Q1 2024 KKR Real Estate Finance Trust Inc Earnings Call
Operator: Good morning and welcome to the KKR Real Estate Finance Trust Inc. first quarter 2024 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 presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Jack Switala. Please go ahead.
Good morning, and welcome to the KKR Real estate Finance Trust, Inc. First quarter 2024 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 todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
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 first quarter of 2024.
Jack Switala: Great. Thanks, Operator. And welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2024. As the operator mentioned, this is Jack Switala.
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 and judicious.
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, 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.
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-Q for cautionary factors related to these statements.
Speaker Change: Before I turn the call over to Matt I'll provide a brief recap of our results for the first quarter of 2024, we reported a GAAP net loss of $8 $7 million for negative <unk> 13 per share distributable.
Jack Switala: For the first quarter of 2024, we reported a gap net loss of $8.7 million, or negative 13 cents per share. Distributable earnings for this quarter were $26.7 million, or $0.39 per share. Book value per share as of March 31st, 2024 was $15.18, a decline of approximately 2% quarter over quarter. Our CECL allowance increased to $3.54 per share from $3.06 per share last quarter. In mid-April, we paid a cash dividend of $0.25 per common share with respect to the first quarter. With that, I'd now like to turn the call over to Matt.
Matthew A. Salem: Earnings this quarter were $26 $7 million or 39 per share.
Matthew A. Salem: Book value per share as of March 31, 2024 was $15 18, a decline of.
Matthew A. Salem: Approximately 2% quarter over quarter.
Matthew A. Salem: Our seasonal allowance increased to $3 54 per share from $3.06 per share last quarter.
Matthew A. Salem: In mid April we paid a cash dividend of 25 cents per common share with respect to the first quarter.
With that I'd now like to turn the call over to Matt.
Matthew A. Salem: Thank you, Jack. Good morning, everyone, and thank you for joining us today.
Matthew A. Salem: Thank you Jack good morning, everyone and thank you for joining us today.
Matthew A. Salem: I'd like to begin with a brief update on the state of the market. Despite the latest higher-than-expected CPI, resulting in muted expectations for near-term interest rate cuts, the commercial real estate market continues to heal. With increased transaction volume, Price Transparency, and Liquidity Across Most Properties, given the narrowing views around interest rates and sustained economic growth, combined with Evaluation Stability, we are beginning to see encouraging green shoots. The lending environment is competitive, as a significant amount of capital availability outweighs suppressed transaction volume.
Matthew A. Salem: I'd like to begin with a brief brief update on the state of the market.
Matthew A. Salem: Despite the latest higher than expected CPI print, resulting in muted expectations for near term interest rate cuts the commercial real.
Matthew A. Salem: Estate market continues to heal with increased transaction volume price transparency and liquidity across most property types.
Matthew A. Salem: Given narrowing views around interest rates and sustained economic growth.
Matthew A. Salem: Combined with evaluation stability we.
Matthew A. Salem: We are beginning to see encouraging green shoots.
Matthew A. Salem: The lending environment is competitive.
Matthew A. Salem: A significant amount of capital availability outweighs suppressed transaction volumes.
Matthew A. Salem: Over the last 24 months, insurance companies, foreign banks, and government agencies have been able to meet the needs of the market, and Sympathy With Broader Macro Strength. Spreads are tight, with recent lending on stabilized real estate in the mid-100s. With U.S. banks still largely on the sidelines and increased market activity.
Matthew A. Salem: Over the last 24 months insurance companies foreign banks and government agencies have been able to meet the needs of the market.
Matthew A. Salem: In sympathy with broader macro strength spreads are tightening with.
Matthew A. Salem: With recent lending on stabilized real estate in the mid one hundreds.
Matthew A. Salem: With U S banks still largely on the sidelines.
Matthew A. Salem: And the increased market activity.
Matthew A. Salem: Our expectation is for this supply-demand imbalance to normalize and potentially reverse, creating an attractive opportunity for KRA to fill this void as we resume lending in the next few quarters. But our team has not been dormant, given KKR's large and diversified CRE credit platform. We have been actively originating loans throughout this cycle. Bank, Insurance, and Debt Fund Pools of Capital across the U.S. and Europe are actively investing with a budget of approximately $10 billion this year.
Matthew A. Salem: Our expectation is for this supply demand imbalance to normalize.
And potentially reverse.
Matthew A. Salem: An attractive opportunity for KBR to fill this void as we resume lending in the next few quarters.
Matthew A. Salem: But our team has not been dormant.
Matthew A. Salem: Given <unk> large and diversified CRE credit platform.
We have been actively originate loans throughout this cycle.
Matthew A. Salem: Bank insurance and debt funds pool of capital across the U S and Europe are actively investing with a budget of approximately 10 billion. This year.
Matthew A. Salem: Our own pipeline demonstrates this return of transaction volume, with an existing pipeline of deals in review or in closing of approximately $20 billion, totaling over 100 opportunities. This compares favorably to last year's weekly average pipeline of $14 billion.
Our own pipeline demonstrates this return of transaction volumes.
Matthew A. Salem: With an existing pipeline of deals and review.
Matthew A. Salem: In closing of approximately 20 billion.
Matthew A. Salem: Italy over 100 opportunities.
This compares favorably to last year's weekly average pipeline a $14 billion.
Matthew A. Salem: While we expect CRE lending across the U.S. banking activity to remain muted, we are seeing a notable shift of preference from direct mortgage origination to loan-on-loan facilities from institutions like ourselves. This change is driven by more efficient capital treatment, Less Intense Resources, and relative safety, in terms of property type fundamentals.
Matthew A. Salem: While we expect CRE lending across the U S banking activity to remain muted.
Matthew A. Salem: We are seeing a notable shift in preference from direct mortgage origination so loan on loan facilities to institutions like ourselves.
This change is driven by more efficient capital treatment.
Matthew A. Salem: Less intense resources and.
And relative safety.
Matthew A. Salem: In terms of property type fundamentals.
Matthew A. Salem: Office Sector Remains Challenged, though we are beginning to see more liquidity now than six months ago, and in the KRES Portfolio. We continue to feel we have identified the potential office issues within our watch list and do not anticipate further negative ratings migration to the watch list from the office sector. In terms of life science, we remain positive on the sector given the long-term demand from innovations in science and technology, although the market has seen a decrease in funding. We downgraded one additional life science loan to our watch list this quarter as a result of challenges posed by the short-term leasing slowdown.
Matthew A. Salem: The office sector remains challenge, though we are beginning to see more liquidity now than six months ago.
Matthew A. Salem: Okay rest portfolio.
We continue to feel we have identified the potential office issues within our watch list.
Matthew A. Salem: And do not anticipate further negative ratings migration to the watch list from the office sector.
Matthew A. Salem: In terms of life science.
Matthew A. Salem: We remain positive on the sector given the long term demand from innovations in science and technology.
Matthew A. Salem: Though the market has seen a decrease in funding.
