In addition to this we had $377 million of unencumbered and Unpledged senior loans.
As Matt mentioned previously.
The opportunity to generate attractive risk adjusted returns in the current market environment, given our strong liquidity position.
I also want to update on our watch list.
The current portfolio has a risk rating of two nine on a five point scale.
In line with last quarter.
And 95% of our loans are risk rated three or better.
<unk> to 94% last quarter.
Quarter over quarter, our watch list has decreased by a net $40 million on a.
Committed basis.
Three assets came off the watch list this quarter.
First in January our four rated Brooklyn based hospitality loan, which was originated in January 2019 was repaid in full through a property refinance with a large money Center bank.
Second in February we originated a new loan to finance the acquisition of the Queen's Industrial property with a new sponsor coming in with fresh equity.
Third good progress has been made at our 107 unit New York Condo conversion loan.
And we reduced the loan's risk rating from our for two or three.
And removed alone from the watch list.
Yeah.
In terms of the asset that remains.
And assets that have been added to the watch list.
Our New York luxury condo loan remains on the list as a reminder, this loan had initial balance of $240 million.
And is paid down to $32 million.
Well margin to where recent sales have been.
Just four units remained to be sold with one unit under contract.
Lastly, we've added two office loans based in Philadelphia to our watch list.
Loans are performing with in place occupancy to very strong sponsors, but we place. These loans on the watch list to reflect softer office leasing velocity within the broader Philadelphia MSA.
Finally, we have made strides on the LIBOR to software transition.
With the goal of mitigating basis risk throughout this transition period.
As of quarter end, 25% of our floating rate liabilities, where sulfur based and 13% of our assets were sofa based.
We expect the transition to sulfur to be non material to us from an earnings perspective.
In summary.
<unk> finished the quarter with a record $7 25 billion total funded portfolio, which has grown by 36% on a year over year basis.
We originated nine senior floating rate loans in Q1 for over $840 million and grew the funded portfolio by $462 million.
We expanded our permanent equity base by 21%.
To 165 billion and executed on our CLO Upsized, a bespoke non mark to market financing facility.
And upsized, our revolving credit facility.
$275 million to a total of $610 million post quarter end.
We grew book value per share by <unk> <unk> per share.
Finally, we have ample liquidity to capitalize on the current market backdrop.
And we feel we are well positioned to generate attractive risk adjusted returns in today's lending and mark today's lending market.
Thank you for joining us today.
And now we're happy to take your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question will be from Jade Rahmani with Keybanc. Please go ahead.
Thank you very much can you talk to the tone in the current market and what youre seeing from borrowers as well as competitive lenders and also did your pace of originations underperform, perhaps your.
Estimated.
Relative to where you said loans.
Loans in closing we're at the last quarter's comments.
Hey, Jay this is Matt.
You for the question.
Good to hear from you.
Just on terms of.
The tone in the market.
<unk>.
I think clearly we are seeing.
At the macro level a lot of uncertainty.
As it relates to inflation as it relates to.
Short term interest rate increases.
Certainly geopolitical environment.
And then when you look down at the real estate level.
Things feel pretty.
Pretty healthy, especially in the growth sectors.
Some pretty substantial rent increases.
Across a lot of the property types that.
We invest in.
And so I'd say, what we're seeing in the market from our borrowers is trying to navigate navigate that dichotomy and trying to understand what is going to be the long term impact on or short term impact on real estate fundamentals.
Fundamentals in values.
But I think we're still seeing an increase in allocation to real estate. If you think about some of the inflation trends that we've seen in the market.
Yeah.
Then people view real estate as.
An inflation hedge as a good investment within an inflationary environment.
So theres still a lot of demand for real estate and it is a very active.
Acquisition market today.
Today as well on the lending side.
More cautious today for sure.
You've seen the <unk> market reprice.
Pretty substantially in line with other capital markets.
Got it.
A little bit of a knock on effect onto balance sheet lenders is just you start to see more supply come out of the securitized markets into.
And our market.
We're certainly looking at a number of opportunities that.
Historically be in.
On the capital market space, So from a lender's perspective, it's certainly as we mentioned in our comments theres more structure. There is a reduction in leverage and an overall more cautious tone, but whether it's in the security space or in the lending space everything is functioning.
So I think you can execute in either market, but it's just a little bit.
Obviously, a little bit more costly and it's got more structure attached to it.
And then on the I think you had asked around the originations as well.
