Q2 2024 KKR Real Estate Finance Trust Inc Earnings Call

Operator: Good morning, and welcome to the KKR Real Estate Finance Trust Incorporated second quarter 2024 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 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 incorporated second quarter 'twenty 'twenty four financial results Conference call.

Speaker Change: All participants will be in listen only mode.

Speaker Change: Need assistance, please signal a conference specialist by pressing the star key followed by zero.

Speaker Change: After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: Please note this event is being recorded.

Speaker Change: I would now let's turn the conference over to Jack Switala. Please go ahead.

Jack Switala: Great, thanks operator, and welcome to the KKR Real Estate Finance Trust earnings call for the second quarter of 2024. As the operator mentioned, this is Jack Switala.

Jack Switala: Great. Thanks, operator, and welcome to the KKR Real estate Finance Trust earnings call for the second quarter of 2024.

Jack Switala: 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, 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.

Speaker Change: Today I'm joined on the call by our CEO, Matt Salem, Our President and C O O Patrick Mattson and our CFO Kendra Decius I'd.

Speaker Change: 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.

Speaker Change: Call will also contain certain forward looking statements, which do not guarantee future events or performance. Please.

Jack Switala: Refer to our most recently filed 10-Q for cautionary factors related to these statements.

Jack Switala: For the second quarter of 2024, we reported a gap net income of $20.2 million, or 29 cents per share. Distributable earnings this quarter were negative $108.7 million, or negative $1.57 per share, including realized losses of $136 million, or $1.97 per share. Distributable earnings prior to realized losses were $0.40 per share relative to our Q2 $0.25 per share dividend. Book value per share as of June 30, 2024 was $15.24, representing an increase of $0.06, quarter over quarter. Our CECL allowance decreased to $1.65 per share from $3.54 per share last quarter, primarily driven by realized losses. With that, I'd now like to turn the call over to Matt.

Jack Switala: Before I turn the call over to Matt I'll provide a brief recap of our results for.

Matthew A. Salem: For the second quarter of 2024, we reported GAAP net income of $20 $2 million or 29 cents per share.

Matthew A. Salem: Distributable earnings this quarter were negative $108 $7 million or a negative $1 57 per share, including realized losses of $136 million.

Matthew A. Salem: Our $1 97 per share.

Matthew A. Salem: Distributable earnings prior to realized losses were <unk> 40 per share relative to our Q2 25 cents per share dividend.

Matthew A. Salem: Book value per share as of June 30th 2024 was $15.24, representing an increase of six cents quarter over quarter.

Matthew A. Salem: Our CCA allowances decreased to $1.65 per share from $3 54 per share last quarter.

Matthew A. Salem: Primarily driven by realized losses.

Matthew A. Salem: 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: Before turning to KRF's second quarter results, I'd like to begin with a brief market update. In mid-July, U.S. core CPI came in at the lowest level since 2021, signaling that inflation is subsiding. Fixed income and equity markets reacted positively. Within commercial real estate, values for most property types appear to have bottomed out at these lower levels. However, transaction volume is slowly increasing, and investor demand is present. Albeit largely for more value add and opportunistic equity with most core pools of capital dormant. While rental increases have largely subsided, lower new construction starts may lead to supply and demand imbalances over the next few years.

Matthew A. Salem: Before turning to <unk> second quarter results I'd like to begin with a brief market update.

Speaker Change: In mid July U S core CPI came in at the lowest level since 2021.

Speaker Change: Signaling that inflation is subsiding.

Speaker Change: Fixed income and equity markets reacted positively.

Speaker Change: Within commercial real estate values for most property types appear to have bottomed out at these lower levels.

Speaker Change: Transaction volume is slowly increasing.

Speaker Change: And then in industrial demand is present.

Speaker Change: Albeit largely for more value add and opportunistic equity with most core pools of capital doormat.

Speaker Change: While rental increases have largely subsided.

Speaker Change: Lower new construction starts may lead to supply demand imbalances over the next few years.

Matthew A. Salem: On the lending side... New Originations benefit from lower LTVs, more cash flow per unit of debt, and a basis well below replacement costs. Given these factors, our expectation is that this vintage of real estate lending will be very strong. We continue to think that the market opportunity, While attractive today, will accelerate as transaction volumes normalize, and Bank Activity remains muted. Banks historically represented 40% of the market, and we expect their participation to come down materially.

Speaker Change: On the lending side.

Speaker Change: New originations benefit from lower Ltvs.

Speaker Change: More cash flow per unit of debt.

Speaker Change: And a basis well below replacement cost.

Speaker Change: Given these factors.

Speaker Change: Our expectation is that this vintage of real estate lending will be a very strong credit.

We continue to think that the market opportunity.

Speaker Change: While attractive today.

Speaker Change: We'll accelerate.

Speaker Change: Transaction volumes normalize.

Speaker Change: Bank activity remains muted.

Thanks, historically represented 40% of the market.

We expect there, but their participation to come down materially.

Matthew A. Salem: Our best guess is that the bulk of the opportunity will occur over the next 18 to 24 months. This dynamic will present KREP with an opportunity to step in, as we look to turn to offense and resume lending over the next few quarters.

Speaker Change: Our best guess is that the bulk of the opportunity will occur over the next 18 to 24 months.

Speaker Change: This dynamic will present, K rough with an opportunity to step in.

Speaker Change: As we look to turn to offense and resume lending over the next few quarters.

Speaker Change: Notably.

Matthew A. Salem: U.S. banks are demonstrating a shift of preference from direct mortgage origination to originating loan-on-loan facilities. So, senior financing for our investments is readily available as we return to the market. As a reminder, KRF sits within KKR's broader real estate business, which manages over $70 billion of capital across both debt and equity globally in real estate credit. We have a number of different pockets of capital, across First Mortgage Origination, and Securities Invested, as well as our KSTAR Asset Management and Special Servicing Platform. Our team of over a hundred individuals is actively investing from our bank and insurance SMAs, the Private Debt Fund, which allows us to stay active in the market, and Service, our strong client relationship.

Speaker Change: U S banks are demonstrating a shift of preference from direct mortgage origination.

Mitch: Mitch a loan on loan facilities.

Mitch: So senior financing for our investments.

Mitch: As readily available as we return to the market.

Mitch: As a reminder.

Speaker Change: Tariff sits within take yours broader real estate business that manages over $70 billion of capital across both debt and equity globally.

Speaker Change: Within real estate credit.

Speaker Change: We have a number of different pockets of capital.

Speaker Change: First mortgage origination.

Speaker Change: And security is investing.

Speaker Change: As well as our case to our asset management and special servicing platform.

Speaker Change: Our team of over 100 individuals.

Speaker Change: Is actively investing from our bank insurance Sma's and private debt funds, which allows us to stay active in the market.

Speaker Change: In service, our strong client relationships.

Matthew A. Salem: Our own real estate credit pipeline is robust, totaling over $20 billion, which is up over 40% compared to last year's weekly average. And we are converting the pipeline into investment activity. In the second quarter alone, we invested over $4.7 billion across our real estate credit complex. Now, turning to our second quarter results. KRUF's distributable earnings prior to realized losses of $0.40 comfortably covered our $0.25 per share dividend. As we stated earlier this year... We set our dividend at a level which we believe we can cover with distributable earnings prior to realized losses, with our performing loan portfolio under a number of different scenarios, in the near term.

Our own real estate credit pipeline as robust totaling over $20 billion.

Speaker Change: Which is up over 40% compared.

Speaker Change: Compared to last year's weekly average.

Speaker Change: And we are converting the pipeline into investment activity.

Speaker Change: In the second quarter alone, we invested over $4 7 billion across our real estate credit complex.

Speaker Change: Now.

Speaker Change: Turning to our second quarter results.

Ross: Hey, Ross distributable earnings.

Speaker Change: That's a realized losses of 40.