Matthew A. Salem: We downgraded one additional life science loan to our watch list this quarter as a result of challenges posed by the short term leasing slowdown.
Matthew A. Salem: Multifamily fundamentals have slowed given the new supply dynamics, but liquidity in the sector is very high. Market research suggests a 50% decline and multifamily construction starts in 2024 versus 2022, leading many investors to look past the elevated rate environment and current rent pressure. Multifamily represents 43% of our portfolio and has performed well with weighted average rent increases of 3.4% year over year. Now, turning to KREF's earnings results for the first quarter of 2024.
Matthew A. Salem: Multifamily fundamentals have slowed given new supply dynamics, but liquidity in this sector is very high.
Matthew A. Salem: Market Research suggests a 50% decline in multifamily construction starts in 2024 versus 2022.
Matthew A. Salem: Many investors to look past the elevated rate environment and current rent pressures.
Matthew A. Salem: Multifamily represents 43% of our portfolio and has performed well with weighted average rent increases of three 4% year over year.
Now turning to <unk>, earning results for the first quarter of 2024.
Matthew A. Salem: KROF comfortably covered our 25 cents per share dividend this quarter with distributable earnings of 39 cents per share. As we stated last quarter, we set our dividend at a level that we can cover with distributable earnings minus losses with our performing loan portfolio under a number of different scenarios. Our expectation is that in the near term... DEX losses will continue to be significantly higher than our dividends, with the help of KKR Capital Markets.
Matthew A. Salem: Payroll comfortably covered our 25 cents per share dividend this quarter with distributable earnings of 39 cents per share.
Matthew A. Salem: As we stated last quarter, we set our dividend at a level that we can cover with distributable earnings ex losses with our performing loan portfolio under a number of different scenarios.
Matthew A. Salem: Our expectation is that in the near term.
Matthew A. Salem: E X losses, we will continue to be significantly higher than our dividend.
Matthew A. Salem: With the help of KKR capital markets.
Matthew A. Salem: KREP continues to maintain high levels of liquidity with $620 million of availability at quarter end, including $107 million of cash on hand and $450 million of undrawn corporate revolver capacity. We have diversified financing sources across a number of facilities totaling $8.7 billion, with $2.9 billion of undrawn capacity. 78% of our secured financing is completely non-mark-to-mark, with the remaining balance marked to credit only, and verifies no corporate debt or final facility maturities until 2026.
Matthew A. Salem: <unk> continues to maintain high levels of liquidity with $620 million of availability at quarter end, including $107 million of cash on hand, and $450 million of Undrawn corporate revolver capacity.
Matthew A. Salem: We have diversified financing sources across a number of facilities totaling $8 7 billion.
With $2 9 billion of Undrawn capacity.
78% of our secured financing is completely non mark to market.
Matthew A. Salem: With the remaining balance marked to credit only.
Matthew A. Salem: Eric has no corporate debt or final facility maturities until 2026.
Matthew A. Salem: Yeah.
Matthew A. Salem: Composition of KREF's financing structure remains a true differentiator. This quarter, we received $336 million in loan repayment, including full repayments of $173 million on our previously four-rated D.C. office loan and $151 million on our previously for-rated New York City condo line. We funded $103 million for loans closed in previous years for a net reduction of $232 million.
Matthew A. Salem: Composition of K reps financing structure remains a true differentiator.
Matthew A. Salem: This quarter, we received $336 million in loan repayments.
<unk> full repayments of $173 million on our previously four rated D C office loan.
Matthew A. Salem: 100 $151 million on our previously four rated New York City condo loan.
Matthew A. Salem: We funded $103 million for loans closed in previous years for a net reduction of $232 million.
Pat: These payments have now exceeded funding in four of the last five quarters. We expect this to continue with aggregated projected repayments throughout 2024 of over a billion dollars. KROQ, as an externally managed vehicle, benefits from access to resources, relationships, and expertise of KKR's global real estate platform, which manages nearly $70 billion of assets across both debt and equity. Our dedicated team of approximately 150 real estate professionals has a strong reputation as a full-service capital solutions provider.
Matthew A. Salem: Repayments have now exceeded fundings in four of the last five quarters.
Matthew A. Salem: This to continue with aggregated projected repayments throughout 2024 of.
Matthew A. Salem: Of over $1 billion.
Matthew A. Salem: Hey, Ralph as an externally managed vehicle benefits from access to resources.
Matthew A. Salem: Relationships and.
Matthew A. Salem: And expertise are picky ours global real estate platform.
Matthew A. Salem: Managers, nearly 70 billion of assets across across both debt and equity.
Matthew A. Salem: Our dedicated team of approximately 150 real estate professionals.
Matthew A. Salem: <unk> reputation as a full service capital solutions provider.
Pat: This integration provides us with an optimal toolkit to implement a variety of strategies and maximize value across our portfolio. In addition, Haystar, our affiliated rated special servicer with a team of more than 45 professionals and over $45 billion of special servicing rights, representing over 5,000 properties, provides us with extensive access to an expert team with sizable real-time market information. We will continue to proactively and transparently navigate this challenged real estate market. As we mentioned last quarter, we will patiently optimize our REO portfolio, and as we sell those assets, we believe we can reinvest the capital to generate an additional $0.12 per share in distributable earnings per quarter. And with that, I'll turn the call over to Pat.
Matthew A. Salem: This integration provides us with an optimal tool kit to implement a variety of strategies.
Matthew A. Salem: <unk> value across our portfolio.
Matthew A. Salem: In addition, taste or our affiliated rated special servicer with a team of more than 45 professionals in over 45 billion of special servicing rights.
Matthew A. Salem: Presenting over 5000 properties.
Matthew A. Salem: Provides us with extensive access to an expert team with sizable.
Matthew A. Salem: Real time market information.
Matthew A. Salem: We will continue to proactively and transparently navigate this challenging real estate market.
Matthew A. Salem: As we mentioned last quarter, we will patiently optimize our Oreo portfolio and as we sell those assets. We believe we can reinvest the capital to generate additional 12 cents per share and distributable earnings per quarter.
Matthew A. Salem: And with that I'll turn the call over to Patrick.
Pat: Thank you, Matt. Good morning, everyone.
Patrick Mattson: Thank you Matt good morning, everyone.
Pat: I'll begin with updates to our CECO allowance and watch list. Cecil Reserves increased $33 million this quarter, driven primarily by collateral-dependent loan reserves, resulting in an aggregate $246 million of CECL. This was largely related to a further downgrade of our $37.5 million retained mezzanine loan backed by an office property located in Boston. As we mentioned last quarter, KREF is currently in modification discussions, and we anticipate subordinated the portion of our mezzanine loans to new equity contribution from the existing sponsor. Regarding our Risk Rated 5 Seattle Life Sciences Loan and Mountain View Office Loan.
Patrick Mattson: I'll begin with updates to our seasonal allowance and watch list.
Patrick Mattson: <unk> reserves increased $33 million this quarter, driven primarily by collateral dependent loan reserves.
Patrick Mattson: Resulting in an aggregate $246 million of Cecil.