We had said we originated around $1 billion a quarter, we were slightly under that in the first quarter and it's always hard to predict obviously in land that exactly.
And then you can see what we signed up with in the second quarter and if you add them together, it's pretty close to that $1 billion quarter. So maybe slightly behind in the first quarter, but there's a number of factors in play obviously the macro environment.
Changing and so we're mindful of that and just watching pacing a little bit the equity raise that we did was towards the back half of.
The deployment schedule for the first quarter. So some of that capital probably wasn't available to us. So just a number of factors, but I think if you look across the year, we still feel pretty good about that.
That estimate.
Obviously, when you add the two together.
Close to those numbers.
Thank you.
The growth in the non traded REIT sector has been <unk>.
Astonishing I think.
B rates raising $3 billion a month.
Starwood non traded REIT, raising I don't know a $1 billion a month maybe.
And.
Blackstone seems to announce a new REIT acquisition every week, which probably has to continue for them to deploy that capital what impact on the market. If any do you believe that influences, having and do you view it as a negative positive or.
Not really relevant to.
Overall real estate I mean, the concern would be that they are in fact setting pricing.
Some areas of the market and that could be feeding into for example.
For example, multifamily.
Yes, I mean, I wouldn't want to comment on how it's impacting the broader real estate markets I can tell you how it's impacting.
Real estate finance and the things that we do on a day to day basis.
It's creating a lot more lending opportunity.
If you think about the publicly traded REIT historically, they would finance themselves.
Through this the MBS market not necessarily through the mortgage market.
They were pretty heavily use corporate unsecured and so you've seen a transfer of.
That from that unsecured market into the into the mortgage market and I think that drove a lot of the.
The issuance in SaaS be last.
Single asset single borrower CBS market last year.
So we locally sitting here I think it's a net positive because it gives us more opportunities to lend to high quality sponsors and theyre typically not high leverage borrowers either so its a relatively safe lending profile and if you take one step back out of <unk> and think about what we're doing across our picking a real estate credit platform.
The insurance capital have with Securities capital that we have it certainly created a good investing environment for the debt side of our business.
Okay. So youre, saying that you are lending to them.
I don't think Thats a negative it's positive probably because they are very low leverage but is that what youre, saying.
Yes, it's great lending opportunities.
Say investing opportunities for us both on the direct lending side as well as on the on the securities investing side away from <unk> and some of the private funds that we manage.
Thank you very much sure.
The next question will be from Stephen laws from Raymond James. Please go ahead.
Yes, hi, good morning, Matt.
Matt I wanted to started kind of bigger picture a lot moving around with with asset yields interest rate financing costs et cetera. So no can you can you maybe walk through.
Ro.
You say, a new dollar put into senior loan multifamily today versus kind of how that ROE build.
It looked in the fall maybe looking at.
Coupon financing costs and the leverage you can get to cielo is your counterparties.
Yeah, Stephen Thank you for the question I can take a shot at that I think that the math is relatively straightforward.
I would say asset and liability spreads have widened call it.
25% or so basis points.
On the year.
So those are those are largely offsetting leverage available to us as a borrower.
Largely unchanged.
And.
You do have to seek financing in other places so there's more dispersion in the cost of financing today like cielo.
CLO Mark obviously.
The wider end of.
Pricing, but.
Other alternatives to that.
That you can use that havent havent why not as materially so you have to be a little bit more discerning and where your borrowing.
But overall I would say from an ROE basis, most of the impact we're seeing is really from the forward curve.
And a little bit more obviously conservative lending environment or what we're doing.
So we're thinking about ROE is now call it.
Probably up 100, or so basis points, maybe slightly more from from the fall of last year. The posture of the market just away from row as we mentioned in our call I mean, the posture of the lending market is certainly very different than the fall.
Last year end.
There's much more conservatism in the market today.
And it's kind of a little bit more of a lender's market. If you will.
Great. Thanks for those comments, Matt Patrick shifting of the interest rate sensitivity.
I appreciate the disclosure you guys provide.
Certainly.
We'll come back here soon.
No.
Our information we tended to do more things on average, but trying to think about any any lumpiness in that are there any large loans that could repay that.
Significantly in the money floors or anything we need to look at some of Lumpiness on the LIBOR sensitivity.
Standpoint.
Sure Good morning, Stephen Thanks for the thanks for the question I think Thats right.
Where we'd have some sensitivity as to the positive meaning that we still have a few larger loans that have higher LIBOR floors and as we forecast over the course of this year and beyond those.