Speaker Change: Comfortably covered our 25 cents per share dividend.

Speaker Change: As we stated earlier this year.

Speaker Change: We set our dividend at a level a level, which we believe we can cover with distributable earnings prior to realized losses.

Speaker Change: Our performing loan portfolio under a number of different scenarios.

Speaker Change: In the near term we.

Matthew A. Salem: We expect DEX losses to continue to be significantly higher than our dividend. This was an important quarter for us, as we completed the transition of two watchlist loans to REO. And while we realize losses, we were appropriately reserved.

Speaker Change: We expect the E X losses to.

Speaker Change: To continue to be significantly higher than our dividend.

Speaker Change: This was an important quarter for us as we completed the transition of two watch list loans to Oreo.

Speaker Change: And while we realized losses.

Speaker Change: We're appropriately reserved.

Matthew A. Salem: We have Ledwood Transparency, and KREP has remained disciplined in adjusting CECL reserves. And importantly, we did not have any negative watchlist migrations this quarter. Book value per share grew by $0.06, quarter over quarter, to $15.24, at the end of the second quarter.

Speaker Change: We have led with transparency.

Speaker Change: And <unk> has remained disciplined and adjusting seasonal reserves.

Speaker Change: Importantly, we did not have any negative watch lists migration this quarter.

Speaker Change: Value per share grew by 6% quarter over quarter to $15 24.

Speaker Change: At the end of the second quarter.

Matthew A. Salem: This quarter, we received $384 million in loan repayment, with full repayments across four loans, including hospitality, industrial, and multifamily property types, one of which was previously a four-rated loan. We funded $121 million in loan principal for a net reduction of $263 million. Repayments have now exceeded fundings in four of the last five quarters.

Speaker Change: This quarter, we received $384 million in loan repayments.

Speaker Change: With four repayments with full repayments across four loans, including hospitality.

Speaker Change: Industrial and multifamily property types, one of which was previously a four rated loan.

Speaker Change: We funded $121 million in loan principal for a net reduction of $263 million.

Speaker Change: Repayments have now exceeded fundings and four of them of the last five quarters.

Matthew A. Salem: Future funding obligations have declined to approximately 9% of the funded portfolio. Repayments have also allowed us to de-lever the balance sheet, with a current leverage of 3.9 times, in line with our target leverage. Within our current pipeline across the real estate credit business, we're focused on favored asset classes with strong fundamentals. For example, our current KREP portfolio is 60% multifamily and industrial. Resilient property types with long-term tailwinds. To note, our multifamily portfolios performed well with weighted average rent increases. 3.1% year over year. In terms of other property types,

Speaker Change: Future funding obligations have declined to approximately 9% of the funded portfolio.

Speaker Change: You can't repayments have also allowed us to delever the balance sheet.

Speaker Change: With current leverage of three nine times.

Speaker Change: In line with our target leverage.

Speaker Change: Within our current pipeline across the real estate credit business.

Speaker Change: Our focus on favorite asset classes with strong fundamentals.

Speaker Change: Our current <unk> portfolio was 60% multifamily and industrial.

Speaker Change: Jillian property types with long term tailwind.

Speaker Change: No our multifamily portfolio has performed well with weighted average rent increases.

Speaker Change: Three 1% year over year.

Speaker Change: In terms of other property types.

Matthew A. Salem: While there is currently decreased tenant demand in the life science sector, we remain positive about the innovations in science and technology. And our loan exposure is located in the deepest markets of Boston and San Francisco, with around half of our loan portfolio in this sector comprised of new trophy real estate. KMF has robust liquidity with $644 million of availability, subsequentially from the prior quarter, with the assistance of KKR Capital Markets. We have built a diversified financing structure, with sources totaling $8.4 billion and $2.8 billion of undrawn capacity. 79% of our secured financing is completely not mark-to-mark. And the remaining balance is marked to credit OMA. Arup has termed out its debt structure as well. No corporate debt or final facility maturities until 2026.

Speaker Change: While there is currently decreased tenant demand in the life science sector.

Speaker Change: We remain positive given the innovations in science and technology.

And our loan exposures located the deepest markets of Boston and San Francisco.

Speaker Change: With around half of our loan portfolio in this sector comprised of new Trophy real estate.

Speaker Change: <unk> has robust liquidity was $644 million of availability.

Speaker Change: Up sequentially from the prior quarter.

Speaker Change: With the assistance of KKR capital markets.

Speaker Change: We have built a diversified financing structure.

Total resources totaling $8 4 billion and $2 8 billion of Undrawn capacity.

Speaker Change: 79% of our secured financing is completely <unk>.

Speaker Change: Non mark to market.

Speaker Change: And the remaining balance is marked to credit only.

Eric: Eric was termed out debt structure as well.

Eric: No corporate debt or final facility maturities.

Eric: Until 2026.

Matthew A. Salem: Now, I want to take a step back and discuss how the company is positioned. We've come a long way through the stress induced by the work-from-home dynamics and the significant Fed hiking cycle. We've approached our issues in the portfolio proactively and transparently, leveraging the full breadth of the KKR platform. We have taken various approaches to working out our watchlist loans, including DPOs, modifications, and foreclosures, always with the mindset of optimizing shareholder value over the long term and fighting any near-term noise it may cause. We reduced the dividend in order to give us time to create value and our REO portfolio. We've maintained ample liquidity throughout, with repayments exceeding funding as anticipated.

Eric: Now I want to take a step back and discuss how the company is positioned.

Eric: We've come a long way through the stress induced by the work from home dynamic.

Eric: And a significant fed hiking cycle.

Eric: We've approached our issues in the portfolio proactively and transparently.

Eric: Leveraging the full breadth of our platform.

Eric: We have taken various approaches to working at our watch list loans.

Eric: Putting dps <unk>.

Eric: Modifications.

Eric: And foreclosures.

Eric: Always with the mindset of optimizing shareholder shareholder value over the long term.

Eric: Fight any near term noise it may cause.

Eric: We reduced the dividend in order to give us time to create value.

Eric: And our Oreo portfolio.

Eric: We have maintained ample liquidity throughout.

Eric: With repayments exceeding funding as anticipated we.

Eric: We've been able to reduce our leverage ratio to within our target range.

Matthew A. Salem: We've been able to reduce our leverage ratio to within our target range. But, I can't say we're out of the woods yet. I do think we're at the edge of the woods, and we're starting to see the proverbial light. To that end, we've begun to discuss what a return to offense looks like in the second half of the year. We are evaluating all our options and Thinking Through Relative Value to maximize return for our shareholders. With over 75 years of collective experience across our leadership and asset management team, and our access to the broader KKR real estate platform, KF has the tools to continue to navigate the challenges of today's market. With that, I'll turn the call over to Patrick.

Speaker Change: Well I can't say, we're out of the woods yet.

Speaker Change: I do think we're at the edge of the woods.

Speaker Change: Starting to see the proverbial light.

Speaker Change: To that end, we've been we've begun to discuss what our return to offense looks like in the second half of the year.

Speaker Change: We are evaluating all our options.

Speaker Change: And thinking through relative value.

Speaker Change: To maximize return for our shareholders.

Speaker Change: With over 75 years of collective experience across our leadership in asset management team.

Speaker Change: And our access to the broader picture our real estate platform.

Speaker Change: <unk> has the tools to continue to navigate the challenges of today's market.

Speaker Change: With that I'll turn the call over to Patrick.

Patrick Mattson: Thank you, Matt. Good morning, everyone.

Patrick Mattson: Thank you Matt good morning, everyone.

Patrick Mattson: I'll begin with updates to our CECO allowance and watch list. Cecil reserves decreased by $131 million to $115 million, driven primarily by realized losses in the quarter. There were no additions to the watch list.

Patrick Mattson: I'll begin with updates to our seasonal allowance and watch list.