Patrick Mattson: This was largely related to a further downgrade of our 37 and a half million dollar retained mezzanine loan backed by an office property located in Boston.
Patrick Mattson: As we mentioned last quarter K RAF is currently in modification discussions and.
Patrick Mattson: And we anticipate subordination of a portion of our mezzanine loan to new equity contribution from the existing sponsor.
Patrick Mattson: Regarding our risk rated five Seattle life Sciences loan and Mountain view office loan.
Pat: We are working with those respective sponsors to take ownership through a deed in lieu of foreclosure in Q2, as we explore the path of joint venture partners and continue to evaluate the Go Forward business plan. Further details on these loans, as well as our existing REO portfolio, are reflected on page 13 of our Supplemental. We experienced no realized losses in the first quarter of 2024.
Patrick Mattson: We are working with those respective sponsors to take ownership through a deed in lieu of foreclosure in Q2.
Patrick Mattson: As we explore the path of joint venture partners and.
Patrick Mattson: And continue to evaluate the go forward business plans.
Patrick Mattson: Further details on these loans as well as our existing Oreo portfolio is reflected on page 13 of our supplemental.
Patrick Mattson: We experienced no realized losses in the first quarter of 2024.
Pat: However, during the second quarter, as we anticipate taking title to the Mountain View and Seattle assets, we expect a significant portion of our collateral-dependent loan reserve, Flow Through Distributable Earnings, coupled with the anticipated modification on our Boston office loan. We project realized losses to total approximately $140 million in Q2, or approximately $2 per share, in line with our existing reserves across these three assets.
Patrick Mattson: However, during the second quarter as we anticipate taking title to the mountain view in Seattle assets.
Patrick Mattson: We expect a significant portion of a collateral dependent loan reserve.
Patrick Mattson: Flow through distributable earnings.
Patrick Mattson: Coupled with the anticipated modification on our Boston office loan.
Patrick Mattson: We project realized losses to total approximately $140 million in Q2.
Patrick Mattson: Or approximately $2 per share.
Patrick Mattson: In line with our existing reserves across these three assets.
Pat: For our Philadelphia asset that became REO last quarter, we have an agreement in place to sell two of the four buildings, with a closing date tracking for Q2. We are comfortable holding the remaining office building and parking garage longer term. However, we may have an opportunity to sell those properties as well, and we'll update everyone on the next call. KREP is well capitalized, with a debt-to-equity ratio of 2.1 and a look-through leverage ratio of 4.1 as of Q1, slightly lower than year-end. We expect deleveraging to continue through the remainder of 2024, as repayments are anticipated to outpace future funding obligations.
Patrick Mattson: Or if they don't for our Philadelphia asset that became Oreo last quarter.
Patrick Mattson: We have an agreement in place to sell two of the four buildings with a closing date tracking for Q2.
Patrick Mattson: We're comfortable holding the remaining office building and parking garage longer term. However, we may have an opportunity to sell those properties as well.
Patrick Mattson: And we'll update everyone on the next call.
<unk> is well capitalized.
Patrick Mattson: The debt to equity ratio of 2.1.
Patrick Mattson: With look through leverage ratio of 4.1 as of Q1.
Patrick Mattson: Slightly lower than year end.
Patrick Mattson: We expect deleveraging to continue through the remainder of 2024.
Patrick Mattson: As repayments are anticipated to outpace future funding obligations.
Pat: KREF's weighted average risk rating on the portfolio remains 3.2, and 85% of our portfolio is risk rated 3 or better. KRF has built a fortified liability structure that has diversified across two CRE CLOs, a number of match term lending agreements, and Asset Specific Financing Structures, as well as our corporate revolver. KREF's substantial equity position of over $600 million at quarter end, including $450 million of undrawn revolver capacity, is a key component of our ability to navigate this dynamic credit and interest rate environment. With our best-in-class finance, over 75% of which is fully mark-to-market, and our long-standing relationships with our financing partners and borrowers, KRF has the tools at its disposal to withstand the challenges of today's market environment.
Patrick Mattson: Okay reps weighted average risk rating on the portfolio remains $3, two and 85% of our portfolio is risk rated three or better.
Patrick Mattson: <unk> has built a fortified liability structure.
Patrick Mattson: That is diversified across to CRA clo's.
Patrick Mattson: A number of match term lending agreements and asset specific financing structures as.
Patrick Mattson: As well as our corporate revolver.
Patrick Mattson: Hey, Ralph substantial liquidity position of over 600 million at quarter end.
Patrick Mattson: Including 450 million of Undrawn revolver capacity.
Patrick Mattson: He is a key component of our ability to navigate this dynamic credit and interest rate environment.
Patrick Mattson: Coupled with our best in class financing.
Patrick Mattson: Over 75% of which is fully non mark to market.
Patrick Mattson: And our long standing relationships with our financing partners and borrowers.
Patrick Mattson: <unk> has the tools at its disposal to withstand the challenges of today's market environment.
Operator: Thank you for joining us today. Now, we're happy to take your questions. We will now begin.
Speaker Change: Thank you for joining us today.
Speaker Change: Now we're happy to take your questions.
Speaker Change: We will now begin our question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Operator: We will now begin our question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. 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 come from Rick Shane from J.P. Morgan. Please go ahead.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: And the first question will come from Rick Shane from J P. Morgan. Please go ahead.
Richard Barry Shane: Hey, thanks for taking my question this morning. So when we look at the reserve rate at the end of the first quarter, and we take the implied or the charge-offs that you got into in the second quarter, It would imply a reserve rate X those expected losses of about 140-145 basis points. Does that seem appropriate? It's obviously well below what your reserve rate has been for the last year or two, but it is also reflecting the realized loss on specifically reserved assets. So how should we think about your reserve rate as you start to realize some of the bigger losses that you've held?
Richard Barry Shane: Hey, Thanks for taking my question this morning.
Richard Barry Shane: So when we look at the reserve rate at the end of the first quarter and we keep.
Speaker Change: The implied or the <unk>.
Richard Barry Shane: Charge offs that you've guided to you was that in the second quarter.
Richard Barry Shane: It would imply a reserve rate.
Richard Barry Shane: Ex those expected losses of about 140 to 145 basis points.
Richard Barry Shane: Is does that seem appropriate it's obviously well below what your reserve rate has been the last year or two but it is also reflecting the.
Richard Barry Shane: The realized loss on specifically reserved asset so how should we think about reserve rate as you start to realize some of the bigger losses that you've held.
Patrick: Rick, good morning. It's Patrick.
Patrick: Thanks for that question. So I think in terms of that number, it's around 150, or 160 basis points on the balance. So I think you're directionally correct there. I think what it is really reflective of is, you know, as we work through some of these more challenged assets on the watch list, we're going to get down to a pool where we think we've got relatively clean composition. And so I don't view that number as sort of high or low. It feels probably appropriate right now. I think, longer term, that could even feel a little bit high. But in this market, that's probably the right level. Yeah,
Richard Barry Shane: Ric Good morning, it's Patrick Thanks for that question.
