Q4 2023 KKR Real Estate Finance Trust Inc Earnings Call
Operator: Good morning, and welcome to the KKR Real Estate Finance Trust fourth quarter 2023 financial results conference call. All participants will be in listen only mode.
Good morning, and welcome to the KKR Real estate Finance Trust fourth quarter 2023 financial results Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero after today's.
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Operator: To withdraw your question, please press star then two. Please note, this event is being recorded. 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 Jack Switala. Please go ahead.
Great. Thanks, operator, and welcome to the KKR Real estate Finance Trust earnings call for the fourth quarter of 2023 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 <unk>.
Jack Switala: Great. Thanks, operator. And welcome to the KKR Real Estate Finance Trust earnings call for the fourth quarter of 2023. As the operator mentioned, this is Jack Switala.
Jack Switala: Today, I'm joined on the call by our CEO, Matt Salem, our President and COO, Patrick Mattson, and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the investor relations portion of our website. This call will also contain certain forward-looking statements that do not guarantee future events or performance; please refer to our most recently filed 10-K 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 fourth quarter of 2023, we reported a net loss of $18.7 million, or negative 27 cents per share.
Yes.
I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor relations portion of our website.
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.
Before I turn the call over to Matt I'll provide a brief recap of our results for.
For the fourth quarter of 2023, we reported a GAAP net loss of $18 $7 million or negative <unk> 27 per share.
Jack Switala: Distributable earnings this quarter were negative $26 million, or negative 37 cents per share, including a write-off of $59 million, or 85 cents per share. Distributable earnings prior to realized losses were $0.47 per share, relative to our Q4 $0.43 per share dividends. Book value per share as of December 31, 2023 was $15.52, a decline of approximately 5% quarter over quarter. Additionally, our CECL allowance decreased to $3.06 per share from $3.21 per share last quarter.
Distributable earnings this quarter were negative $26 million or negative <unk> 37 per share, including a write off of $59 million or <unk> 85 per share.
Distributable earnings prior to realized losses were 47 cents per share relative to our Q4 43 cents per share dividend.
Book value per share as of December 31, 2023 was $15.52 a decline of approximately 5% quarter over quarter.
Our seasonal allowance decreased to $3 six per share from $3 21 per share last quarter.
In mid January we paid a cash dividend of 43 per common share with respect to the fourth quarter.
Jack Switala: In mid-January, we paid a cash dividend of $0.43 per common share with respect to the fourth quarter. Additionally, the company's Board of Directors declared a dividend of $0.25 per share of common stock with respect to the first quarter of 2024. The dividend is payable on April 15th, 2024 to KRF's common stockholders of record as of March 28th, 2024. Thank you, Jack. Good morning, everyone.
Additionally, the company's board of directors declared a dividend of 25 per share of common stock with respect to the first quarter of 2024.
The dividend is payable on April 15th 2024 to <unk> common stockholders of record as of March 28 2024.
With that I'd now like to turn the call over to Matt.
Thank you Jack good morning, everyone and thank you for joining us today.
Matt Salem: And thank you for joining us today. Before turning to the current market environment, company results, and dividend commentary, I'd like to highlight KREF's achievements during 2023. We have focused our efforts on maintaining high levels of liquidity, fortifying our liability structure, and proactively managing our portfolio, all of which has been critical to KRF's ability to navigate this challenging market, to be specific.
Before turning to the current market environment company results and dividend commentary I'd like to highlight K rest achievements during 2023.
We have focused our efforts on maintaining high levels of liquidity.
Fortifying our liability structure.
Proactively managing our portfolio.
All of which has been critical to K rest of ability to navigate this challenging market.
To be specific.
Matt Salem: We have built and maintained a market-leading liquidity position with the help of KKR Capital Markets, with current cash on hand and undrawn corporate revolver capacity of nearly $600 million. Our financing continues to be best in class, which we further optimized by upsizing a repurchase agreement by $160 million and extending the term. KRF has no corporate debt or final facility maturities for two years.
We have built and maintained our market leading liquidity position with the help of KKR capital markets.
With current cash on hand, and Undrawn corporate revolver capacity of nearly $600 million.
Our financing continues to be best in class.
Which we further optimized by upsizing, our repurchase agreement by $160 million.
And extending the term.
<unk> has no corporate debt where final facility maturities for two years.
Matt Salem: 76% of our secured financing, as of year-end, was completely non-mark-to-market, and the remaining 24% was only marked to credit. We received $767 million in repayment, with office loans representing approximately 25% of total repayment. Our unfunded commitments as a percentage of the portfolio are 10% at year-end 2023, down from 16% at year-end 2022. More than half of our portfolio is supported by multifamily and industrial properties; multifamily remains our largest property type, representing approximately 41% of the portfolio, and we continue to see stable underlying performance across that segment, with weighted average rent increases of 3.9% year over year in our portfolio. Office represents our second largest property type and since the beginning of last year has decreased as a percent of the portfolio from 26% to 22% today, including a full payoff last month of $173 million previously risk-rated for loans.
76% of our secured financing as of year end was completely non mark to market.
And the remaining 24% is only mark to credit.
We received 767 million of repayments with office loans, representing approximately 25% of total repayments.
Our unfunded commitments as a percentage of the portfolio are 10% at year end 2023.
From 16% at year end 2022.
More than half of our portfolio is supported by multifamily and industrial properties.
Multifamily remains our largest property types, representing approximately 41% of the portfolio.
And we continue to see stable underlying performance across that segment.
With weighted average rent increases of three 9% year over year and our portfolio.
Office represents our second largest property types and since the beginning of last year has decreased as a percent of the portfolio from 26% to 22% today, including a full payoff last month.
173 million dollar previously risk rated four loans.
Matt Salem: Although secured by a Washington, D.C., property, access to KKR's broader real estate platform, with approximately 150 dedicated professionals and over 68 billion assets under management, has been instrumental in the management of KRF's portfolio. Our capabilities have been further bolstered by our affiliated, rated special servicer, KSTAR, with a team of more than 45 professionals and over $45 billion of special servicing rights, providing us with extensive expertise and access to sizable, real-time market information. We have been actively using the many tools at our disposal to execute on a variety of workout options, including modifications, restructurings, as well as taking title to and managing real estate.
Secured by a Washington D C property.
Access to kick yards brought a real estate platform.
With approximately 150 dedicated professionals and over 68 billion of assets under management.
Has been instrumental in the management of <unk> portfolio.
Our capabilities have been further bolstered by our affiliated rated special servicer Costar with a team of more than 45 professionals.
Over 45 billion of special servicing rights.
Providing us with extensive expertise and access to a sizable real time market information.
We have been actively using the many tools at our disposal.
Skewed on a variety of workout options, including modifications restructurings.
Restructurings as.
As well as taking title and managing real estate.
Since our last call.
Matt Salem: Since our last call, the Federal Reserve has indicated an end to its interest rate hike, with potential rate cuts beginning in the first half of the year. Market sentiment has improved dramatically, as some of the tail risk driven by inflation and higher interest rates has subsided. The Broader Rally in Equities and Fixed Incomes is impacting the commercial real estate equity and debt markets as well, with a significant heightening in CMBS and loan spreads over the past few months. The fear-greed factor has clearly shifted, and capital is flowing into the market. We expect acquisition and refinance activity to increase this year, and we are seeing that in our own lending pipeline across our different capital sources. However, despite this strong momentum, challenges remain given the value declines from the post-COVID interest rate environment.