Patrick Mattson: So reserves decreased by 131 million to $115 million.

Patrick Mattson: Driven primarily by realized losses in the quarter.

Speaker Change: There were no additions to the watch list.

Patrick Mattson: And the risk ratings remain stable on the remaining loans in the portfolio. The weighted average risk rating on the portfolio is now 3.1, compared to 3.2 last quarter, and over 90% of our portfolio is risk rated 3 or better. We continue to proactively manage the remaining watchlist loans and have begun discussions with the sponsor on the four-rated life science loan, and we'll update everyone as those proceed on our Philadelphia asset that became REO in late 2023.

And the risk rate risk ratings remained stable on the remaining loans in the portfolio.

Speaker Change: The weighted average risk rating on the portfolio is now 3.1.

Speaker Change: Compared to $3 two last quarter.

Speaker Change: And over 90% of our portfolio risk rated three or better.

Speaker Change: We continue to proactively manage the remaining watch list loans and have begun discussions with the sponsor on the four rated life science alone.

Speaker Change: And we'll update everyone as those proceed.

Speaker Change: For our Philadelphia asset that became Oreo in late 2023.

Patrick Mattson: This quarter, we succeeded in selling two of the four properties within the portfolio. As we have stated previously, we're comfortable holding the remaining office property and parking garage for longer terms but are in discussions to sell those two assets as well. As projected on last call, in June, we took title to a Class A office campus in Mountain View, California, and a Class A life science property in Seattle through deeds in lieu of foreclosure, and wrote off a mezzanine office loan in Boston that was deemed uncollectible, resulting in a combined realized loss of $136 million. This actual loss amount was less than the approximately $140 million CECL reserve we had previously recorded for these With the transfer of the Mountain View and Seattle properties complete,

Speaker Change: This quarter, we succeeded in selling two of the four properties within the portfolio.

Speaker Change: As we have stated previously we're comfortable holding the remaining office property and parking garage longer term.

Speaker Change: But our discussions to sell those two assets as well.

Speaker Change: As projected last call in June we took title to a class a office campus in Mountain view, California.

Speaker Change: In a class a life science property in Seattle through deeds in lieu of foreclosure.

Speaker Change: And wrote off a mezzanine office alone in Boston that.

Speaker Change: That was deemed uncollectible.

Speaker Change: Resulting in a combined realized loss of $136 million.

Speaker Change: This actual loss amount was less than the approximately $140 million seasonal reserve. We had previously recorded for these three loans.

With the transfer of the mountain view and Seattle properties complete.

Patrick Mattson: We're beginning to work to position these assets for long-term success, using the full breadth of the KKR platform. We will manage our remaining REO portfolio to maximize shareholder value and believe in the future monetization of those assets. We can reinvest the capital to generate an additional $0.12 per share in distributable earnings per quarter. Details on our REO portfolio, which currently represents approximately $264 million of net equity, in the aggregate, or $3.80 per share, are reflected on page 11 of our supplementary.

Speaker Change: We're beginning to work to position these assets for long term success using the full breadth of the KKR platform.

Speaker Change: We will manage our remaining oreo portfolio to maximize shareholder value.

Speaker Change: And believe upon future monetization of those assets.

Speaker Change: We can reinvest the capital to generate an additional 12 cents per share and distributable earnings per quarter.

Speaker Change: Details on our Oreo portfolio.

Speaker Change: Currently represents approximately 264 million of net equity in the aggregate or $3 80 per share are reflected on page 11 of our supplemental.

Patrick Mattson: On the financing side, over 75% of the portfolio continues to be fully mark-to-market. Our two outstanding CRE CLOs continue to perform well, with no loan delinquencies, providing KREP with attractive leverage and a creative cost of capital; repayments are tracking above a billion dollars for the full year. In addition to the $384 million received during the quarter, we have received an incremental $188 million of paydowns in July, bringing year-to-date repayments to over $900 million.

Speaker Change: On the financing side over 75% of the portfolio continues to be fully non mark to market.

Speaker Change: Our two outstanding CRE CLO <unk> continued to perform well.

Speaker Change: With no loan delinquencies, providing K RAF with attractive leverage and accretive cost of capital.

Speaker Change: Repayments are tracking above a $1 billion for the full year.

Speaker Change: In addition to the 384 million received during the quarter.

Speaker Change: Have received an incremental $188 million of pay downs in July.

Speaker Change: Bringing year to date repayments to over $900 million.

Patrick Mattson: With reduced future funding obligations, KREF was able to repay $242 million in financing during the quarter, reducing the debt to equity ratio and total leverage ratio to 1.9 times and 3.9 times, respectively, in the second quarter. Repayments are projected to outpace future funding obligations throughout the remainder of 2024. In summary... KREF has a substantial equity position that increased this quarter to over $644 million. We've had no negative credit migrations this quarter, and our book value per share increased by $0.06 to $15.24. Given the progress we have made on the portfolio and the constructive lending backdrop we are seeing within real estate credit. We feel confident that KKR is well positioned going into the second half of the year.

Speaker Change: With reduced future funding obligations KBR was able to repay $242 million of financing during the quarter.

Speaker Change: Reducing the debt to equity ratio and total leverage ratio to one nine times and three nine times, respectively in the second quarter.

Speaker Change: Repayments are projected to outpace future funding obligations throughout the remainder of 2024.

Speaker Change: In summary.

Speaker Change: <unk> has a substantial liquidity position that increased this quarter to over $644 million.

Speaker Change: We've had no negative credit migration this quarter.

Speaker Change: And our book value per share increased by six to.

Speaker Change: The $15 and 24.

Speaker Change: Given the progress we've made on the portfolio.

Speaker Change: And the constructive lending backdrop, we're seeing within real estate credit.

Speaker Change: We feel confident that <unk> is well positioned going into the back half of the year.

Patrick Mattson: 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.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question is from Stephen Laws with Raymond James. Please go ahead.

Speaker Change: We will now begin the question and answer session.

Speaker Change: To ask a question you May Press Star then one on your Touchtone phone.

Speaker Change: If you were using a speakerphone please pick up your handset before pressing the keys.

Speaker Change: To withdraw your question. Please press Star then two.

Speaker Change: At this time, we will pause momentarily to assemble our roster.

Speaker Change: The first question is from Stephen laws with Raymond James. Please go ahead.

Stephen Albert Laws: Hi, good morning.

Stephen Albert Laws: Congratulations on a nice, nice print and looks like you got a lot done in the second quarter. You know, I think first I'd like to start with the new investments and kind of outlook for leverage. Matt, I think you commented about shifting to offense, having that discussion, Patrick, and you followed up talking about repays outpacing new originations. So should we look at leverage kind of dropping at year end and growing next year?

Speaker Change: Congratulations on a nice nice Pratt and <unk>.

Speaker Change: Looks like you got a lot done in the second quarter.

Speaker Change: I think first I'd like to start with.

Speaker Change: The new investments and kind of outlook for leverage you know, Matt I think you know you commented about shifting to off that having that discussion Patrick you followed up talking about repays outpacing new originations. So should we look at leverage kind of swapping at year end and then growing next year, how do we think about portfolio size in the coming quarters and as you think.

Stephen Albert Laws: How do we think about portfolio size in the coming quarters? And as you think about moving to off, do you see it being more the more competitive type assets that have a pretty strong bid just given their CLO-type eligible collateral, or are you looking at more opportunistic stuff, you know, construction loans or maybe heavier lift stuff that no financing for that has higher returns?

Speaker Change: Moving to offense.

Speaker Change: Do you see it being more the more competitive.

Type assets that have a pretty strong bid just given their CLO type eligible collateral or are you looking at more opportunistic stop.

Speaker Change: Construction loans or maybe heavier lift stopped that.

Speaker Change: On the financing for that have higher returns.

Matthew A. Salem: Thanks, Steven, for the question. It's Matt.