Ric: So I think in terms of that number it's around 150 160 basis points on the balance. So I think you're Directionally correct. There I think what is really a reflective of is you know as we've worked through some of these more challenged assets on the watch list, we're going to we're going to get down to a pull.
Ric: Where we think we've got relatively.
Ric: Clean composition, and so I don't I don't view that number as sort of high or low it feels probably appropriate right now I think longer term that could even feel a little bit high but in this market, that's probably the right level.
Richard Barry Shane: Look, you know that I love metaphors, and I think that in some ways, the reserve is a piggy bank that you've been depositing into for many quarters, and I guess what you're saying is that we should expect it is now time to crack open the piggy bank and perhaps make some withdrawals.
Speaker Change: Yeah look you know that I love metaphors and I think that in some ways. The reserve is is a piggy bank that you've been depositing in for many quarters and I guess, what youre, saying is that we should expect it is now time to crack open the piggy bank and perhaps make some withdrawals.
Patrick: I think directionally that's what's happening when you think about the guidance that we're giving for the second quarter.
Speaker Change: I think directionally, that's what's happening when you think about the guidance that we're giving on the second quarter.
Richard Barry Shane: Geez, Patrick, I couldn't get you to buy into my piggy bank metaphor.
Speaker Change: Keith Patrick I couldn't get you to buy into my Piggy Bank metaphor.
Patrick: Wasn't bad, Rick. It wasn't bad. Thanks, guys.
Keith Patrick: It wasn't bad Rick it wasn't bad.
Speaker Change: Thanks, guys.
Speaker Change: Yeah.
Stephen Albert Laws: And our next question will be from Steven Laws from Raymond James. Please go ahead.
Speaker Change: And our next question will be from Stephen laws from Raymond James. Please go ahead.
Stephen Albert Laws: Good morning. First, I want to start, I guess, to follow up on the reserve question, and I think you guys appreciate the color on the five-rated loans. As you think about the four rated loans, three of which are multifamily, how do you think about the next three to six months for those assets? What are the key things you're watching that may move them back to a three versus moving to a five?
Stephen Albert Laws: Hi, good morning.
Stephen Albert Laws: Firstly I wanted to start I guess follow up on the reserve question and I think you guys I appreciate the color on the five rated loans.
Stephen Albert Laws: As you think about the four rated loans three of which are multifamily.
Stephen Albert Laws: Do you think about you know the next three to six months for those assets you know what are the key things you're watching that may move them back to a three versus moving to a five.
Stephen Albert Laws: And when you take a step back and look at the collateral values versus your attachment point with the loans, do you feel there's still good coverage there from a collateral standpoint? Or what is the risk that if they move to a five, it'll drive incremental specific or asset-specific reserves?
Stephen Albert Laws: And when you take a step back and look at the collateral values versus your attachment point with the loans.
Stephen Albert Laws: Do you feel theres still good coverage there from a collateral standpoint, or you know what is the risk that if they move to a five it'll drive the incremental specific or asset specific reserves.
Matt: Hey, Steven, it's Matt. I can jump in on that one. I appreciate you joining the call and asking the question. You know, on the four loans, I guess I would break it down a little bit, as you're suggesting, in terms of just by property type. I think we still believe that the multifamily segment, while it's going to have noise, especially if you think about just a little bit higher rate environment for a little bit longer, could put more pressure on some of the sponsors that don't have as much liquidity as others.
Stephen Albert Laws: Hey, Stephen it's Matt I can jump in on that one I appreciate you joining the call and asking the question.
You know I think on on the four loans I guess I would I would break it down a little bit as you're suggesting in terms of just by property type.
Matthew A. Salem: I think we still believe that the multifamily segment, while it's going to have noise, especially if you think about just a little bit higher rate environment for a little bit longer to put more pressure on some of the sponsors that don't have as much liquidity as others.
Matt: But we don't feel like there's material loss content in that component of the portfolio. I think we've stated that in previous earnings calls. I think we still feel like that today. So while certainly there's the ability to transition a multifamily property from a three to a four or a four to a five over time, really looking through to what's the value of that asset versus our basis, I think we still feel that way. So I'm pretty good about the overall positioning there.
Matthew A. Salem: But we don't feel like there is material loss content in that component of the portfolio. I think we've stated that in previous earnings calls that I think we still we still feel like that today. So while certainly there is the ability to transition a multifamily property from a three to a four 4%.
Matthew A. Salem: Five over time.
Matthew A. Salem: Are you really looking through to what's the what's the value of that asset versus our basis I think we still feel.
Matthew A. Salem: So pretty good about the overall positioning there.
Matt: When you start to think about some of the other assets, like life science or other things, there's a little bit more jump risk, I think, in terms of just, okay, what happens as those transition through? Of course, it's not rated at 5. These loans aren't rated at 5 for a reason. They're performing, paying their current debt, et cetera.
Matthew A. Salem: You know when you start to think about some of the other assets like life science or other things theres, a little bit more jump risk I think in terms of just okay. What happens as those transitions through of course, it's not ready to five of these.
Matthew A. Salem: As long as that rate of five for reason, they're performing paying current data et cetera.
But at that moment, we're just starting to get into difficulty or monetary default then those reserves can can certainly increase.
Stephen Albert Laws: I appreciate the comments there. And then, Matt, I wanted to follow up on your comments around originations.
Speaker Change: I appreciate the comments there and then I wanted to follow up on your comments around originations. You know you guys have really been focused on asset management for the past year and.
Matt: You guys have really been focused on asset management for the past year, and you mentioned that maybe the supply-demand balance is shifting possibly more in your favor over the next coming quarters. What is it that you're kind of looking for before shifting back on offense? Is it getting these three resolutions in the second quarter behind you? Is it some segment of your existing portfolio that you want to monitor performance before returning to offense?
Speaker Change: You mentioned that debt.
Speaker Change: The supply demand balance is shifting possibly more in your favor over the next coming quarters.
Speaker Change: What is it that you're kind of looking for before shifting back on offense is it getting these three resolutions in the second quarter behind you is it something some.
Speaker Change: Some segment of your existing portfolio that you want to monitor performance before returning to off that Sir.
Speaker Change: Is it really the returns available that seem pretty titled stabilized assets that you don't think is an attractive time to put money to work, maybe maybe a little more clarity on what you're looking for to tourism new originations.
Matt: Or is it really the returns available that seem pretty tight on stabilized assets that you don't think is an attractive time to put money to work? Maybe a little more clarity on what you're looking for to resume a new origination.
Speaker Change: Yes, Stephen happy to jump ahead, and I would say.
Speaker Change: I think it's more internal to K RAF right, what we're looking at.
Speaker Change: And within our own portfolio.
Speaker Change: Comment on the market environment, because as I mentioned through.
Stephen Albert Laws: Yeah, Steven, happy to jump in. I would say, I think it's more internal to KRF, right, what we're looking at within our own portfolio than it has been a comment on the market environment. Because, as I mentioned, through our various pools of capital away from KREF, we're actively lending. We like the market there. We just think it's going to get better over time. And so what are we looking for within KREF? I would like to say a couple of things.