The Federal reserve has indicated and to their interest rate hikes with potential rate cuts beginning in the first half of the year.
Market sentiment has improved dramatically.
Some of the tail risk driven by inflation and higher interest rates have subsided.
The broader rally in equities and fixed income is.
Is impacting the commercial real estate equity and debt markets as well with.
With significant tightening and see MBS.
And loan spreads over the past few months.
The fear greed factor has clearly shifted and capital is flowing into the markets.
We expect acquisition and refinance activity to increase this year.
And we're seeing that in our own lending pipeline across our different capital sources.
However, despite this strong momentum challenges remain given the value declines from the post COVID-19 interest rate environment.
Matt Salem: Today's higher interest rates and carrying costs, combined with interest rate cap costs and near-term maturity dates, continue to stress the real estate capital structure. And now, I'll discuss KREF's earnings power and dividend philosophy as we get into 2020. Last year, KREF's earnings potential benefited from the higher interest rate environment, with average run rate distributable earnings before losses of $0.48 per quarter throughout 2023.
Today's higher interest rates and carrying costs.
Combined with interest rate cap costs and near term maturity dates.
Distressed real estate capital structures.
And now I'll discuss tariffs earnings power and dividend philosophy, as we get into 2024.
Last year Kbr's earnings potential benefited from a higher interest rate environment.
With average run rate distributable earnings before losses of 48 cents per quarter throughout 2023.
Matt Salem: We stated last quarter that as we determine the run rate earnings potential of the business into 2024, the main drivers will be interest rates, portfolio performance, and the ability to unlock equity held in our risk-rated five assets. We have been proactive and transparent as we work through this market, and we have implemented a variety of strategies to optimize the outcome of our Watchlist Loan today. We have a few assets with the best path forward to maximize value will be to take title, operate the real estate, and stabilize cash flows before selling. Each has different circumstances.
We stated last quarter that as we determined the run rate earnings potential of the business into 2024. The main drivers will be interest rates.
Portfolio performance.
And the ability to unlock equity held at our risk rated five assets.
We have been proactive and transparent as we work through this market.
And we have implemented a variety of strategies to optimize the outcome of our watch list loans.
Today, we have a few assets, where the best path forward to maximize value.
It will be to take title.
Operate the real estate and stabilized cash flows before selling.
Each has different circumstances, but.
Matt Salem: But this is high-quality real estate that we have full confidence will lease and stabilize over time. Put it simply, we have great real estate, we have ample liquidity, and we have the resources and expertise to create value. Once stabilized, we believe we can sell the real estate at a higher value than our current mark. We cycle that capital into cash-flowing assets and return to a more normal level of operating earnings. However... Getting to stabilization will require time, and Impact Earnings in the entire to that end. The Board of Directors declared a dividend of 25 cents per share for the first quarter.
But this is high quality real estate that we have full confidence well leased and stabilized overtime.
To put it simply.
We have great real estate, we have ample liquidity and.
And we have the resources and expertise to create value.
Once stabilized we believe we can sell the real estate at a higher value than our current mark.
Recycle that capital into cash flowing assets.
And returned to a more normal level of operating earnings.
However.
Getting to stabilization will require time.
And impact earnings in the interim.
To that end.
The board of directors declared a dividend of 25 cents per share for the first quarter.
Matt Salem: The dividend is set at a level where we can cover with distributable earnings X losses with our performing loan portfolio under a number of different scenarios, including lower interest rates and the potential migration of loans to cost recovery and REO. To be clear, in the near term, we expect DEX losses to be significantly higher than our dividends, similar to how we've operated in the past. We are taking a proactive approach and making this adjustment now, as opposed to waiting for a typical March declaration date, in order to provide transparency, importantly, as we sell our REO portfolio. We can reinvest the capital. It's a new loan asset to unlock additional earnings potential. To put some context around this, We believe we can generate an additional $0.12 per share in Distributable Earnings per quarter, and this is just on our existing base. Of course,
The dividend is set at a level, where we can cover with distributable earnings ex losses with our performing loan portfolio.
Under a number of different scenarios.
Including lower interest rates.
And the potential migration of loans to cost recovery in Oreo.
To be clear in the near term, we expect D E X losses to be significantly higher than our dividend.
Similar to how we've operated in the past.
We are taking a proactive approach.
In making this adjustment now.
As opposed to waiting for a typical March declaration date.
In order to provide transparency.
Importantly, as we sell our Oreo portfolio.
We can reinvest the capital.
And the new loan assets.
To unlock additional earnings potential.
To put some context around this.
We believe we can generate an additional.
12 cents per share.
Distributable earnings per quarter.
And this is just on our existing basis of course.
Patrick Mattson: The goal is to gain more than that. The assets driving this impact include our Portland retail and redevelopment property, our Philadelphia REO, Mountain View Projected REO, and potentially the Seattle Life Science Loan, which combined represent approximately $150 million of equity. Continuing with our transparent reporting, we've added a new page in our earnings presentation highlighting these assets. With that, I'll turn the call over to Patrick. Thank you, Matt. Good morning, everyone
The goal is to gain more than that overtime.
Yeah.
The assets driving this impact include our Portland retail redevelopment property.
Our Philadelphia Oreo.
Our mountain view projected RVO and potentially the Seattle life science loan, which combined represent approximately $150 million of equity.
Continuing with our transparent reporting we've added a new page in our earnings presentation highlighting these assets.
With that I'll turn the call over to Patrick.
Yeah.
Thank you Matt Good morning, everyone I'll begin with updates to our Stifel allowance and watch list.
Patrick Mattson: I'll begin with updates to our Cecil Allowance and Watch List. We finish the quarter with $213 million in CECL reserves, over two-thirds of which is held against the three 5-rated loans. Reserves decreased by $9 million quarter over quarter, primarily as a result of a few changes in Q4.
We finished the quarter with $213 million in seasonal reserves.
Over two thirds of which is held against the three five rated loans.
Reserves decreased by $9 million quarter over quarter, primarily as a result of a few changes in Q4.
First upon.
Patrick Mattson: First, upon taking title to the five-rated Philadelphia office asset, we realized a $59 million loss, which is lower than the $69 million asset-specific FUSIL reserve in the prior quarter. The CECL amount was reversed, and the realized loss flowed through our distributable earnings in Q4. Looking ahead, we are in discussions to sell two of the four properties in the near term. I do not expect any impact on DE as a result of the sale. Second, we increased reserves on our loans secured by the Class A office campus in Mountain View, California. Reflecting a lower valuation given the continued slow leasing environment in Silicon Valley and the lower levels of liquidity, we expect to take title to the asset in the second quarter. Third, we downgrade the risk rating and increase reserves on a loan backed by a Class A Seattle Life Sciences property.
Upon taking title to the five rated Philadelphia office asset, we realized a 59 million dollar loss, which is lower than the 69 million dollar asset specific seasonal reserve in the prior quarter.
The full amount was reversed and realized law flowed through our distributable earnings in Q4.
Looking ahead, we are in discussions to sell two of the four properties in the near term.
Do not expect any impact of D E. As a result of the sale.
Second we increased reserves on a loan secured by the class a office campus in Mountain view, California.