Speaker Change: Thanks, Stephen for the question.

Speaker Change: It's Matt I can take that I think from leverage perspective, we're going to maintain.

Matthew A. Salem: I can take that. I think from a leverage perspective, we're going to maintain our target leverage range, which has been the same really over the last handful of years, which is that high threes leverage. So I don't think we're going to look to increase the overall leverage of the portfolio. But as we start to get additional repayments in, obviously, we'll have equity there we can redeploy. In terms of what we're looking at, we're going to stick to similar things that we've done in the past, so favorite property types, predominantly multifamily, industrial, and student.

Matthew A. Salem: Our target leverage range, which has been the same really through over the last handful of years, which is that high threes leverage. So I don't think were going to look to increase the overall leverage of the portfolio, but as we start to get.

Matthew A. Salem: Additional repayments and obviously, we will have equity there we can we can redeploy.

Speaker Change: In terms of what we're looking at.

Speaker Change: We're going to stick to similar.

Speaker Change: Similar things that we've done in the past so favorite property types.

Speaker Change: Predominantly multifamily industrial student, we're seeing a lot of activity in the data center space right now as well.

Matthew A. Salem: We're seeing a lot of activity in the data center space right now, so there's an opportunity for us to increase our footprint as well. Over the last couple of years, we've set up a team in London that focuses on Western Europe that's fully integrated with our real estate equity team in Europe. So certainly, a geographic expansion is on the table as well. As it relates to construction, I do think there's an opportunity there. When you think about the bank retrenchment, it's really across the board, but it's most acute in construction lending, which tends to be a little bit less capital efficient for the banks.

Speaker Change: There is an opportunity as opportunity for us to increase our footprint as well over the last couple of years.

Speaker Change: Stood up a team in London.

Speaker Change: That focuses on western Europe.

Speaker Change: That is fully integrated with our real estate equity team in Europe. So certainly a geographic expansion is on the table as well.

Speaker Change: As it relates to <unk>.

Speaker Change: Construction I do think there's an opportunity there when you think about the bank retrenchment.

Speaker Change: It's really across the board, but it's most acute in construction lending, which tends to be a little bit less capital efficient for the banks.

Matthew A. Salem: And as they have become more and more kind of capital focused, they've pulled back from that part of the market even more dramatically. So it's an area that we'll continue to look at. We're going to have to balance that a little bit. Obviously, that comes with a lot of future funding, and you don't get dollars in the ground immediately. But I think some percent of our portfolio certainly could be allocated to that opportunity.

More and more kind of capital focused they've pulled back from that part of the market even more dramatically. So it's an area that we'll continue to look at it we're gonna have to balance that a little bit obviously that comes with a lot of future funding and you don't get dollars and the ground immediately but I think some percent of our portfolio certainly could be allocated to that.

Speaker Change: Opportunity.

Patrick Mattson: Great. And Patrick, a quick one.

Patrick Mattson: Great and Patrick will a quick one when you look at the C stores or what percentage of that you allocate or roughly across the five watch list.

Speaker Change: Loans versus.

Patrick Mattson: The other parts of the portfolio.

Patrick Mattson: When you look at the CSORs, kind of what percentage of that do you allocate to or roughly across the five watch list loans versus, you know, the other parts of the portfolio?

Yes, Steven Thanks. Thanks for the question, we think about it as you might expect that the watch list loans tend to make up the majority of the seasonal that's been true.

Patrick Mattson: Yeah, Steven, thanks for the question. We think about it, as you might expect, that the watchlist loans tend to make up the majority of the CECL. That's been true over the last several quarters and continues to be true today.

Patrick Mattson: Over the last several quarters and continues to be true today.

Matthew A. Salem: Great. And then lastly, I think one more, you know, when you look at the five watchlist loans, the four REO assets, which of those do you think may have resolutions in the second half of this year? And which of them, you know, I assume in the remainder, will have a longer term resolution path?

Speaker Change: Great and then lastly, sneak one more in you know when you look at the five watch list loans before you or four Oreo assets now which of those do you think may have resolutions in the second half of this year and which of them.

Speaker Change: You know I assume then the remainder would be longer term resolution passed.

Speaker Change: Okay.

Matthew A. Salem: I think, yeah, if you look at the existing watchlist loans, I think the one that comes to mind.

Speaker Change: I think if you look at.

Speaker Change: The existing watch list loans.

Speaker Change: I think the one that.

Speaker Change: It comes to mind.

Matthew A. Salem: First is our four-rated life science loan. So, as Patrick mentioned, we're entering discussions with the sponsor on that. So, my guess is that we'll get some conclusion over the back, you know, over the next quarter or two. It's always hard to time these things, you know; you never know exactly how long it's going to take.

Speaker Change: First is our four rated life science loans, so as Patrick mentioned.

Speaker Change: We're entering discussions with with the sponsor on that so my guess is that we'll get some conclusion.

Over the over the next quarter or two.

Speaker Change: Always hard to time these.

We know exactly how long it's going to take.

Matthew A. Salem: And then, of course, on our independent, on our Philadelphia office asset, we, again, expect to likely sell those remaining two of those properties by year end. It is unclear on the timing for the remaining watch list loans at this point in time, but some of those certainly could continue to go into 2025. But if you recall what we discussed on our last quarterly call, I really break it down by property type a little bit.

Speaker Change: And then of course.

Speaker Change: Our independence, Philadelphia office asset.

Speaker Change: Again, we expect to likely sell those remaining two of those.

Speaker Change: Properties by year end.

Speaker Change: And.

Speaker Change: Unclear on the timing for for the remaining watch list loans at this point in time some of those.

Speaker Change: Certainly could continue to go into the 2025, but if you recall, what we discussed on our last quarterly call I really break it down by property type a little bit and the <unk>.

Matthew A. Salem: And again, while there can be noise there, there can certainly be loans transitioning to four or from four to five. The real question is, is there material loss content in that sector? And from what we're seeing, there continues to be a lot of liquidity in multifamily. The performance is pretty solid, and so we're not anticipating any real material losses in the multifamily property type at this point.

Speaker Change: The majority of the remaining loans are in the multifamily category and again, while there can be noise. There can certainly be loans transitioning to four or four.

Speaker Change: Four to five.

Speaker Change: The real question is is there a material loss content.

Speaker Change: In that sector and from what we're seeing there continues to be a lot of liquidity in multifamily the performance is.

Speaker Change: Pretty solid.

Speaker Change: So we're not anticipating any real material losses in the multifamily property type at this point in time.

Stephen Albert Laws: Great. I appreciate the comments this morning. Thank you.

Speaker Change: Great I appreciate the comments this morning. Thank you.

Richard Barry Shane: The next question is from Rick Shane with J.P. Morgan. Please go ahead.

Speaker Change: The next question is from Rick Shane with J P. Morgan. Please go ahead.

Richard Barry Shane: Hey guys, thanks for taking my questions this morning, and I clearly need to cue in before Steve Laws, because it's along the same vein, but look, you know, as you shift to offense a little. I would describe it as opposed to really moving aggressively that way at this point. I'm curious when you look at your geographic exposure, you know, concentration in California, concentration in Texas, and to a lesser extent, Florida, I'm curious if, with the way we see some costs associated with property ownership evolving in some of those regions, you would expect to sort of continue to keep the same distribution on the geographic side as well as on the property.

Richard Barry Shane: Hey, guys. Thanks for taking my questions. This morning.

Richard Barry Shane: Clearly need to Colin before Steve laws.

Speaker Change: Because it's along the same vein, but.

Richard Barry Shane: Look.

Speaker Change: As you shift to offense.

Richard Barry Shane: Hum.

Speaker Change: A little I would describe it as opposed to really move aggressively that way at this point I'm guessing.

Speaker Change: I'm curious when you look at your geographic exposure.

Speaker Change: Concentration in California concentration in Texas, Lesser extent, Florida.