Speaker Change: Through our various pools of capital away from tariffs like we're actively lending we like the market. There. We just think it's going to get better.
Speaker Change: Overtime and.
Speaker Change: So what are we looking for within within K wrap I would say a couple of things number one just <unk>.
Speaker Change: Distant repayments.
Speaker Change: So we're starting to see that obviously you want velocity in your portfolio before you start lending new new capital and I think that philosophy is coming back.
Speaker Change: And certainly for the five last quarters, we've had repayments offset.
Speaker Change: Future Fundings, we think we'll get $1 billion of repayments. This year. So that certainly is that starting to move in the Green zone.
Matt: Number one, just consistent repayments. And so we're starting to see that. Obviously, you want velocity in your portfolio before you start lending new capital. And I think that velocity is coming back, and certainly for the last five quarters, we've had repayments offset, no future funding. We think we'll get a billion dollars in repayments this year.
Speaker Change: In terms of how we're looking at it.
Speaker Change: The second thing.
Speaker Change: Would just be okay portfolio migration.
Speaker Change: Terms of like what are we seeing from a credit perspective that feels like it's slowing down now this isn't a market I, particularly want to predict.
Speaker Change: Predict the future, but certainly when we look at the.
Speaker Change: The velocity of where things are going from three to four is a force to fives that wave of office feels like we've dealt with a lot of that already.
Matt: So certainly, that's starting to move into the kind of green zone in terms of how we're looking at it. The second thing would just be, okay, portfolio migration in terms of, like, what are we seeing from a credit perspective? That feels like it's slowing down. Now, this isn't a market I particularly want to predict the future of, but certainly when we look at the velocity of where things are going from threes to fours or fours to fives, that wave of office feels like we've dealt with a lot of that already.
Speaker Change: And there's other things that have come in recently, but it feels like it's slowing down so I think just some stability around that in the portfolio migration.
Speaker Change: And then finally, just leverage ratios right just to make sure we get back to you.
Speaker Change: Where we historically have operated which has been in more of that high threes context versus very low fours, where we are today and that's migrating in the right way and certainly when we look through our projections, we expect that to continue to go in the right in the right direction. So.
Speaker Change: Those are probably the three things we're watching.
Matt: And there are other things that have come in recently, but it feels like it's slowing down. So I think just some stability around that in the portfolio migration. And then finally, just leverage ratios, right? Just make sure we get back to where we historically have operated, which has been in more of that high threes context versus very low fours where we are today, and that's migrating in the right way. And certainly, when we look at our projections, we expect that to continue to go in the right direction. So those are probably the three things we're watching most closely. From a liquidity perspective, we have lots of liquidity, so we can certainly go out and
Speaker Change: Most closely from a liquidity perspective, we have lots of liquidity. So certainly we can go out and make another loan or two but I think we really wanted to see those other those other areas are firm up before we move in that direction.
Speaker Change: Great I appreciate the comments this morning. Thank you.
Speaker Change: And the next question will be from Sarah <unk> from B T. I G. Please go ahead.
Sarah: Hi, Good morning, everyone. So my first question is related to the life science portfolio could you talk about the leasing outlook for assets that are still three rate and that may be close to delivering the project that potentially remain vacant.
Sarah: Could you give us any insight into lead internal leasing for life science in your portfolio in general Thank you.
Sarah: Hi, sorry, it's Matt Yeah happy to happy to answer that as you identified it we've got a couple too.
Matthew A. Salem: Life Science loans on the watch list today, when you look at the loans.
Stephen Albert Laws: Great. I appreciate the comments this morning. Thank you.
Sarah Barcomb: And the next question will be from Sarah Barcomb from BTIG. Please go ahead.
Matthew A. Salem: Are the properties outside of those two that have been identified.
Sarah Barcomb: Hi, good morning everyone. So my first question is related to the life science portfolio. Could you talk about the leasing outlook for assets that are still three-rated that may be close to delivering the project but potentially remain vacant? Could you give us any insight into leasing for life science in your portfolio in general? Thank you.
Matthew A. Salem: About 70% of the remaining exposure there is new build as you are suggesting so by definition very very high quality Trophy and some in some cases and these are extremely well located assets in the best and the best life Science markets in the country.
Matthew A. Salem: So I think we feel very good about.
Matt: Hi, sir. It's Matt. Yeah, happy to answer that. As you mentioned, we've got a couple, two life science loans on the watch list today. When you look at the loans or the properties outside of those two that have been identified, about 70% of the remaining exposure there is new build, as you suggested. So, by definition, a very, very high quality trophy in some cases. And these are extremely well-located assets in the best life science markets in the country.
Matthew A. Salem: About where those stand currently.
Matthew A. Salem: Some are kind of lease ready and some are still in the process of finishing construction and waiting for that moment to really have.
Matthew A. Salem: An opportunity to attract the tenant and but I think what we've seen is that the velocity.
Matthew A. Salem: And it's early days and.
Matthew A. Salem: But certainly with the L O I's and to some extent.
Matthew A. Salem: Leases that are getting signed at these these assets there is a little bit more velocity in these newer.
Matthew A. Salem: Newer build.
Matthew A. Salem: Our purpose built assets in new construction than we've seen in maybe some of the conversion plays.
Matt: So I think we feel very good about where those stand currently. Some are kind of lease ready, and some are still in the process of finishing construction and waiting for that moment to really have an opportunity to attract a tenant. But I think what we've seen is that, in its early days, and certainly with the LOIs and, to some extent, leases that are getting signed at these assets, there's a little bit more velocity in these newer built, purpose built assets and new construction than we've seen in maybe some of the conversion plays.
Speaker Change: Okay great.
Speaker Change: And then my follow up question is related to the Oreo portfolio.
Speaker Change: Could you walk us through expectations for potential Capex spend on these assets and maybe some commentary on your expectations for foreclosures going forward beyond Europe expected rel disclosures.
Speaker Change: I think from a cap.
Speaker Change: Let me start on the on the Capex side.
Speaker Change: I would say were still finalizing these business plans and as we go Oreo will will develop we will develop those I guess when we think about it.
Speaker Change: A couple of ways number one.
Sarah Barcomb: Okay, great. And then my follow-up question is related to the REO portfolio. Could you walk us through expectations for potential CapEx spend on these assets and maybe some commentary on your expectations for foreclosures going forward beyond your expected REO disclosures?
Speaker Change: We are we were perfectly.
Speaker Change: Committed to spending capex to positioning these assets and absolutely the best way possible to attract really high quality tenants and stabilize them.
Stabilize the property so that as that is our mindset that we will spend money to create value I'd say number two.
Matt: I think from a capital point of view, but it's about again, let me start on the CapEx side. I would say we're still finalizing, you know, these business plans. And as we go, REO, we'll, we'll develop, we'll develop those. I guess when we think about it, in a couple of ways.