Reflecting a lower valuation given the continued slow leasing environment in silicon valley, and the lower levels of liquidity.
We expect to take title to the asset in the second quarter.
Third we downgrade the risk rating and increase reserves a loan backed by a class a Seattle life Sciences property.
Patrick Mattson: This property was built in 2021, and our sponsors purchased and converted the asset to life science lab use for spec lease up. As Matt mentioned, our multifamily portfolio has generally been stable, with low single-digit rental increases supporting NOI growth. Most sponsors have renewed interest rate caps at maturity. However, we downgraded two multifamily loans to risk ratings of four in the quarter, given ongoing discussions regarding interest rate caps. Both properties are over 90% occupied, and the loans are current on interest payments. As we continue to work through our watch list portfolio, we saw positive outcomes on two of our Washington, D.C., office loans that had been on the watch list last quarter. 1st January
This property was built in 2021 and our sponsors purchased and converted the asset to life Science lab use prospect lease up.
As Matt mentioned.
Our multifamily portfolio has generally been stable with low single digit rental increases supporting NOI growth.
Most sponsors have renewed interest rate caps that maturity.
However, we downgraded chew multifamily loans, so risk ratings of four in the quarter.
Given ongoing discussions regarding interest rate caps.
Both properties are over 90% occupied.
And the loans are current on interest payments.
As we continue to work through our watch list portfolio. We saw positive outcomes on two of our Washington D. C office loans that had been on the watch list last quarter.
First in January.
Patrick Mattson: The $173 million Washington, D.C. office loan was paid off in full, as the sponsor completed a refinance with a new lender. This recently renovated and well-located Class A office asset had leased up to nearly 90% following the completion of the sponsor's CapEx plan, or other watch lists. The Washington, D.C. office loan is now risk rated three, following a modification finalized in the fourth quarter, which included a Class A property is 92% leased after positive momentum throughout last year. With these positive outcomes, we have only one remaining risk-rated for-office loan, with current asset exposure in the form of a $37.5 million mezzanine loan. Secured by a Class A property located in Boston, we entered into discussions with the sponsor and have begun modification negotiations which may result in increased CECL reserves. We expect to provide a further update on the status of the modification next quarter. In the past 13 months, KRAF has received over $1 billion in repayment, including two full repayments totaling approximately $325 million we received in January.
The $173 million, Washington D C office loan paid off in full.
It's a sponsor completed our refinance with a new lender.
This recently renovated and well located class a office asset at least up to nearly 90%.
Following the completion of the sponsors Capex plan.
Our other watch list, Washington D C office loan.
Now risk rated three.
Following a modification finalized in the fourth quarter.
Which included a $20 million principal pay down.
The class a property is 92% leased after positive momentum throughout last year.
With these positive outcomes, we have only one remaining risk rated four office loan.
With current ASIC exposure in the form of a 37 and a half million dollars mezzanine loan.
Secured by a class a property located in Boston.
Post quarter end, we entered into discussions with the sponsor and have begun modification negotiations, which may result in increased diesel reserves.
We expect to provide a further update on the status of the modification next quarter.
In the past 13 months <unk> has received over 1 billion of repayments, including two full repayments totaling approximately 325 million we received in January.
Patrick Mattson: Both loans were previously risk-rated for..., including the D.C. office loan previously mentioned and the New York City condo loan. The weighted average risk rating on the portfolio remains 3.2, and 87% of our portfolio is risk rated 3 or better. KREF has built a diversified liability structure with $8.9 billion of financing capacity and $2.8 billion of undrawn capacity. Our non-market-to-market capacity rate remains substantial at 76%, and is diversified across two CRE CLOs, and a number of matched term lending agreements, asset-specific financing structures, as well as our corporate revolver. Excluding matched term secure financing, there are no corporate debt or final facility maturities until 2026.
Both loans were previously risk rated four including the D. C office loans previously mentioned.
And in New York City condo loan.
The weighted average risk rating on the portfolio remained three point to an 87% of our portfolio is risk rated three or better.
<unk> has built a diversified liability structure with $8 9 billion of financing capacity and $2 8 billion of Undrawn capacity.
Our non mark to market capacity remains substantial at 76%.
And is diversified across chew CRA clo's.
And a number of match term lending agreements.
And asset specific financing structures as well as our corporate revolver.
Excluding match term secured financing there are no corporate debt or final facility maturities until 'twenty 'twenty six.
Patrick Mattson: KRF is well capitalized, with $136 million of cash and $450 million of corporate revolver capacity available as of year end. These levels of liquidity, coupled with our deep relationships with both our financing partners and borrowers, position KREF strongly for this dynamic credit and interest rate environment. Thank you for joining us today.
<unk> is well capitalized.
The 136 million of cash and $450 million of corporate revolver capacity available as of year end.
Our best in class non mark to market financing and high levels of liquidity.
Coupled with our deep relationships with both our financing partners and borrowers positions Kay were up strongly for this dynamic credit and interest rate environment.
Thank you for joining us today.
Operator: Now, we're happy to take your questions. We will now begin our question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key.
Now we're happy to take your questions.
We will now begin our question and answer session to ask a question you May Press Star then one on your telephone keypad.
Youre using a speakerphone please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Operator: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will be from Sarah Barcomb from BTIG. Please go ahead. Hey, good morning, everyone.
At this time, we will pause momentarily to assemble our roster.
Yeah.
And the first question will be from Sarah bark home from B T. I G. Please go ahead.
Hey, good morning, everyone. So I think a good place to start would be with this dividend cut obviously, a big reset here and you mentioned in your prepared remarks that it was mostly the earnings drag from Oreo assets and nonperforming loans that really drove this decision to cut it.
Matt Salem: So, I think a good place to start would be with this dividend cut. Obviously, there is a big reset here. You mentioned in your prepared remarks that it was mostly the earnings dragged from REO assets and non-performing loans that really drove this decision to cut the dividend. I'm also wondering how much of the dividend cut can be attributed to the near-term risk of multifamily loan maturities that are coming up this year. We saw a couple multifamily assets come on the watch list this quarter.
And I'm also wondering how much of that.
The dividend cut can be attributed to the near term risk of multifamily loan maturities that are coming up. This year. We saw a couple of multifamily assets come on the watch list.
Matt Salem: You spoke to those dynamics in your prepared remarks, but we've talked a lot about this risk in recent quarters. These 2021 vintage loans still have SOFR capped well below today's levels, and a significant portion of those caps should come off this year. So, when you were thinking about this dividend reset, how much did that dynamic come into play? Just thinking about multifamily debt service coverage and maybe the risk of seeing more sponsors push back on re-upping that rate cap. I was hoping you could speak to that a little bit. Hey, sir, it's Matt.
And you spoke to those dynamics in your prepared remarks, but you know we've talked a lot about the RASK in recent quarters on these 2021 vintage loans still have so for a capped well below today's levels and a significant portion of that is cap should come off. This year. So you know when you were thinking about this dividend reset how much.
That dynamic I'm coming to play and you know just thinking about multifamily debt service coverage and maybe the risk it seemed more sponsors pushback on re upping that that rate cap I was hoping you could speak to that a little bit.
Hey, Matt.