Those are as you can imagine some of the loans that are expected to be repaid. So we think that there is modest improvement.
Let's get repaid obviously.
In mind that as we make any new loans.
Those new loans are set that.
Floors that are at spot or below sort of the spot rate. So there are 100% sensitive to the rate movements. So this is a snapshot obviously as of the first quarter, but as we think into the second quarter. Two factors are happening one rates are going higher and so as you think about the chart.
We're kind of shifting our starting point to the right a little bit and second we're increasingly turning over those LIBOR loans into new sofa loans, which also should have a positive.
Ben to the to the outlook on this chart in subsequent quarters.
Great I appreciate the comments Patrick Thanks for taking my questions. This morning.
Thank you.
The next question is from Don Vendetti with Wells Fargo. Please go ahead.
Yes can you talk a little bit about the two Philadelphia office building were added to the watch list.
Situations, where the business plans are a little behind schedule endemic related and then maybe just broader comments on office.
Do you think there's still a risk.
<unk> office credits popping up.
Watch one.
Hey, John It's Matt. Thank you for joining us and thanks for the question.
Couple of comments on the two we added.
They were both called light value add.
Lease up place our typical pretty typical for the office.
Profile lending we would do.
And.
With the Covid related I, certainly think Covid had an impact on office leasing overall and certainly within the Philadelphia market. So.
And I think that it's hard to say that.
It wasn't impacted by that.
And why we put them in.
Watch for us because we haven't seen progress on the leasing front. There. So certainly the business plans are a little bit behind but not materially, but a little bit behind.
What we would've projected or budgeted from a leasing perspective.
Occupancies are similar to where we originally went on them.
Both I would say have significant cash equity behind us in terms of.
At closing.
Capital contributions from sponsors so we will continue to monitor those and keep everyone updated.
Overall, I would say on the office sector, it still feels pretty bifurcated.
The growth markets.
And high quality assets.
We're seeing a pretty strong leasing demand.
And in those areas.
Whereas as you get into the more stagnant markets are class B type of office, that's really where youre seeing.
The least amount of.
Need for space.
I do think that that will continue to play through play through the market.
And.
That's our expectation going forward.
Got it thank you.
And the next question will come from Rick Shane from Jpmorgan. Please go ahead.
Thanks for taking my.
Morning.
Look you Tom.
Great deal about your emphasis on multifamily in real life science.
And obviously you continued to participate in.
All segments of the market I'm curious given the competition.
And sort of think of it on a continual basis for multifamily down to probably officer.
At the other end.
Can you talk a little bit about how the comp the competitive landscape and how that impacts deal term and pricing. So what would you expect.
The differential to be at different parts of the continuum.
Hey, Rick it's Matt I can try to take that.
It's interesting.
I'll kind of give you the update locally here and what we're seeing and clearly we're operating in an environment that has more uncertainty than.
In the past.
I would say overall it feels like leverage has dialed back call it.
5% or so across all property types.
But I think you were asking more about the relative continuum between.
Office multifamily at one in an office on the other I.
I would say that generally speaking that continuum is probably not as wide as you think from a leverage perspective multifamily.
Currently and that maybe high 60% to 70% LTV on a transitional asset again dialed back about 5% from the end of the end of last year.
And office leverage.
It depends on the amount of transition, but you are probably thinking more around 60% to 65% leverage again.
Every office, there was going to be pretty unique.
But if you've got in place a lot of in place tenancy in and <unk> got some duration to that to those leases and you could certainly see a 65%.
Our leverage profile and then from a cost of capital perspective multifamily is at the tied into the range.
We're seeing that pricing in today's market in the call it very high twos over sofa.
Office is clearly has a three handle on it so again, a little bit depending on leverage but call. It low low to mid threes would probably be the office quote depending on the dynamic there.
So hopefully that gives you a little bit of a range in terms of multifamily and office and I would say.
Industrial is pricing.
Somewhere in the middle, but probably closer to the multifamily end of things than the office.
No. It's a great answer I really appreciate the effort to be that specific so thank you very much.
Sure.
And the next question will be from Steve Delaney with JMP Securities. Please go ahead.
So congratulations on a strong quarter.
EBITDA coverage and also the capital markets activity.
Let me start with capital markets.
Depressed deal the common deal I guess about 280 some million combined.
They're a direct linkage in terms of that equity.
A formation.