Speaker Change: In most cases from just a pure Capex perspective, we don't think there is a.
Speaker Change: Large large outlays I think lot of the a lot of the capital is going to come from good news from tenant improvement and leasing commissions as we as.
Speaker Change: As we sign as we signed tenants there.
Speaker Change: And.
Speaker Change: From a I guess the two ways you can think about it from an earnings perspective and from a liquidity perspective, certainly from a clue perspective, not worried about it at all again, it's not a big number we are we have ample liquidity to.
Matt: Number one, we are perfectly committed to spending CapEx, to positioning these assets in absolutely the best way possible to attract really high-quality tenants and stabilize the property. So that is our mindset, that we will spend money to create value. In most cases, from just a pure CapEx perspective, we don't think there are large, large outlays. I think a lot of the capital is going to come from good news, from tenant improvement and leasing commissions as we sign tenants there.
Speaker Change: To implement any strategy, we wanted to and from.
Speaker Change: On an earnings perspective.
Speaker Change: There are a lot of the capex by definition is going to get capitalized into the asset. So it's not going to come through earnings and we will have a little bit of just expenses that will certainly impact earnings and when we thought about resetting the dividend.
Clearly that was kind of factored in some of the scenario analysis as we think about that so.
Speaker Change: Hopefully that helps address a little bit of your.
Matt: You know, from I guess the two ways you could think about it, like from an earnings perspective and from a liquidity perspective, certainly from a clear perspective, not worried about it at all. Again, it's not a big number; we have ample liquidity to, you know, implement any strategy we want to. And from an earnings perspective, a lot of the CapEx, And by definition, it's going to get capitalized into the asset, so it's not going to come through earnings.
Speaker Change: Of your of your Capex questions and then from.
Speaker Change: From an Oreo perspective, or foreclosure perspective, I think we've identified everything at this point in time in terms of where.
Speaker Change: You know what's in the watch list that were kind of proceeding down that path and of course.
Speaker Change: We will keep that transparency on.
Speaker Change: On a quarterly basis and that change we can we can update it but there's nothing kind of like left right now that we're that.
Speaker Change: We haven't identified that we plan to go to Taiwan.
Speaker Change: Great. Thank you.
Speaker Change: The next question is from Steve Delaney with JMP Securities. Please go ahead.
Matt: And we'll have a little bit of just expenses that will certainly impact earnings. And when we thought about resetting the dividend, clearly, that was kind of factored into some of the scenario analysis as we think about that. So hopefully, that helps address a little bit of your CapEx questions. And then, from an REO perspective or foreclosure perspective, I think we've identified everything at this point in time in terms of where... You know, what's on the watch list that we're kind of proceeding down that path.
Steven Cole DeLaney: Good morning, everyone can you hear me.
Yeah, we hear you well see okay, great. Thanks on the cell phone this morning listen first.
Steven Cole DeLaney: Really applaud the forward disclosure about.
Steven Cole DeLaney: You know about the losses projected Oreo and the realized losses in the second quarter. It makes I think it will make sense.
Steven Cole DeLaney: We make their life easier and it will yours, and I think shareholders as well just to kind of not have the uncertainty about two Q I'm looking at page 11, now given that perspective.
Steven Cole DeLaney: Should we think about your faster.
Steven Cole DeLaney: Those projected already goes that as far as Bob ratings as you see things right now.
Matt: And of course, we'll keep that transparency on a quarterly basis, and if there's anything kind of left right now that we haven't identified that we plan to go title on.
Steven Cole DeLaney: That you're basically left there are many in Boston office.
Steven Cole DeLaney: Property is.
Steven Cole DeLaney: That the way to look at it sort of post the.
Steven Cole DeLaney: The <unk> actions.
Speaker Change: That's right Yeah, I mean, obviously absent any other changes thats the way to think about it and keep in mind that Minneapolis, we have modified that loads that's gone through restructuring and then.
Steven Cole DeLaney: The next question is from Steve DeLaney with JMP Securities. Please go ahead.
Speaker Change: As Patrick mentioned in his remarks, the Boston Office is currently under.
Steven Cole DeLaney: Good morning. Yeah, we hear you well, Steve.
Speaker Change: Modification discussions.
Steven Cole DeLaney: Okay. Great. Thanks. On the cell phone this morning.
Speaker Change: Currently and we've tried to reflect that in the ER and the reserves for this quarter.
Steven Cole DeLaney: Listen, first, I really applaud the forward disclosure about the losses, the projected REO, and the realized losses in the second quarter. It makes, I think it'll make, certainly make their life easier, and it will make yours, and I think shareholders as well, just to kind of not have the uncertainty about 2Q. So I'm looking at page 11 now, given that perspective. And should we think about this after those projected REOs? That as far as five ratings go, as you see things right now, you're basically left with the many in Boston office properties. Is that the way to look at it, sort of post? The REO Act
Speaker Change: Got it and with Boston.
Speaker Change: Little unusual there because the 38 the retained mezz.
Speaker Change: Sure Alan.
Speaker Change: The 38 million euro exposure at K RAF and be the difference between the total $188 million with other KKR entities is that the way to do that.
Speaker Change: No.
Speaker Change: So theres a little bit of nuance, there I would say.
Speaker Change: The $38 million is 37, and a half I think there'll be direct but.
Speaker Change: Hey, Ross total exposure.
Speaker Change: The debt, that's where I was going.
Speaker Change: Alright.
Speaker Change: That's right. So that's our maximum exposure of $37 $5 million debt the mortgage debt senior to us which comprises the two together comprised $188 million is held by a third party.
Matt: That's right. Yeah, I mean, obviously, after the other changes, that's the way to think about it, and keep in mind that Minneapolis has modified that loan, so that's gone through restructuring. And then, as Patrick mentioned in his remarks, the Boston office is currently under modification discussions, and we try to reflect that in the reserves for this quarter.
Speaker Change: And obviously your support and of course, there. So you need to focus on that when you look at the property value for sure.
Speaker Change: You know not to get ahead of.
Speaker Change: Things.
Speaker Change: Okay.
Speaker Change: Aggressively trying to get through these problems and to work out.
Speaker Change: I thought it was pretty good.
Speaker Change: A bold but.
Speaker Change: Strong news.
Speaker Change: Or two to make the meaningful cut in the dividend.
Speaker Change: You know ahead of these resolutions and.
Matt: Got it. And with Boston, a little unusual there because of the retained MES. Is the $38 million your exposure at KREP, and the difference between the total $188 million is with other KKR entities? Is that the way to view that?
Speaker Change: And obviously 39 cents.
Speaker Change: This quarter for a reported day well.
Speaker Change: It will be offset by the big number next quarter.
Speaker Change: It does appear.
Speaker Change: By the time, we get into early 2020.
Speaker Change: Bob that.
Matt: There's a little bit of nuance there, I would say. The $38 million is 37 and a half million, to be direct, but it is KREF's total...
Speaker Change: Your run rate <unk>.
Bob: I would expect.
Bob: I'll just have to update our models would be.