Matt Salem: Happy to take it. Thank you for asking the question. I guess when we think about the multi-family portfolio, I don't think our view has changed that much from what we saw or what we spoke about last quarter. As you highlight, obviously, leverage has come up in those loans just given the change in cap rates and the interest rate environment. Keep in mind, our portfolio is almost all Class A multifamily, so this is pretty high quality real estate. We've got, I think we've always been pretty transparent in terms of just how we identify our risk ratings and those particular loans that you mentioned that moved into the four-rated bucket this quarter.
Yeah happy to take it. Thank you for for the question.
I guess, when we think about the multifamily portfolio.
I don't think our view has changed that much from what were what we saw what we spoke about last quarter as.
As you highlight obviously leverages come up in those in those loans, just given the change in cap rates and the interest rate environment.
Keep in mind our portfolio is.
Most all class a.
Class, a multifamily was pretty high quality pretty high quality real estate.
We've got I think we've always been pretty transparent in terms of just how were identifying a risk ratings and.
His particular loans that you mentioned that moved into.
The four rated bucket this quarter.
Matt Salem: We're obviously in modification discussions, both loans are current, so we'll kind of see where we ultimately end up there. But it comes back, I think, to our high-level view, which is there's going to be noise in the multifamily sector, just given that change in value. But it really comes back to value at the end of the day.
Well, obviously in modification discussions both loans are alright, so we'll kind of see where we ultimately ended up there.
But it comes back I think to our high level view, which is there's going to be probably noise in the multifamily sector, just given that change in value, but it really comes back to.
Value at the end of the day and what we think about projecting what's going to happen our multifamily portfolio.
Matt Salem: And as we think about projecting what's going to happen in our multifamily portfolio, we're not expecting a lot of losses at all. I think, in most cases, we'll be able to work with our borrowers. We're seeing the most stress in borrowers that have a little bit less liquidity, and so that interest rate cap becomes more problematic. The one thing I would highlight as well in the multifamily sector is that the amount of liquidity there is tremendous. And when you think about the macro environment where we are today, with a better understanding of interest rates, inflation, et cetera, we've seen a pretty strong demand for multifamily assets as we look across both our equity and our credit. So, a long-winded answer to your question, but we're not really anticipating that much trouble within the multifamily portfolio, but there'll be a little bit of noise here and there Okay, thanks for the color there.
We're not expecting.
A lot of losses.
At all I think in most cases will be able to work with our borrowers where you're seeing the most stresses and borrowers that have a little bit less liquidity and so that interest rate cap becomes more problematic.
The one thing I would highlight as well in the multifamily sector is the amount of liquidity. There is is tremendous.
And.
When you think about the macro environment, where we are today.
With a better understanding of interest rates inflation et cetera.
We've seen a pretty strong demand for multifamily assets as we look across both our equity and our and our credit business. So.
Long winded answer to your question, but we're not really anticipating that much trouble within the within the multifamily portfolio, but there'll be a little bit of noise here and there.
Okay. Thanks for that color there and then my follow up is more office life Science related you know, we we were happy to see the good news updates on those two D C offices and from a headline basis.
Matt Salem: And then my follow-up is more office life science related. You know, we were happy to see the good news updates on those two DC offices. And from a headline basis, there were no strictly office watchlist migrations.
There was no strictly office watchlist migrations, we did however, see that Seattle life Science got straight from a risk three to a risk five so I was hoping you could speak a bit more as to how we should be thinking about the rest of your life science exposure on especially for properties that were.
Matt Salem: We did, however, see that Seattle life science goes straight from a risk three to a risk five. So I was hoping you could speak a bit more as to how we should be thinking about the rest of your life science exposure, especially for properties that were potentially originally purposed for a more traditional office use and then pivoted to the life science format, like we saw with the Seattle asset. Just hoping you can kind of, you know, speak to the rest of the life science portfolio and, you know, how we should be thinking about those properties as offices or as, you know, rentable life science facilities. www.KKRealEstate.com. Sure.
We originally purpose for our more traditional office use and then pivoted to the life science format like we saw with the Seattle asset just hoping you can kind of speak to the rest of the life science portfolio and you know how we should be thinking about those properties. That's offices there as you know leasable life science.
That's it for me.
Sure.
Matt Salem: Happy to do it, a couple things I just want to highlight, and maybe this is the best place to address them. We had a lot going on in the portfolio this quarter. But if you take a step back and think about, you know, our management team, our posture in the market, and, from where we're sitting, it feels like we're getting through most of the major issues, right? We've dealt with, we've modified loans, we've restructured loans. We're going to go to title on a couple of these assets, these bigger offices in the very good part of the office portfolio where, you know, we felt like we would have issues. But, we're largely through that.
Happy to do it.
A couple of things.
A highlight and maybe that's the best place to to address it.
We had a we have a lot going on in the portfolio this quarter, but if you take a step back and you think about.
Our management team our posture in the market.
And.
From where we're sitting it feels like we're getting through most of the major issues right. We've dealt with we modified loans, we've restructured loans, we're going to go to title on a couple of of these assets.
These bigger office.
For the office portfolio, where we felt like we would have issues like we're largely through that we've got one more four rated office loan that Patrick highlighted in his comments that we're in negotiations on with a modification that will likely lead to some increase in reserves, but.
Matt Salem: We've got one more four-rated office loan that Patrick Highlighter, in his comment, mentioned that we're in negotiations on with a modification. And that will likely lead to some increase in reserves.
Matt Salem: And as we talked about in the past, the rest of the offer portfolio, we still feel good that we don't see any near-term or intermediate-term migration of that portfolio into higher risk ratings. So we've come a long way. And the markets have come a long way. This time last year, we didn't know where inflation was going to be. We didn't know when the Fed was going to stop hiking.
And as we've talked about in the past the rest of the offer portfolio. We still feel good that we don't see any near term intermediate term migration of that portfolio into higher risk ratings.
So we've come a long way.
And the market has come a long way. This time last year, we didn't know where inflation was going to be.
We didn't know when the fed was going to stop hiking in fact, we have like for a more for more hikes ahead of us.
Matt Salem: In fact, we have four more hikes ahead of us, and now, clearly, we're in a much different environment, and we're debating how many and when interest rate cuts are going to start. So the market has changed a lot, we've worked through our portfolio a lot, and overall, we feel like we're in a much better position today than a year ago with all that uncertainty as it relates to life science. We break it down into a couple of different buckets within our own portfolio, but a little less than half of our portfolio is basically construction. So it's purpose built, very well located.
And now.
Clearly we're in a much different environment than we're debating how many and when interest rate cuts are going to start. So the market has changed a lot we've worked through our portfolio a lot.
Overall, we feel like.
We're in a much better position today than than they were a year ago with all of that uncertainty.
As it relates to life science.
We break it down into a couple of a couple of different buckets within our own portfolio.
A little less than half of our portfolio is is basically construction. So it's purpose built hot very well located.
Trophy like.
Matt Salem: ........................ real estate within the life science sector. We feel very good about that component of the portfolio for those reasons. We do have some that were more of a conversion from traditional office to life science. Those have been converted at this point in time, so don't think about them as traditional offices.
Real estate within the life science sector, we feel very good about that component of the portfolio for those reasons.
We do have some that was more of a conversion.
From office traditional office to life science those have been converted at this point in time. So don't think about those as traditional office those are ready for lab leasing, including our Seattle.