Speaker Change: I'm curious is.

Speaker Change: With the way we see.

Speaker Change: Some costs associated with property ownership of ball being in some of those regions.

Speaker Change: You would expect to sort of continue to keep the same distribution on the geographic side as well as on the property type side.

Matthew A. Salem: Yeah, thank you for the questions, Matt. I do think there's been a little bit of a shift in terms of how we think about the geographic distribution of the portfolio and how we would invest going forward. I think the two things that I would highlight, one of which you mentioned, are just costs, especially insurance. So states like Florida, we have seen a pretty material increase in insurance. Transcripts provided by Transcription Outsourcing, LLC.

Speaker Change: Yes, thank you for the questions Matt.

Speaker Change: I do think there has been a little bit of shift in.

Speaker Change: Terms of.

Speaker Change: How we think about.

Speaker Change: The geographic distribution of the portfolio and how we would invest.

Speaker Change: Going forward I think the two things that I would highlight one of which you mentioned.

Speaker Change: Is this costs, especially around insurance.

Speaker Change: States like Florida.

Speaker Change: Have seen.

Speaker Change: Pretty material increase in insurance.

Speaker Change: Insurance costs there so.

Speaker Change: It's making us certainly evaluate that market a little bit more carefully the second thing we're watching is supply.

Speaker Change: There's a number of these sun belt markets that have a lot of supply coming in we've seen it.

Matthew A. Salem: The highest levels of demand for multifamily that we've ever seen, so a lot of that is being met with strong demand, but there's certainly some cities that we're a little bit more cautious on today. But at the same time, I just want to reiterate that we are an institutional lender. We are a large loan lender, and we do focus on the major markets. So we're really a top 30 lender within that, a top 30 market lender. Within that, we'll have some preferences, but it'll continue to be our focus to lend in kind of the most populous areas where there's the most liquidity and kind of transparency.

Speaker Change: The highest levels of demand for multifamily.

Speaker Change: We've ever seen so a lot of that is being met with strong demand, but there is certainly some cities that were a little bit more more cautious on today.

Speaker Change: But at the same time I just want to reiterate that we are an institutional lender.

A large loan lender, we do focus on the major markets. So.

Speaker Change: So we're really a top 30 lender within that top 30 market.

Speaker Change: Lender within that we will have some preferences, but it will continue to be our focus as lending and kind of the most populous areas, where there's the most liquidity and transparency.

Matthew A. Salem: Got it. And you brought up something interesting, which sort of resonated with me during your original comments. You talked about the fact that you continue to be constructive on multifamily and that you think the supply-demand is sort of reaching a new equilibrium. That's my word, not yours. I apologize.

Speaker Change: Got it.

Speaker Change: You brought up something interesting, which.

Speaker Change: It's sort of resonated with me during your original comments you talked about the fact that.

You continue to be constructive on multifamily.

Speaker Change: And that you think the supply demand.

Speaker Change: Yeah.

Speaker Change: Is sort of reaching a new equilibrium Thats my word not yours I apologize, but.

Speaker Change: Yes.

Matthew A. Salem: But you also just alluded to the fact demand seems strong, and supply is still coming online. When do you expect supply to sort of peak given the slowdown in new construction? And so we can really start to see that those trends sort of shift very favorably.

Speaker Change: Yeah, but you also just alluded to the fact demand seems strong supply is still coming online when do you expect the supply just sort of crest.

Speaker Change: Given the slowdown in new construction.

Speaker Change: So we can really start to see that.

Speaker Change: Those trends sort of ship very favorably.

Matthew A. Salem: Yeah, I would say it's market dependent. And I think what some people are missing is that it's not only market dependent, but it's very sub-market dependent as well. I think it's hard to look at a market like Phoenix, where you do have a lot of new supply coming in, but it can be in, and it can be very concentrated in certain areas. But the high-level answer to your question is that over the next six to nine months, most of that will get delivered into the market.

Speaker Change: Yeah, six market dependent and I think what some people are missing its not only market dependent but its very sub market dependent as well I think it's hard to look at a market like Phoenix, where you do have a lot of new supply coming in but it can be and it can be very concentrated in certain submarkets.

Speaker Change: The high level answer to your question is over the next six to nine months most of that will get delivered into the market and.

Matthew A. Salem: And there are a number of ways to look at new starts, but by most measures, we're at extremely low historical start levels. And so it will take time to digest past that six- to nine-month period as supply continues to come in. But even our equity investors in the market, and we're seeing that across our client base, we see that in our own business on the real estate equity investing side. People are looking through the current levels of supply in most markets and thinking about what the supply and demand looks like 24, 30 months out from now, and recognizing that the market will tighten up, the market will absorb, and it should be a very good intermediate investing opportunity.

Speaker Change: There's a number of way to look at just look at new starts.

Speaker Change: But by most measures were extremely low historical start levels and so it will take time to digest that six to nine month period as supply continues to come in.

Speaker Change: But even our equity investors in the market and we're seeing that across our client base, we see that in our own business on the real estate equity investing side.

Speaker Change: People are looking through the current levels of supply.

Speaker Change: In most markets.

Speaker Change: Thinking about what what the supply demand looks like 24 30 months out from now.

Speaker Change: And recognizing that the market will tighten up the market will absorb.

Speaker Change: And it should be a very good intermediate investing opportunity.

Richard Barry Shane: Thank you guys very much.

Speaker Change: Alright, Thank you guys very much.

Donald James Fandetti: The next question is from Don Fandetti with Wells Fargo; please go ahead.

Speaker Change: The next question is from Dan Fannon Dirty with Wells Fargo. Please go ahead.

Donald James Fandetti: Yes, um, if the Fed does begin cutting, can you sort of paint a picture of how you think this will play out in terms of series spreads, you know, capital coming in, borrower willingness to hang on to properties that are, you know, marginal or on the edge? You know, do you expect an impact there?

Speaker Change: Yes.

Speaker Change: That does begin cutting can.

Speaker Change: Can you just sort of paint a picture of how you think this will play out in terms of CRE spreads capital coming in borrower willingness to hang onto properties that are.

Speaker Change: Marginal or on the edge.

Speaker Change: Do you expect.

Speaker Change: And the impact there.

Matthew A. Salem: Hey Don, it's Matt. I can start, and maybe Patrick can jump in with anything I miss here. As much as it's been telegraphed through. [inaudible] different inflation trends or economic trends. I do think that there is a sentiment change when they actually start. My belief is that it will lead to higher transaction volumes, people are going to get their sea legs a little bit more as sentiment improves, and the cost of capital will clearly start coming down a little bit.

Speaker Change: Hey, John It's Matt I can start and maybe Patrick jump in with anything I Miss here.

Speaker Change: As much as it's been telegraphed through.

Speaker Change: Such statements.

Speaker Change: Inflation trends are economic trends.

Speaker Change: I do think there is a sentiment change when.

Speaker Change: They actually start to cut.

Speaker Change: And.

Speaker Change: My belief is it will lead to higher transaction volumes and you're just going to get people are going to get their sea legs, a little bit more of a sentiment improves.

Speaker Change: And cost of capital will clearly start coming down a little bit.

Matthew A. Salem: And in my mind, the opportunities that are going to be driven by how much transaction volume there is in the market. So when I think about a Fed environment where we're cutting, and we're cutting just because inflation is under control and not, you know, for more... GDP issues.

Speaker Change: And in my mind the opportunity set.

Really is going to be driven by how much transaction volume there is in the market. So when I think about a fed environment, where we're cutting and we're cutting just because inflation is under control and not.

Speaker Change: Yes.

Speaker Change: GDP issues, where employment issues.

Speaker Change: Yeah.