To your ability to increase your revolver and your term loan facility.
The way you did in the quarter.
Hey, Steve Good morning, it's Patrick.
Patrick.
Hi, there is certainly I mean, I think as you look at what we've done over the last couple of years as we've grown the equity base.
We've gone back to a number of our facilities. There was two examples of that this quarter both on the non mark to market facility, which we grew from 500 to 750, but also the revolver, which we grew from $3 35 to $6 10.
Sequential quarter and so certainly we.
As we increase equity our ability to increase our liabilities, we did that in the fall with a term loan b, we had a $300 million term loan b that we repriced and then upsize an additional $50 million. So I think as you see us continue to.
Grow the company, we will have opportunities to size up the debt pieces that we that we have in place. We are still very focused on diversity as you know and so were not done evolving and continuing to innovate.
On the financing side and so we will continue to look to add other sources of financing, but clearly growing some of the existing facilities that we have through the relationships.
At KKR capital markets is one of our top goals.
Great Yes.
Looked over it I was thinking okay.
You've really got your 79% non mark to market, you've got a lot of diversity in the funding and if I see any kind of a gap or let's call. It an opportunity you do have the one small convert but im curious if you would.
We're watching the high yield notes market another convert with the objective of obtaining some fixed rate.
Funding, which would clearly make you more asset sensitive.
Sure I mean, those are those markets. The two that you mentioned are ones that we track.
We watch closely and I think going forward, we'll be opportunistic.
Thinking about having how to access those.
Great. Thanks, Patrick.
Thank you.
The next question is from Eric Hagen with BTG. Please go ahead.
Hey, Thanks, Good morning, I think I have a couple first just wanted to ask about the coupon spread on the multifamily loans you originated in April and maybe understand a little bit more about what's driving that to come come in a little tighter than the spread you have in the back book.
And then on the conditions in the CLO market.
I imagine that having the multifamily loans makes it easier to potentially issue going forward, but can you share some detail around how other loan types or financing through cielo right now and your outlook there.
Yes, I can take the first part Eric it's Matt Thanks for the question.
Just on <unk>.
Sure.
The multifamily deals that we did in.
In April I think these are generally in line with where we see current market spreads I can go back and compare them to what we did in the first quarter on the multifamily side, but as I mentioned.
Rick I think we see that multifamily market from.
From a spread.
<unk> in that very high twos area and so this is sort of in line with that.
And then I am sorry can you repeat your second question.
So yes, just checking in on conditions in the CLO market.
I imagine that having the multifamily loans makes it.
On a more seamless to potentially issue another deal going forward, but any detail around how other loan types of financings CLO.
Eric It's Patrick I'll take that question certainly.
When I think about the range of assets that can be financed in the CLO market.
It's relatively wide I mean, it fits all of the.
Major asset types that we think about from an asset selection standpoint, So multifamily office life science industrial all readily financeable in the CLO market. We did the multifamily only CLO in the first quarter and I think that was generally well received.
And so that's and obviously, we'll continue to have the benefit of that going forward from a from a reinvestment standpoint, but I think that the market is open to finance all of those property types.
The range of capital structures and spreads differ a little bit and probably a different theres been more differentiation this year than we've seen.
In the past and I think that's not uncommon when you see spreads widen out, but I think if you look at where the asset coupons are for those different property types away from multifamily.
Can still be financed relatively efficient.
Relatively efficiently.
Got it that's helpful. Thank you.
Again, if you have a question. Please press Star then one.
The next question is a follow up from Jade Rahmani from <unk>. Please go ahead.
Thanks very much.
Just to follow up on the watch list loans to Philly loans, where they put on watch list immediately because the Philadelphia office market index slowed and that was what triggered that or are there asset specific reasons for that.
Yes.
Yeah.
It really has to do with the.
The business plan, just the leasing profile of each asset and we just haven't seen a lot of net absorption are net positive leasing at at each at each of the properties. So it's obviously a comment on the broader Philadelphia market, but.
Slowing through to these assets in particular.
And in your view does the Philadelphia office market represent more of that sluggishness trend that we're seeing in legacy office.
There isn't that compelling and need to be back in the office or is it a timing factor what do you think the main explanation is.
I think really is one of those markets thats lagged in.
Philadelphia is one of those markets is allowed during COVID-19 .
Okay. Thanks, very much for taking the follow up.
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.
Great. Thanks, everyone for joining today's call. Please reach out to me or the team here with any follow up questions take care.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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