Matt Salem: Those are ready for lab leasing, including our Seattle transaction or property. A big subset of those have leasing in place, and I think one of the reasons we saw the jump in the risk rating in the Seattle Life Science, it's a big business plan, right? There's a big lease up ahead of us there, and when you add that together with the time that takes and the cost of carrying in the market, it just gets really expensive for the existing sponsor. So we'll continue negotiating that with our existing sponsor there. We don't know exactly which way that's going to go yet. Obviously, we referenced it as a potential REO, but we could get to a modification there as well. We'll see how that discussion plays out.
That transaction or ore property.
And.
A big subset of those have leasing in place and I think one of the reasons. We saw the jump in the risk weighting in the Seattle Life Science Hill, just a big it's a big business plan right Theres, a big lease up ahead of US there and when you add that together with the time that takes in the cost of carry in the market. It just gets really expensive for them.
For the existing sponsor so we will continue modify negotiating that with our with our existing sponsor there and we don't know exactly which way that's going to go yet obviously, we referenced it as a potential oreo, but we could get to a modification there as well we will see how that how that discussion plays out.
Matt Salem: And that's a little bit how we're thinking about the overall life science portfolio. It's still, by the way, still a sector we like a lot. We think, obviously, it's had a little bit of cyclicality as it relates to the equity markets, but with where we are today and liquidity returning to the sector, I think we still feel very good about the intermediate and long-term prospects of life science. Great, thank you.
That's a little bit how we're thinking about the overall life life science portfolio is still by the way still a sector. We like a lot. We think obviously you've had a little bit of cyclicality as it relates to the equity markets, but.
With where we are today and and liquidity returning to the sector.
We I think we still feel very good about the intermediate long term prospects of the life science business.
Great. Thank you.
Matt Salem: And the next question is from Don Fandetti from Wells Fargo. Please go ahead. Can you talk a little bit more about the sort of difference between your expectations for DE and the 25 cent quarterly dividend? It sounds like you ran some scenarios. What would it take to put you at that tougher end of that scenario where DE gets closer to the 25 cents? Yeah, Dennis Madigan, I could take that question.
Uh huh.
And the next question is from Don <unk> from Wells Fargo. Please go ahead.
Can you talk a little bit more about the sort of difference between your expectations for D E and the 25 cent quarterly dividend and you know it sounds like you ran some scenarios like what would it take to put you with that tougher and that scenario where T. He gets closer to the 25 cents.
Okay.
Yeah.
Yes, John its Matt again, all I can take that question.
I think the two big factors that can drive that lower.
Matt Salem: I think the two big factors that could drive that lower are probably obvious, but portfolio performance, so if we saw continued negative migration in the portfolio, non-performing loans, REO, etc., beyond anything that we're seeing today. Obviously, we're incorporating our current views of, for instance, the Boston office four-rated loan. Of course, that's incorporated in what we're projecting currently, but if it goes beyond our current expectations, that could impact DE and bring that number closer to that dividend level. And then just interest rate cuts, right? We can all look at the forward curve; we're running a number of scenarios beyond that. But if we get into some type of major cuts by the Fed, that will put pressure on the portfolio as well.
<unk>.
Probably obvious but portfolio performance. So if we saw.
Can you.
Negative migration in the portfolio nonperforming loans, Oreo et cetera beyond anything that we're seeing today, obviously, we're incorporating our current views.
For instance, the Boston Office, a four rated loan of course, that's incorporated in our in.
And what we're projecting currently but if it goes beyond kind of our current expectations that could impact M D.
E and break that number closer down to that dividend level.
And then just interest rate cuts right. We can all look at the forward curve, where we're running a number of scenarios beyond that but.
But if we got into some type of like major cutting them by the fed that will put pressure on the portfolio as well, but we're trying to look out a fair a fair amount of quarters here to.
Matt Salem: But you know, we're trying to look out for a fair number of quarters here to, you know, to make sure that we've got some headroom and gives us time, right, to have patience, we want to protect book value to work out these REO assets. I think it's what our shareholders really want us to do is use our expertise and as part of the bigger KKR ecosystem. And so we are trying to buy a fair amount of time to be able to effectuate those business plans. The comments on Office are interesting.
You know to make sure that we've got some headroom and gives us time right who.
We want to have patients we want to protect book value to work out these oreo.
I think it's what our shareholders really want us to do is use our expertise and that's part of the bigger KKR ecosystem.
And so we are trying to to buy a fair amount of time.
To be able to effectuate those business plans.
Got it and then you know the comments on office or interesting it sounds like you're not expecting any intermediate term migration.
Matt Salem: It sounds like you're not expecting any intermediate term migration on the risk ratings other than the 1.4 rated. What kind of gives you that confidence, just given it seems like there's still a lot of stress in the office, plus you have rate caps and so on. Yeah, I think what gives us the confidence, and we've highlighted this on other calls, is that when you look at the three rated loans...... in the portfolio, they have very long lease terms in place, so over eight years of lease terms in place. They've got a very high debt yield, and we think at a relatively reasonable leverage, equating to a relatively reasonable leverage point. So that's the idea.
Our ratings other than the one four rated.
What kind of gives you that confidence just given it seems like there's still a lot of stress in the office plus you have rate caps and other dynamics.
Yeah.
I think what gives us confidence and we've highlighted this on on other calls is when.
When you look at the three rated loans.
In the portfolio.
They have very long lease terms in place so over eight years of lease term in place they've got a very high a.
Very high debt yield.
And we think that a relatively reasonable leopard equating to a relatively reasonable leverage point.
So.
And then.
Matt Salem: And then that's obviously the entire portfolio that's in those three, a number of those we've clearly already modified, written off, cut, and restructured with our sponsors. We've been proactive about that, but it really just comes down to the durability of those cash flows that we're seeing and how much debt yield and leverage we think is in that. And I think we've got a good idea of where the office market is. Obviously, we've worked through a number of loans within the KREP portfolio. We just got refinance out on a DC office loan, so we know where there's liquidity, and we're using all that to obviously make those statements around what we see in the rest of the three-rated office loans. Okay, thanks. And the next question will be from Steven Laws from Raymond James. Please go ahead. All right, thanks. Good morning.
Obviously, the entire portfolio that's in that three a number of those we've clearly already modified.
Written off cut.
Restructured with our with our sponsors we've been proactive about about that.
But it really just comes down to the durability of those cash flows that we're seeing and how much debt yield and leverage we think is in that and we've got a I think we got a good idea of where the office market is obviously, we've worked through a number of loans within the <unk> portfolio.
We just got refined out out of D. C office alone so.
So we know where there's where there's liquidity and we're using all of that to to obviously make those statements around.
What we see in the rest of the three rated offices.
Okay. Thanks.
And the next question will be from Stephen laws from Raymond James. Please go ahead.
Alright, thanks, good morning.
Not to follow up on <unk> question around Seattle can you talk a little bit about how.
Matt Salem: Matt, to follow up on Sarah's question about Seattle, can you talk a little bit about how that discussion may play out, the timing, you know, is it something we'll hear about next quarter, whether it's modified or REO, or is that something that lasts longer than that, kind of how that process will play out? Yes, Steven. It is always hard to handicap the timing around these discussions.
How that discussion may play out that the timing you know is it something you'll hear about next quarter, whether it's modified or are yellowed or is that something that that lasts longer than that kind of how that process will play out.
Yes, Stephen Thank you for the question.
It is always hard to handicap the timing around these discussions I think this one will go faster so we should be able to get them.