Matthew A. Salem: I think that as transaction volumes increase, it will not impact spreads dramatically. I think spreads will be largely unchanged. I could even imagine a world where those spreads widen because... We have not felt the full absence of the banks yet. If you think of transaction volumes being down 60 plus percent, thanks for watching. Certainly imagine a scenario where spreads widen because there's just not enough capital to meet the opportunity set. Even if they don't widen, I'm a very firm believer that there's going to be a lot of relative value in real estate credit just given the presence of the banks and how large they are in our space. And so there should be a pretty good investing market over the next couple years as we get back to a little bit of normal levels, a little bit of how we're thinking about the market opportunity here.

Speaker Change: I think that as that transaction volumes increase.

Speaker Change: It will not impact spreads dramatically I think spreads will be largely unchanged I could even imagine a world where those spreads widen because.

We have not felt the full.

Speaker Change: Absence of the banks, yet and if you think.

Speaker Change: Transaction volumes being down 60%.

Speaker Change: Thanks, being 40% of the lending market as you start to get into a more normal transaction environment.

Speaker Change: We are going to feel the absence of the banks and we don't know no one knows what that exactly looks like but you can certainly imagine a scenario where spreads widen because theres just not enough capital to meet the opportunity set.

Speaker Change: Even if they don't widen.

Speaker Change: Every firm believer that.

There's going to be a lot of relative value and.

Speaker Change: In real estate credit just given the presence of the banks and how large the R&R space.

Speaker Change: And so there should be a pretty good investing market over the next couple of years as we get back to a little bit of normal levels.

Speaker Change: So that's.

Speaker Change: A little bit how we're thinking about the market opportunity here.

Donald James Fandetti: Got it. And then I guess, you know, the provision was the lowest in the last few years. How are you feeling about the migration of threes to fours? I guess at this point, you're feeling comfortable that you're where you need to be and that that's a lower probability.

Speaker Change: Got it and then I guess the provision was the lowest in the last few years.

Speaker Change: How are you feeling about the migration of three to four I guess at this point youre feeling comfortable but.

Speaker Change: You are where you need to be and that that's a lower probability.

Matthew A. Salem: As I said in my initial comments, we're not out of the woods yet. It's hard to kind of predict what will happen over the next handful of quarters. A lot will be driven by the economic environment that we're living in. But it does feel like the bulk of the issues have been identified, they've been reserved for, and they've now, in many cases, come through to REO or have been or have been liquidated. And so I don't want to say there's nothing ahead of us, but I think we've, we've made it. The vast majority of it.

Speaker Change: As I said in the initial comments.

Speaker Change: We're not out of the woods yet.

Speaker Change: Hard to kind of predict what happens over the next handful of quarters lot will be driven by what's the economic environment that we're living in.

Speaker Change: But it does feel like the bulk of the issues have been identified they've been reserved for.

Speaker Change: In many cases.

Speaker Change: Through the Oreo or been or been liquidated and so I don't want to say Theres nothing ahead of us, but I think we've we've come through.

Speaker Change: The vast majority of it.

Matthew A. Salem: And I think we'll still have here and there issues around; I'm sure there'll be multifamily here and there that pops up in and out. But our expectation there, again, is that it's relatively contained from a loss perspective. So those are things that don't particularly concern us. Obviously, we'll be focused on them, and we'll have to react to them. But from just a pure loss context, I think we'll be fine.

Speaker Change: And I think we'll still have here and theyre issues around I'm sure there'll be multifamily here and there that pops up in and out but our expectation. There again is that it's relatively contained from a from a loss perspective.

Speaker Change: Those are things that don't particularly concern us obviously, we will be focused on it and we'll have to react to it but from.

Speaker Change: I'm, just a pure loss content.

Donald James Fandetti: It does not feel like there are any big challenges there.

Speaker Change: It does not feel like.

Speaker Change: Yes, there is any big challenges there.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Jade Joseph Rahmani: The next question is from Jade Rahmani with KBW. Please go ahead.

The next question is from Jade Rahmani with K B W. Please go ahead.

Jade Joseph Rahmani: Thank you very much. In the comment about DEX losses will exceeding the dividend, are you expecting upcoming losses as you proceed through the watchlist loan?

Jade Joseph Rahmani: Thank you very much and the comment about D E X losses will exceed the dividend are you expecting upcoming losses. As you proceed through the watch list loans.

Matthew A. Salem: Um, well, we could have... We could have some, Jade. I mean, you know, we're obviously still in negotiations on a number of these. So, Yeah, I don't think we have to see what kind of happens with these individual negotiations and how we get to the end of those. So there is a watchlist portfolio, and again, I think most of our focus is on the life science asset. Certainly, it could result in increased reserves or realized losses on that component of the portfolio.

Well, we could have.

Jade: We could have some jade I mean.

Speaker Change: Obviously, we're still in negotiations on a number on a number of these so.

Speaker Change: Yes, I don't think we have to see what kind of happens with these individual negotiations and how we get to the to the end of those.

Speaker Change: So there was a watch list portfolio.

Speaker Change: Again, I think our most of our focus is on is on the life science asset.

Speaker Change: It certainly could could result in increased reserves or realized losses on that component of the portfolio.

Patrick Mattson: On the REO side, can you talk about any parameters around the amount of capital you expect to contribute to those assets, whether those assets will be generating losses from an earnings standpoint in terms of just carrying the expenses, and specifically in the Seattle life science, you know, what the outlook is for attracting some tenants.

Speaker Change: On the Oreo side can you talk to any parameters around the amount of capital.

Speaker Change: You expect to contribute to those assets.

Speaker Change: Those assets will be generating losses for from an earnings standpoint in terms of just carrying the expenses and specifically on the Seattle lifestyle. It's you know what the outlook is for attracting some tenants.

Speaker Change: Yeah.

Patrick Mattson: Hey, Jade, it's Patrick. I'll take that. So nothing specific. At this moment, you know, we are going through a lot of business plans, working through what that capital outlay might be over the next several quarters. So I would anticipate that, you know, we'll have further guidance around that in the coming quarters, but nothing specific at the moment. I think with regard to Seattle, I guess, similar to the Mountain View deal, we've got high-quality real estate in a market that is experiencing some leasing challenges at the moment.

Speaker Change: Hey, Jade, it's Patrick I'll take that so nothing specific.

Speaker Change: At this moment, we are going through a lot of the business plans working through what that capital outlay might be.

Speaker Change: Over the next several quarters. So I would anticipate that we will have further guy.

Guidance around that in the <unk>.

Speaker Change: Coming quarters, but nothing specific at the moment.

Speaker Change: I think with regard to Seattle, I guess similar to the mountain view deal we've got high quality real estate in a market that is experiencing some leasing challenges at the moment, but we're starting with.

Patrick Mattson: But we're starting with really good real estate, and so we don't have a definitive view on sort of the timing of that lease-up, but we're active in those markets, sort of in these markets, and sort of coordinating with our broader real estate equity team. And you know, we'll obviously look to have further updates in the coming quarters, but I have nothing specific to report right now.

Speaker Change: Really good real estate.

Speaker Change: So.

We don't have.

Speaker Change: And the view on sort of the timing of that.

Speaker Change: Lease up but we're active in those markets our teams.

Speaker Change: Across our.

Speaker Change: Asset management are.

Speaker Change: In these markets and sort of coordinating with our broader real estate equity team and.

Speaker Change: We will obviously look to have further updates in the coming quarters, but nothing specific to report right now.

Jade Joseph Rahmani: In terms of loan modifications, has the rate slowed down? You know, beyond just the rate of CECL reserves and of watch-listed assets, has the rate of modification slowed as well? Yes, certainly, and then, Just lastly, I was wondering if you could provide some color, Matt, on the 4 plus billion in KKR credit deals so far. Are these, you know, refunds of existing deals from other lenders? Are they new acquisitions or opportunistic? How would you characterize the deal flow? Sure. I'll be happy to, Jade.

Speaker Change: In terms of loan modifications has the right.