Bob: In excess of your of your 25% current dividend.
Matt: The debt, that's where I'll go in to find out how much payraffic is exposed. That's right. So that's our maximum exposure, $37.5 million. The debt, the mortgage debt senior to us, which comprises the two together comprised 188 million, is held by a third party.
Bob: I guess psychologically.
Bob: At the board level.
Bob: What does the board and what does management want to see in the portfolio before it would be reasonable to reconsider the dividend for a possible increase.
Matt: And obviously, you're a subordinate, of course, there. So you need to focus on that when you look at the property value for sure. So I, you know, not to get ahead of things, you know, obviously, you're aggressively trying to get through these problems in the workouts. I thought it was pretty.
Speaker Change: Thanks, Steve Thats, not I can jump in again.
Yeah.
Speaker Change: <unk>.
Speaker Change: I guess, a couple of things first of all on.
Speaker Change: Unfortunately, we just reduce the dividends I don't think we are of course are increasing it.
Speaker Change: In the near term here.
And I think most of the uplift.
Steven Cole DeLaney: A bold but... strong move by the board to make a meaningful cut in the dividend, you know, ahead of these resolutions. And, you know, and obviously 39 cents in this quarter for a reported DE will be offset by a big number next quarter. But it does appear that by the time we get into early 2025, your run rate, DE, I would expect, perhaps all of us have to update our models, would be, you know, in excess of your $0.25 current dividend, sort of, I guess, psychologically, at the board level. What does the board and what does management want to see in the portfolio before it would be reasonable to reconsider the dividend for a possible increase?
Speaker Change:
Speaker Change: Is generally going to come from the recycling of Oreo assets.
Speaker Change: Into performing loans or earning assets effect effectively right and so.
Speaker Change: So when we start to think about the go and Thats why we keep referencing back to <unk>.
Speaker Change: <unk> sure where okay, we're going to take title, we're gonna be patient, we're going to lease. These I think thats the best thing for our shareholders. The best thing for our balance sheet.
Speaker Change: Over time, and not paying out a higher short term dividend, but if we optimize those outcomes and we repatriate that capital then we will be able to.
Speaker Change: We think increase earnings by at least 12.
Speaker Change: Sure. So that's that's really what we're focused on is that optimism optimization implementation of that.
Speaker Change: Strategy.
Matt: Thanks, Steven. It's Matt.
Speaker Change: We'll see what the world looks like in six months nine months, maybe other things that are have a material impact on that obviously, where is the interest rate environment will be a big driver of given where our floating rate portfolio, but.
Matt: I can jump in again. I'm, I guess I need a couple of things. First of all, unfortunately, we just reduced the dividends. I don't think we're increasing them in the near term here. And I think most of the uplift is generally going to come from the recycling of REO assets into performing loans or, you know, or earning assets effectively, right? And so when we start to think about the goal, and that's why we keep referencing back to, We're going to take title, we're going to be patient, we're going to lease these.
Speaker Change: But that's where I'd say, what we're what we're mostly focused on is what is the path and the timeline to get.
Speaker Change: Oreo assets.
Speaker Change: Got it well congrats on the resolutions and I appreciate the color. Thank you.
Thank you Steve.
Speaker Change: And the next question is from Jade Rahmani with K B W. Please go ahead.
Jade Joseph Rahmani: Thank you very much just stepping away from the transitional CRE space and looking more broadly can you give any sense as to what's happening to theory loans at maturity. What are you seeing from most lenders in terms of you know loans.
Matt: I think that's the best thing for our shareholders, the best thing for our balance sheet over time, and not paying out a higher short-term dividend. But if we optimize those outcomes and we repatriate that capital, then we'll be able to, we think, increase earnings by at least $0.12 a share. So that's really what we're focused on, the optimization and implementation of that REO strategy. You know, we'll see what the world looks like in six months, nine months, maybe other things that have a material impact on that.
Jade Joseph Rahmani: Loans that come up for maturity the percentage that get refinanced.
Jade Joseph Rahmani: <unk> modified get extended how would you characterize it from your broader vantage point.
Jade Joseph Rahmani: Hey, Jay This is Matt. Thank you for the question I would say.
Matthew A. Salem: First of all I don't have exact numbers at my fingertips in terms of like what how much is repaying versus getting extended.
Matthew A. Salem: Certainly we're in an environment now where they are.
Matt: Obviously, the interest rate environment will be a big driver, given we're a floating rate portfolio. But that's really, I'd say, what we're mostly focused on is what is the path and the timeline to give REO assets.
Matthew A. Salem: There's a lot more extensions than normal payoffs and I think lenders are more than willing to work with borrowers.
Matthew A. Salem: On an extension scenario.
Matthew A. Salem: They need a little bit more time to to get into a interest rate environment.
Steven Cole DeLaney: Well, congratulations on the resolutions and I appreciate the colors. Thank you.
Matthew A. Salem: You know more.
Matthew A. Salem: Accepting I guess of property value so.
Matthew A. Salem: And I think everyone looks at the maturity wall, maybe that's a little bit of a question embedded in your question I never look at that maturity walls like something that's a real sign of it.
Jade Joseph Rahmani: And the next question is from Jade Rahmani with KBW. Please go ahead.
Jade Joseph Rahmani: Thank you very much. Just stepping away from the transitional CRE space and looking more broadly, can you give any sense as to what's happening to CRE loans at maturity? You know, what are you seeing from most lenders in terms of, you know, loans that come up for maturity, the percentage that get refinanced, get modified, get extended? You know, how would you characterize it from your broader vantage point?
Matthew A. Salem: Imminent danger or or.
Matthew A. Salem: Issues I think that if it makes sense and the borrowers are willing to put in a little bit of money I think almost all lenders are willing to kind of give another six months 12 months.
Matthew A. Salem: To go down the road I'm very very few instances, our lenders really need that capital back.
Matt: Hi Jade and Matt. Thank you for the question. I would say, first of all, I don't have exact numbers at my fingertips in terms of how much is repaying versus getting extended. Certainly, we're in an environment now where there are a lot more extensions than normal payoffs, and I think lenders are more than willing to work with borrowers on an extension scenario if they need a little bit more time to get into an interest rate environment that's, you know, more.
Matthew A. Salem: In force force people out of the portfolio.
Matthew A. Salem: So that'd be a little bit of a.
Matthew A. Salem: How we think about it.
Speaker Change: Thank you and on the flip side from a borrower standpoint, and I know K RAF has some large real estate equity holdings, how our borrowers contemplating the outlook now it seems that there has been a material shift in the interest rate outlook.
Speaker Change: Higher for longer versus earlier in the year any color you could provide there.
Speaker Change: Sure.
Speaker Change: And what we're seeing in embedded in my comments, just the return to transaction volumes and of course, when that inflation print head and we got that rate move and that.