Matt Salem: I think this one will go faster, so we should be able to get, I hope, for sure, an update. We certainly will have an update, but potentially more of an idea of what the resolution looks like by our, you know, by our next call. You know, these discussions are... We're pretty deep in them right now, so we should be able to give a more fulsome update at that point. Right, and then multi was covered.
Hope for sure we'd have an update we'll certainly we'll have an update but potentially more of an idea of what the resolution looks like by our by our next call. These discussions are.
We're pretty deep in them right now so we should be able to give a more fulsome update at that point in time.
Okay and then.
I think multi was covered so a quick one on the mountain view, California, Patrick I think you said, it's probably a to cure that you know it's the it's the specific reserve that will run through D. E that we should think about the difference in the loan principal balance versus the slide that shows the projected Oreo.
Matt Salem: So a quick one on Mountain View, California, Patrick. I think you said it's probably a two queue event. You know, is the specific reserve that will run through D that we should think about the difference in the loan principal balance versus the slide that shows the projected REO? Or are there other things where it's not necessarily exactly that difference that will run through as a realized loss?
Or are there things, where it's not necessarily exactly that difference that'll run through as a realized loss.
Patrick Mattson: No, Steven, that's a good question and that's correct. On page 13 of the supplemental, where we highlight the REO schedule, we have the carrying values so that gives you a good roadmap for what we expect to happen there in the second quarter. Great. Matt, bigger picture, you know, what I guess, sort of shifting gears, but, you know, what are you looking for to go back on offense, right?
No Stephen that's a good question and that's correct, Yeah page 13 of the supplemental where we highlight the Oreo schedule. We've got the carrying value. So that gives you a good roadmap for what we expect to happen there in the second quarter.
Great that bigger picture, what are sort of shifting gears, but you know what are you looking for to go back on offense right. I know you look at a lot of investment pipeline across the KKR platform.
Matt Salem: I know you look at a lot of investment pipeline across the KKR platform. It seems like you feel like you've got a good handle on proactively addressing your concerns, and your commentary a second ago leads me to think you have comfort in your current three-rated loans. You know, do you expect to do some new originations, especially given the repayments in January? Are new originations a Q2 event? Is it something that's going to be later this year? Is it not until 25?
It seems like you feel like you've got a good handle on proactively addressing their concerns and and you know the commentary a second ago we'd.
Do you think you have comfort in your current three rated loans.
Do you expect to do some new originations, especially given the repayments in January as well.
Our new originations a Q2 event or is it something that's going to be later this year or is it not until 'twenty five kind of how do you think about you know.
Matt Salem: Kind of how do you think about, you know, turning back to offense, given where you are with your existing portfolio and your current liquidity? Yeah. Thank you, Steven.
Turning back to offense, given where you are with your existing portfolio and your current liquidity.
Yeah. Thank.
Thank you Steven I would say a couple of things, let's step away from <unk> for a second and think about the broader kick out a real estate credit business.
Matt Salem: I would say a couple things. Let's step away from KRAFT for a second and think about the broader KKR real estate credit business here. We expect to win somewhere in the magnitude of $8-10 billion dollars this year away from KRF. So we've got an active lending business across a variety of different risk-reward strategies, bank, insurance, and debt fund capital. We're seeing a very large return. In transaction volumes, both acquisitions and refinance, as I mentioned, obviously, the macro is cleared up a fair amount, and the market's getting its sea legs again, and values have come down a lot.
Will.
Expect to win somewhere in the magnitude of $8 billion to $10 billion. This year away from away from Colorado. So we've got an active lending business across a variety of different kind of risk reward strategies.
Bank insurance.
On capital, we're seeing a very large return and.
And transaction volumes, both acquisitions and refinance as I've mentioned, obviously, the macro has cleared up.
Fair amount and the market is getting its sea legs again and values have come down a lot. So you see equity investors.
Matt Salem: So you see equity investors in real estate trying to put money to work, and it's still a very good lending and lending market just given the elevated rates and the lower basis you can lend on today. So overall, we do like the market environment to invest in today. I think from a KREF perspective, it really comes back to what we've talked about in the past, which is just seeing a healthy level of repayments in the portfolio. You know, I don't think we want to increase our leverage profile right now. There's still uncertainty about that. And so, as we start to get more repayments, I think that's really where we'll look to redeploy. You're right.
In real estate trying to put money to work in and it's still a very good lending our lending market just given up the elevated rate and the lower basis, you can lend on today.
So overall, we do like the the market environment to invest today I think from.
Okay Rep perspective.
It really comes back to what we've talked about in the past which is.
Just seeing a healthy level of repayments in the portfolio.
I don't think we want to increase our leverage profile.
Now there is still uncertainty.
And so as we start to get more repayments I think that's really where well we will look to redeploy you're right. We saw a fair amount of repayments this quarter and repayments in sectors that obviously have a little bit less liquidity like office.
Matt Salem: A fair amount of repayments this quarter and repayments in sectors that obviously have a little bit less liquidity, like office. So if we see that continue in the portfolio, I think that's really where we'll think about turning it back on. Hard to predict and project when that happens, but I think it's more of a back half of the year for us if I had to guess today.
If we see that continuing the portfolio I think that's really where we will think about turning it back on hard to predict and project when that happens but.
It's more of a back half of the year for us.
If I did yesterday.
Matt Salem: But we'll continue to monitor that. Great. And then one last quick one, if I may.
But we'll continue to monitor monitor that.
Great and then one last quick one if I may add.
Matt Salem: Don's question, you talked about dividends and kind of what would push the E to that level. You mentioned kind of, I believe, aggressive settings and just given the impact of a floating rate portfolio. Any considerations of buying your own rate floors at some level to take that tail risk off the table?
Dawn's question you talked about.
Dividend and kind of what what would push the eat at that level, you mentioned kind of I believe aggressive studies and just given the impact of a floating rate portfolio any considerations of buying your own weight floors.
Some level to take that tail risk off the table.
Matt Salem: I mean, it's something we've looked at over time, at different moments in time. Right now, it doesn't feel like the best use of capital, but it's something we can continue to watch.
I mean, it's something we've it's something we've looked at them.
Over time at different moments in time.
Right now it doesn't feel like the best use of capital, but it's something we can continue to you know continue to watch.
Alright I appreciate the comments this morning. Thank you.
Matt Salem: I appreciate the comments this morning. Thank you. And again, if you have a question, please press star, then 1. The next question is from Jade Romani from KBW. Please go ahead.
And again, if you have a question. Please press Star then one.
The next question is from Jade Rahmani from K B W. Please go ahead.
Jade Romani: Thank you very much. And thanks for all the color in the presentation. Just a basic question.
Thank you very much and thanks for all the color.
And then in the presentation.
Just a basic question when we think of.
Matt Salem: When we think of interest and income, what percentage of the interest that KREF receives is funded out of existing reserves vs. Property Cash Flows, and is there perhaps a third source that I haven't thought of? Hey, Jade. It's Matt.
Interest.
Income what percentage of the interest that carryout receives its funded out of existing reserves.
Versus property cash flows and is there, perhaps a third source that I haven't thought of and thinking about that.
Hey, Jay it's Matt. Thanks for the question today, it's not a number I have.