Speaker Change: LOE down.

Speaker Change: You know beyond just the rate of C. Some reserves and of our watch list did assets has the rate of modification slowed as well.

Speaker Change: Yes, certainly.

Speaker Change: And then.

Speaker Change: Just lastly, I was wondering if you could provide some color Matt on the four plus billion of KKR credit deals. So far are these.

Speaker Change: Refinances of existing deals from other lenders are they new acquisitions opportunistic.

Matthew A. Salem: How would you characterize the deal flow.

Speaker Change: Yeah.

Matthew A. Salem: Sure, happy to Jade. If you look at our pipeline right now, across our business, as I mentioned, it's called $20 billion. And keep in mind, we're lending on behalf of bank, capital, insurance, capital, and debt fund capital. So, in terms of risk reward profile, it really does stretch across everything.

Jason: Sure happy to Jason.

Matthew A. Salem: If you look at our pipeline right now.

Across our business as I mentioned, it's call it $20 billion and keep in mind, we're lending on behalf of bank capital insurance capital and debt fund capital. So it really took the risk reward profile.

Matthew A. Salem: Does.

Matthew A. Salem: Stretch across everything.

Matthew A. Salem: If you look at the context of our pipeline, and this translates through to some of the investing activity also, it still is heavily weighted towards refinance. But we have seen the amount of acquisition requests increase steadily over the course of the last, call it, six months. Right now, I think just under 25% of our overall pipeline is acquisitions. Historically, that would have been around half.

Matthew A. Salem: If you if you look at the context of our of our pipeline and this translates through to some of the investing activity also.

Matthew A. Salem: It still is heavily weighted towards towards refinance.

Matthew A. Salem: <unk>.

Matthew A. Salem: But we have seen the amount of acquisition.

Matthew A. Salem: Requests increased steadily over the course of the last call. It six months and now it's running I think just under 25% of our overall pipeline is acquisitions historically that would have been around half I think it bottomed out like low double digits.

Matthew A. Salem: I think it bottomed out at, like, low double digits last year, so it just gives you some context of the direction of travel. The other thing that we're seeing in our pipeline is a little bit more requests for floating rates than for fixed. That's steadily been increasing again over the last six to nine months, and now about half of our pipeline is floating rate requests versus a fixed request. We're most active in our insurance capital. It's our biggest pool of capital, so a lot of that activity is in the insurance business, but we've also done a number of more opportunistic deals that, obviously, KREF would participate in as well.

Matthew A. Salem: Last year. So it just gives you some context of the direction of travel.

Matthew A. Salem: The thing that we're seeing in our pipeline is a little bit more request for floating rate than for fixed that's steadily been.

Matthew A. Salem: Increasing again over the last six to nine months and now that's about half of our portfolio or how excuse me half of our pipeline is.

Matthew A. Salem: Floating rate request versus versus a fixed request.

Matthew A. Salem: We're most active in our insurance capital. It's the biggest it's our biggest pool of capital. So a lot of that activity is in is in the insurance business, but we've also done.

Matthew A. Salem: A number of more opportunistic deals that obviously K RAF would would participate in as well.

Matthew A. Salem: Thank you very much.

Jay: Thanks Jay.

Steven Cole DeLaney: The next question is from Steve DeLaney with Citizens JMP. Please go ahead. Thank you.

Speaker Change #102: Next question is from Steve Delaney with citizens JMP. Please go ahead.

Steven Cole DeLaney: Hey, good morning, Matt and Patrick. Congratulations on the progress you've made in the quarter and also on the positive market reaction. You got some people's attention this morning. I want to take you back.

Steven Cole DeLaney: Hey, good morning that Patrick Congratulations on all the progress you've made in the quarter.

Steven Cole DeLaney: So on the positive market reaction you got some people's attention. This morning.

Speaker Change #104: I'm going to take you back.

Matthew A. Salem: Matt, you made some comments about KKR on the equity side, looking at the actual property dollars that you have under management. I think I heard you say that in terms of the potential buyers you're talking to about some of your REO properties, which you would characterize as more opportunistic money, and that the core money, you're not really seeing the kind of flow coming in from core real estate equity investors. What has to change there, and is that what we really need to see cap rates come in and property values improve materially as we move forward? Thank you.

Speaker Change #104: Matt you made some comments about KKR from the equity side looking at actual property dollars that you have under management.

Speaker Change #105: I think I heard you say that in terms of the potential buyers youre talking to about some of your Oreo property that you would characterize it as more opportunistic money ended the core money youre not really seeing the kind of the.

Speaker Change #106: You know the flow coming in from core real estate equity investors. What do you what has to change there and is that what we really need to see cap rates on me in and property values improve materially.

Speaker Change #107: As we move forward. Thank you.

Matthew A. Salem: Yeah, thanks for the question. Yeah, I think what we've seen in the market broadly is a higher cost of capital, whether that's from the debt side. Obviously, when banks are largely on the sidelines, they have the lowest cost of capital. I mean, if that's being replaced by lenders like KRF or other alternative lenders, there's clearly a cost associated with that. On the equity side, as we discussed in the opening remarks, almost all the capital available is value-add, drawdown funds, and you've seen a lot of the odyssey funds or some of the core plus on the sidelines right now.

Speaker Change #108: Yes, thanks for the question.

Speaker Change #108: Okay.

Speaker Change #109: Yes, I think what we've seen in the market broadly is a higher cost of capital whether that's from from the debt side, obviously when the banks are largely on the sidelines they have the lowest cost of capital.

Speaker Change #109: I mean, if that being replaced by lenders like <unk> or other alternative lenders, there's clearly a cost associated with that.

Speaker Change #109: On the equity side as we discussed on the opening remarks.

Speaker Change #109: All the capital available.

Speaker Change #109: As value add.

Speaker Change #109: We're opportunistic drawdown funds and you've seen a lot of the Odyssey funds or some of the core plus.

Speaker Change #109: Non traded REIT, just really on the sidelines right now.

Speaker Change #109: That being said.

Steven Cole DeLaney: That being said, it's still, in my mind, a little bit of a question of who the sellers are than who the buyers are. Yes, the buyers have a slightly higher cost of capital, but cap rates are not unreasonable. In today's market, you have multifamily properties trading at very low fives. We've seen four handles in some cases, and so, in my mind, versus the treasury complex, those are not unreasonable returns. But there certainly can be a fair amount of compression in the market and increased values if we start to get some of this core capital back online.

Speaker Change #109: It's still in my mind, a little bit of a question of who the sellers are then who the buyers are yes. The buyers have a slightly higher cost of capital, but cap rates are not unreasonable.

In todays market you have multifamily properties trading at.

Speaker Change #109: Very low fives, we've seen four handles in some cases.

And so in my mind versus the Treasury complex.

Speaker Change #109: Those are not unreasonable.

Speaker Change #109: Returns.

Speaker Change #109: But there is certainly can be a fair amount of compression.

Speaker Change #109: In the market and increased values, if we start to get some of this core capital back online I think that what changes that is sentiment and relative value.

Steven Cole DeLaney: I think that what changes that is sentiment and relative value. Real estate is living in a world with a lot of negative sentiment, and largely due to the rate environment, and clearly office is creating losses in portfolios and issues, making people pull back from the market. That heals with time and relative value. And you look at where some of these other markets are trading, you look at what's going on in the corporate credit world, and I think real estate equity and real estate debt are going to start looking very attractive versus some of the alternatives. And money and capital are very efficient. It will find its way to opportunities, but it's going to take a little bit of time.

Speaker Change #109: Real estate is living in a world with a lot of negative sentiment.

Speaker Change #109: And largely due to the.

Speaker Change #109: The rate environment, and clearly office is creating losses in portfolios and issues in portfolios that is.

Speaker Change #109: Making people pull back from the market that heals with time.