Matt: I guess it's the acceptance of property values. So, and I think just everyone looks at the maturity wall, maybe that's a little bit of a question embedded in your question. I never look at that maturity wall as like something that's a real sign of imminent danger or, you know, issues. I think that, if it makes sense and the borrowers are willing to put in a little bit of money, I think almost all lenders are willing to give another six months, 12 months to go down the road. Very few instances do lenders really need that capital back and force people out of the portfolio? That would be a little bit of how we think about it.
Speaker Change: I think there was a little bit of.
Speaker Change: Uncertainty in the market around okay, how will this impact.
Speaker Change: Real estate equity participants how do they think about acquisitions, how do they think about their ownership of assets.
Speaker Change: And what we saw in its early days, but I think what we're seeing today is a materially different outlook than perhaps we saw in the fall where we had obviously.
Speaker Change: Backup in rates as well.
Speaker Change: Which is.
Speaker Change: A view that im not going to necessarily change how I think about.
Matt: And on the flip side, from a borrower standpoint, and I know KRF has some large real estate equity holdings, how are borrowers contemplating the outlook now? It seems that there has been a material shift in the interest rate outlook, higher for longer versus earlier in the year. Any color you could provide there?
Speaker Change: Terminal.
Speaker Change: Interest rates terminal cap rates may have a little bit higher cost of capital in the interim here. However.
Speaker Change: My views around growth are more solidified today than they were six months ago. So people are like leaning into growth a little bit more than they had been and really kind of leaving exit caps around the same from what we can tell.
Matt: You know, what we're seeing and what I've embedded in my comments is a return to transaction volumes. And of course, when that inflation hit and we got that rate move, I think there was a little bit of uncertainty in the market around, okay, how will this impact real estate equity participants? How will they think about acquisitions? How will they think about, you know, their ownership of assets?
Speaker Change: And therefore the.
Speaker Change: His friend has been okay.
Speaker Change: Relatively I think immaterial to the mindset of institutional real estate investors again early but that's certainly what we're seeing right now and Theres a lot of big transactions in the market that are pricing.
Speaker Change: And that's what that's what we're witnessing.
Speaker Change: Thanks, and if I could ask a follow up.
Matt: And what we saw in its early days, but I think what we're seeing today is a materially different outlook than perhaps we saw in the fall, where we had obviously a backup in rates as well, which is a view that I'm not going to necessarily change how I think about terminal interest rates, terminal cap rates, may have a little bit higher cost of capital in the interim here. However, my views around growth are more solidified today than they were six months ago.
Speaker Change: Just could you give a range on what your views of the exit cap rates are.
Speaker Change: Touching on property type you could leave aside office.
Speaker Change: Yeah.
Speaker Change: Yeah. So.
Speaker Change: Multifamily right now.
Speaker Change: I would say entry caps are in the.
Speaker Change: For class a somewhere around 5%.
Speaker Change: Very high fours to low fives, I would say is kind of where those entry cap rates are.
Speaker Change:
Speaker Change: Industrial is very hard to put up and these are all market dependent I think industrial is very hard to put up.
Matt: So people are leaning into growth a little bit more than they had been and really kind of leaving exit caps around the same, from what we can tell. And therefore, this print has been relatively, I think, immaterial to the mindset of institutional real estate investors, again, early, but that's certainly what we're seeing right now. And there are a lot of big transactions in the market that are pricing. And that's what you know; that's what we're witnessing.
Speaker Change: Our pet on just because what's.
Speaker Change: Whats the embedded gain to lease how long are the lease terms.
Speaker Change: What market are you in what your box size I mean, there's so much variation there.
Speaker Change: But.
Speaker Change: I do think that that a lot of those assets are trading call. It high fives low six percents type of like a context and then people are running exit caps.
Speaker Change: Either at or slightly inside of those levels to adjust for obviously rallies in the in the treasury over the over the next over the next couple of years.
Speaker Change: Yes.
Speaker Change: Thanks Thats helpful.
Speaker Change: Yeah.
Speaker Change: And as a reminder, if you'd like to ask a question. Please press Star then one.
Jade Joseph Rahmani: Thanks, and if I could,
Jade Joseph Rahmani: Thanks. And if I could ask a follow-up question, just could you give a range of what your views of the exit cap rates are, you know, touching on property type? You could leave one side off.
Speaker Change: The next question is from Don fan Dirty from Wells Fargo. Please go ahead.
Speaker Change: Patrick the two remaining Philly assets, you said you could possibly announce the sale is that indicative of more capital coming in.
Matt: Yeah, so I think multifamily right now. I would say entry caps are in the, somewhere around 5%, very high 4s to low 5s, I'd say that's kind of where those entry cap rates are. Um, you know, I think industrial is very hard to put a pen on, and these are all market-dependent. I think industrial is very hard to put a pen on just because.
Speaker Change: Real estate or is that more you just saying.
Speaker Change: Makes sense, let's clear protect.
Patrick Mattson: Hey, Don Patrick.
Patrick Mattson: I think it's a couple of things.
Patrick Mattson: I think there are signs in certain markets, where when real estate gets to a certain value that there is interest.
Patrick Mattson: Those two assets that we were and obviously have the ability to hold longer term one is a well occupied office and the other is a parking garage and I think when you talk about that profile of deal.
Matt: What's the embedded gain to lease? How long are the lease terms? What market are you in? What's your box size?
Matt: I mean, there's so much variation there. But, you know, I do think that a lot of those assets are trading at call it high fives, low sixes, type of context, and then people are running exit caps, either at or slightly inside those levels to adjust for, obviously, rallies in the Treasury over the next couple of years. Thanks, that's helpful. And as a reminder, if you'd like to ask a question, please press.
Patrick Mattson: Even in this market there is interest and so I think as we indicated we.
Patrick Mattson: We will see how that transpires over the quarter.
But we do think there is some possibility too.
Patrick Mattson: Just to sell both of those properties.
Patrick Mattson: Thanks.
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.
Operator: And as a reminder, if you'd like to ask a question, please press star, then one. The next question is from Don Fandetti from Wells Fargo. Please go ahead. I'll ask the two remaining...
Jack Switala: Great. Thanks, operator, and thanks, everyone for joining today, please reach out to near the team here. If you have any questions take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Donald James Fandetti: Yeah, I think it's a couple of things. When real estate gets to a certain value, there's interest. Those two assets that we were, and obviously have the ability to hold longer term, one is a well-occupied office, and the other is a parking garage. And I think when you talk about that type of deal, Even in this market, there's interest. And so, as we indicated, we'll see how that transpires over the quarter. But we do think there is some possibility of selling both of those properties.
Jack Switala: Okay.
Jack Switala: [music].
Jack Switala: 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.
Jack Switala: Yes.
Jack Switala: Yes.
Operator: Well, great. Thanks, operator. And thanks, everyone, for joining us today. Please reach out to me or the team here if you have any questions. Take care. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Jack Switala: Yes.
Jack Switala: Okay.
Jack Switala: [music].
Jack Switala: Yeah.
Jack Switala: Yes.
Jack Switala: Yes.
Jack Switala: Okay.
Jack Switala: [music].
Operator: ?? ?? ?? ?? ?? ?? ?? ??