Matt Salem: Thanks for the question today. It's not a number I have. You know, in front of me right now, we can take a deeper look and and and look at that if you think about, you know, most of our largest asset type and the second largest asset type in multifamily and office at www.KKRealEstate.com. Instruction or in lease up, and that's really where the reserves are going to factor in, and in most cases, the high, big amount of reserves is going to factor in, but don't have the exact number in front of me. The follow-up would just be what you think the true drivers of default will be in this market. You mentioned in multi-family, you don't expect much pressure. It sounds like there'll be modifications. Discussions are around interest rate caps, but you don't expect much default there. So, what, at its core, do you think is the driver of default?
In front of me right now we can take a deeper look in and look at that.
You'd think about.
Most of our.
Largest asset type.
And the second largest asset type in multifamily and office.
Most of those are leased assets.
And some high level of occupancy so I would think that the majority of the portfolio is going to be of the income coming off the floor into the portfolio I suppose.
It's coming from actual property cash flows theres, obviously, some business plans that are in.
Construction or in lease up and that's really where the reserves are going to to factor. It in and most of the big amount of reserves are going to factor in but don't have the exact.
Number in front of me.
Yeah.
The follow up would just be you know what you think the true drivers of default will be in this market. You mentioned in multifamily you don't expect much pressure you know it sounds like there'll be modifications discussions around interest rate caps, but you don't expect much default there so.
At its core do you think is the driver of default I know in a lot of cases for the mortgage Reits much of the interest is in fact funded out of interest reserves, which is similar to construction loans.
Matt Salem: I know in a lot of cases for the mortgage REITs, much of the interest is, in fact, funded out of interest reserves, similar to construction. Right. So I think, I guess a couple things. Let's just state the obvious.
Right. So I think I guess a couple of things.
Let's just state the obvious big.
Matt Salem: Big secular change and value change in office. So I think that's, you know, despite cash flow, in some cases, like, you know, there's clearly a very big deterioration there. So that will be on its own.
Big secular change and value change in office. So I think that's you know despite cash flow.
In some cases like you know there is clearly a very big deterioration there so that well will be on its own and we're all saying that we know that the other places I think you could see it is.
Matt Salem: And we're all seeing that we know that. The other places I think you could see it are in just these bigger lease-up plans. I think Seattle Life Science is a good example of that, where you're in the right sector, we're in a good property, leasing has slowed down, the business plan is very expensive to implement from our existing sponsors' perspective, and that obviously is creating... www. KKRealEstate.com On the multifamily side, I speak from our own portfolio, which, Again, tends to be very high-quality real estate.
Is it just these bigger lease up plans I think the Seattle Life Sciences is a good example of that where you are in the REIT sector. We're in a good property leased to get slowed down the business plan is very expensive to implement from our existing sponsors perspective and that obviously is creating.
And issue in discussions with that loan so youll see that in other places I think as well.
On the multifamily side I speak from our own portfolio, which.
Again, it tends to be very high quality.
Matt Salem: There's a lot of liquidity there, I think, across the board. But certainly, you could see some noise in the multifamily sector, especially if you have sponsors implementing deep value-add business plans, heavy renovations that take a long time, and then you're trying to kind of release it. Because those are, again, just deeper, longer time periods in which you're really exposed to the cost of capital in the market today. So I'll highlight a few of those things.
Real estate Theres, a lot of liquidity, there I think across the board, but it's.
Certainly you could see some noise in the multifamily sector, especially if you have sponsors implementing like valves like deep value add business plans heavy renovation.
They take a long time.
And then you're trying to kind of release it because those are again, they're just deeper longer time.
Time periods that you're really exposed to to the cost of capital.
In the market today.
Highlight a few of those things.
Okay. Thanks, and then just going through the portfolio.
Matt Salem: Okay, thanks. And then just going through the portfolio details, when I look at Lifestyne, specifically, and I compare committed principal to current principal, you know, many of the loans, there's a substantial difference, which means there's a lot of future funding, which means these are not leased assets; these are development deals. And there is very weak leasing in life science.
Portfolio details when I look at life Science.
Specifically and I compare committed principal to current principle, you know many of the loans, there's a substantial difference which means there's a lot of future fundings, which means these are not leased assets. These are development deals and there is very weak leasing and life Science I know you said long time, you're bullish but how do you.
Matt Salem: I know you said long-term you're bullish, but how do you think about the outlook for those assets? Are we going to see further non-performance beyond this Seattle asset? Well, that's not our expectation at this point in time.
About the outlook for those assets are we going to see further nonperformance beyond the Seattle asset.
Well, it's not our expectation at this point in time.
Matt Salem: You know, I think that when we look at those ones, they're in very strong locations, you know, we're in Cambridge, we're in Seaport, in Boston, and we're in South San Francisco. So these are great opportunities. Very, very strong locations for life science. The two biggest hubs in the United States, and they're purpose-built.
I think that when we look at those one they're in very strong locations. We're in.
On those construction deals were in Cambridge, where at seaport.
Boston.
We're in South San Francisco So there.
Very very strong locations for life science.
The two biggest hubs in the United States and their purpose built and.
Matt Salem: I think there's going to be a fair amount of demand for that high-quality real estate. So it's not our expectation at this point in time, but you're right to highlight that there is a lease-up component involved here. It's just the quality of the real estate and the location, and our basis, obviously, but we think we'll overcome potential issues there. You know, there's someone. And lastly, just on Seattle, since that was originated on October 21, you said it was converted from traditional office to Lifesign, so that probably took some time. But still, it's a three-year loan, and surprise you; it went from a three to a five in just one quarter.
I think theres going to be a fair amount of demand for that for that high quality real estate. So it's not our expectation at this point in time, but you're right to highlight that the original lease up component involved here. It's just.
The quality of the real estate and the location, we think anr basis, obviously, but we think we'll overcome potential issues there but.
There's some uncertainty.
And lastly, just on the Seattle since that was originated in October of 'twenty. One you said it was converted from traditional office to life science. So that probably took some time, but still it's a three year loan and also surprised you went from a three to a five in just one quarter. What do you think a reasonable timeline is to consider.
Matt Salem: What do you think a reasonable timeline is to consider stabilizing and optimizing that asset? Well, we're doing the work on that now in terms of just really understanding the lease up of that asset. You know, Seattle, in particular, is a little bit smaller life science market, so that one will take a little bit of time, but it could take anywhere from, you know, 18 plus 24 months plus to fully stabilize that asset. Thanks very much. And the next question is from Rick Shane from JP Morgan. Please go ahead.
Stabilizing and optimizing that asset.
Okay.
Okay.
Well, we're doing the work on that now.
Terms are just really understanding.
The lease up of that asset but.
Seattle in particular is a little bit smaller life science market. So that one will take is it going to take a little bit of time, but it could it could take anywhere from <unk>.
18, plus 24 months plus to.
Fully stabilize that asset from a leasing perspective.
Okay.
Thanks very much.
And the next question is from Rick Shane from Jpmorgan. Please go ahead.
Matt Salem: Thanks, guys, for taking my questions this morning. And I apologize; we're bouncing around a little bit. So if some of this has been covered, I apologize. Can you talk a little bit about the ability to redeploy capital, as you realize losses, and removing loans from non-accrual and any potential impact on NII going forward? Sure, I can take that, Matt. I think in the prepared remarks, we tried to give some context around that. I think the timing component is the difficult one, right?
Thanks, guys for taking my questions. This morning, and I apologize were bouncing around a little bit. So some of this has been covered I apologize.
Can you talk a little bit about the ability to redeploy capital as you realized losses.
And removing loans from non accrual and any potential impact on odd.
NII going forward.
Sure.
That's not.
I think in the prepared remarks, we tried to give some context around this.
I think the timing component is a difficult one right we want to make sure that we really optimize.
Matt Salem: We want to make sure that we really optimize the value of the REO portfolio. And that's really the way we're thinking about it, because that's the portion of the portfolio that is not creating earnings. There's actually a drag around that from OPEX and some financing we have against those assets. As we stated in the script, if you just repatriate our basic... in those assets, we think that can generate an additional 12 cents at www. KKRealEstate.com
The value of the Oreo portfolio and that's really the way we're thinking about it is.
That's the portion of the portfolio that it was.
Creating earnings Theres actually a drag.
Around that from Opex and some financing we have against those those assets.
As we stated on the on on this in the script.
If you just repatriate our basis.
And those assets, we think that could generate an.
An additional 12 cents of.
D E.
Third quarter now the question is how much time it takes to get there and that goes back to a comment where we're gonna have to be patient a little bit to Jade blast remarks, somebody's will take a little bit of time to get through.
Matt Salem: But as we sell those assets, stabilize them, sell them in the market, we should be able to, and, of course, it can happen at different times for each asset, we should be able to repatriate that equity and then invest it in new loans and start to get some of that $0.12 back. The $0.12 per quarter is based, again, on our basis, not on where we hope and the goal is to sell these assets. Obviously, we think we're going to make more over time. That's why we're going to start this business. So this gives you a little bit of context of, you know, where we could go, but it's not, we're not thinking about this as like, the next quarter to like, we're trying to make sure that we have the runway to be patient. I got it. I appreciate the color.
But as we sell those assets stabilize them sell them in the market.
Should be able to and of course, it can happen at different times for each asset we should be able to repatriate that equity and invested in new loans and start to get some of that 12 since back. The 12 cents per quarter is based again on a basis not on where we hope and the goal.
Is to sell these assets obviously, we think we're going to make more over time is why we're going to implement its business plan.
So just gives you a little bit of context of where we could go but it's not we're not thinking about this is like.
The next quarter or two like we're trying to make sure that we have the.
The runway to be patient.
Yeah.
Got it I appreciate the color thanks, guys.
Matt Salem: Thanks, guys. And the next question is from Kaylee Wang from Citi. Please go ahead.
Thank you.
And the next question is from Kelly Wang from Citi. Please go ahead.
Kaylee Wang: Thank you. Maybe you could talk about, as you look at the new deal opportunities coming to the market today, how the spreads are trending, and what you are seeing on the competitive front? Yes, thank you for the question. It's Matt again. I'll take that.
Thank you al maybe you could talk about as you look.
Pat.
D O opportunities coming to the market.
Scott Trumbull, what are you seeing from competitors in China.
Yes. Thank you for the question.
It's Matt again I'll take that.
Matt Salem: Again, I'll speak a little bit about our broader real estate credit platform here at KKR where we're actively lending in the market on a daily basis. Um, I would say we have again seen a pretty big return on transaction volumes, both acquisition and refinance needs. Our pipeline right now across all of our different pockets of capital is up over 50% from last year. Still down from, say, peak 21 type levels, but it has picked up a lot over the course of the last couple months as you saw the Fed pivot.
Again, I'll I'll speak a little bit to our broader under the.
Broader real estate credit.
Platform here at Tequila are where we're actively lending in the market on a daily on a daily basis.
I would say, we again, we have seen a pretty big return.
And transaction volumes.
Both acquisition and refinancing needs.
Our pipeline right now across all of our different pockets of capital.
Is up.
Over 50% from last year still down from call. It the peak 21 type of levels, but but has picked up a lot.
Over the course of the last call. It couple of months as you saw the fed pivot.
Matt Salem: And, you know, where we're seeing the most competition, I would say, is in real stabilized assets and insurance capital and the agencies, Freddie Mac and Fannie Mae. That's really where you've seen the most aggressive from a spread perspective from a spread of yield. As you look at what's going on with investment grade corporates, you look at what's going on with CMBS, there's spread tightening happening across most of fixed income, and that's happening in the loan market as well, stuff like stabilized lending. What used to be the low 200s type of spread is now gravitating into the 100s. We've seen insurance companies go as tight as 150 base points over at this point.
And where we're seeing the most competition I would say is on <unk>.
<unk> stabilized assets.
And the insurance capital and agencies, Freddie Mac, and Fannie Mae and so that's really where you've seen the most.
Aggressive from a spread perspective from a spread and yield.
As you look at what's going on with investment grade corporates. If you look at what's going on with <unk>, they're spread tightening happening across most fixed income and that's happening in the loan market as well so if like stabilized lending.
What used to be low two hundreds type of spread is now gravitating into the one hundreds.
Seeing insurance companies go as tight as 150 basis points over at.
At this point so it is there's clearly a lot of demand for lending in today's market I think the big question is we all know is the banking market.
Matt Salem: There's clearly a lot of demand for lending in today's market. I think the big question, as we all know, is the banking market. They are roughly 40% of the overall commercial real estate lending market.
They are roughly 40% of the overall commercial real estate lending market.
Matt Salem: We've seen a little bit more bank activity, but it's still largely on the sidelines. And as we start to pick up volumes this year, the big question is, will there be a gap in the need for financing? Of course, there'll be some alternative lenders like ourselves that can step in and fill that gap. But I think that this year we'll figure out a little bit of how much the banking system is really going to come back online. One piece of good news for KRF, I'd say, is that what we are seeing from, especially the larger banks, is a willingness to lend on loan-on-loan facilities, warehouse facilities, much more. There's been a little bit of a shift away from direct lending, mortgage origination, into more facility-type lending. It's better capital. It's safer.
We've seen a.
A little bit more bank activity, but it's still largely on the sidelines.
And as we start to pick up volumes. This year. That's the big question is will there be a gap and the need for financing of course there'll be some alternative lenders like ourselves that can step out and fill that gap.
But I think that that will this year, we'll figure out a little bit of how much. The banking system is really going to come back online one good news for <unk> I'd say is that what we are seeing from especially the larger banks.
Is a willingness to lend on loan on loan facilities.
Warehouse facilities much more.
Theres been a little bit of a shift away from direct lending.
Mortgage origination into more facility type of of lending, it's better capital it's safer.
Matt Salem: And so that will be, in my mind, one of the big changes as we come out of this market environment: as the banks reduce their footprint in the direct mortgage origination business, they'll likely increase their footprint in the loan-on-loan and warehouse side of things. Great, thanks for the color. And 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 operator. Thanks everyone for joining today. You can reach out to me or the team here if you have any questions. Thanks, and take care. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect, www.krrealestate.com BF-WATCH TV 2021, www.KKRRealEstate.com
And so that will be in my mind, one of the big.
Changes as we come out of this market environment.
As the banks reduced their footprint in the direct mortgage origination business.
Likely increase their footprint and the Malone alone and warehouse side of things.
Great. Thanks for the color.
Thank you.
And 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.
Oh, great. Thanks, operator, and thanks, everyone for joining today you can reach out to me or the team here do you have any questions, thanks and take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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