Speaker Change #109: And relative value and you look at where some of these other markets are trading you look at what's going on in the corporate credit World.

Speaker Change #109: And.

Speaker Change #109: <unk> real estate equity and real estate debt are going to start looking very attractive versus some of the alternatives.

Speaker Change #109: Money and capital is very efficient it will find its way to opportunities.

Speaker Change #109: But it's going to take a little bit of time to get through some of the some of the negative sentiment out there right now.

Matthew A. Salem: That's helpful, and you also mentioned that banks have really pulled back, and I assume you're referring to like transitional real estate lending broadly, but certainly on transitional if they were 40% of the market. Is it possible, as we come out of this thing? Let me ask you, well, first I'll say it's possible, then I can ask you whether you think you can get there.

That's helpful. And you also mentioned that banks have really pulled back and I assume you're referring to light transitional real estate lending broadly, but certainly on transitional it they were 40% of the market.

Speaker Change #110: Is it possible as we come out of this thing.

Speaker Change #114: Let me ask well first of all I think it's possible then I can ask you whether you think you can get there.

Steven Cole DeLaney: If that's the environment, and we've got a broadly improving real estate equity market, the banks are not going to play for regulatory reasons or whatever. Is it possible that on your bridge loans going forward, you're levered ROE? on your loan pricing, and the terms of your bank financing. Do you think your ROE will be as good as it was before, or is it on your bridge portfolio, or is it possible it could improve somewhat? That's my final question. Thank you very much.

Speaker Change #114: That's the environment and we've got a broadly improving real estate equity market. The banks are not going to play for regulatory reasons or whatever is it possible that on your bridge loans going forward that you're levered.

Speaker Change #110: We.

Speaker Change #111: On your loan pricing the terms of your bank financing.

Speaker Change #115: Do you think your ROE.

Speaker Change #112: Will it be as good as it was before or on your portfolio or is it possible. It could could improve somewhat and that's my final question. Thank you very much.

Matthew A. Salem: Thank you. I would say right now, again, in a lower volume environment, we're seeing returns slightly higher than what we've done historically in the portfolio by a magnitude, making it hard to do the apples to apples comparison because the basis we're lending at is so low today. When I think about the first part of the opportunity set, it's all about credit, and you're lending. Most real estate properties traded are valued around replacement cost, in many cases below replacement cost.

Speaker Change #112: Thank you I.

Speaker Change #116: I would say right now.

Speaker Change #113: Again, any lower volume environment.

Speaker Change #117: We're seeing return to slightly higher than what we've done historically in.

Speaker Change #113: In the portfolio by a magnitude like Apple is hard to do the apples to apples comparison because.

Speaker Change #113: The basis were lending out is so low today.

Speaker Change #113: When I think about the first part of the opportunity said, it's all about credit and Youre lending most real estate's trading we're valued around replacement cost in many cases below replacement cost and then if we're lending at 65% of that we're talking about basis at 50% to 55% of replacement costs. This was going to be should be a very safe vintage of.

Matthew A. Salem: And then if we're lending at 65% of that, we're talking about a basis at 50 to 55% of replacement cost. This is going to be, should be, a very safe vintage of loans. So my first consideration is just safety. In terms of yield and incremental return, what we're seeing in the market today is that kind of return in the market despite, you know, getting into a market that has rate cuts and a lower base rate.

Speaker Change #113: Loans. So my first is just safety in terms of yield an incremental return what we're seeing in the market today is call. It 100 to 200 basis points better than we were we were doing.

Speaker Change #113: On an Roe basis.

Speaker Change #113: Call it in.

Speaker Change #113: In 'twenty one.

Speaker Change #113: <unk>.

Speaker Change #113: I do think it's a lot of relative value in the market as the market stabilizes I think there'll be ample opportunity to replicate.

Speaker Change #113: That kind of return.

Speaker Change #113: And the market despite.

Speaker Change #113: Getting into a market that has has rate cuts and lower lower base base rate environment.

Speaker Change #118: Thank you very much.

Tom Catherwood: The next question is from Tom Catherwood with BTIG. Please go ahead.

The next question is from Tom Catherwood with <unk>. Please go ahead.

Tom Catherwood: Thanks and good morning everyone. Matt, maybe taking the flip side to your response to Don's question from before, if we don't get rate cuts, what else could break the dam on transactions and bring sellers to the table, and do you need this pickup in transaction activity before KREF looks to go on offense?

Tom Catherwood: Thanks, and good morning, everyone.

Tom Catherwood: Maybe taking the flip side to your response to Dawn's question from before if we don't get rate cuts what else could break the dam on transactions and bring sellers to the table and do you need this pickup in transaction activity before K RAF looks to go on offense.

Matthew A. Salem: Okay, so that's a good question. We're working backwards. We don't need a pickup in transaction activity. There's enough going on right now that there are ample opportunities for us to lend at what we think are really attractive levels. And as I mentioned, our pipeline is up 40% from last year, so we're seeing that across everything we do. If we get into a market that does not have rate cuts, sustained inflation, and a continued healthy economy, I think we're going to kind of limp along like we are now. The real estate world is probably going to limp along like it is now, and people are going to continue to try to delay sales, push out timelines, to try to get to that moment in time when the cost of capital has decreased a little bit.

Speaker Change #120: Okay. So that's a good question working backwards, we don't need a pickup in transaction activity. There is enough going on right now.

Speaker Change #120: Theres ample opportunities for us to lend that.

Speaker Change #121: What we think are really at really attractive levels.

Speaker Change #120: And.

Speaker Change #120: As I mentioned, our pipeline is up 40% from last year. So we're seeing that.

Speaker Change #120: Across everything we do.

Speaker Change #120: If we got into a market that does not have rate cuts sustained inflation and a continued healthy economy.

Speaker Change #120: I think we're gonna kind of limp along like we.

Speaker Change #120: The real estate Brooks brothers going to limp along like they are now and people are going to continue to try to delay.

Speaker Change #120: Delay sales pushed out time lines.

Try to get to that moment in time, where the cost of capital has decreased a little bit. It does put more pressure I would say on like multifamily property types for instance, where.

Matthew A. Salem: It does put more pressure, I would say, on multifamily property types, for instance, where there were just low cap rates, and even though you have good cash flow there, and they're slowly increasing in a higher rate environment. Please see the complete disclaimer at https://sites.google.com or in the description of this video for more, you know, co-auth content, but you could certainly see more, you know, more transition to

Speaker Change #120: They were just low cap rates and even though you have good cash flow there and they are slowly increasing.

Speaker Change #120: A higher rate environment.

Speaker Change #120: It's just causing more pressure there. So you can create a little bit more noise in that component of the portfolio, but again, we've seen a lot of liquidity there theres a lot of buyers looking to access that market. So I don't think it would change my view materially on.

Speaker Change #120: Loss content, but you could certainly see more.

Speaker Change #120: Sure.

Speaker Change #120: Transition to watch those loans and that in that environment.

Tom Catherwood: I appreciate those thoughts. And then, maybe last for me, on the Philadelphia office sale and origination, what is the sponsor's new plan for the assets? And what is the expected timing of funding the remaining $53 million or so that's committed under the new loan?

Speaker Change #122: No I appreciate those thoughts.

Speaker Change #123: And then maybe last for me on the Philadelphia Office sale and origination what is the sponsors new plan for the assets and what is the expected timing of funding the remaining $53 million or so that's committed under the new loan.

Speaker Change #123: Good morning, Tom It's Patrick welcome to the call I appreciate the question so on Philadelphia.

Speaker Change #124: The 30 million that's reflected as our initial funding as you said, we've got future funding.

Speaker Change #123: Here.

Speaker Change #125: The sponsors willing to take this asset it's going to be a mixed use development. So presently it's 100% office.

Speaker Change #125: And in the future it.

Speaker Change #125: It will be sort of a mix.

Speaker Change #125: Mix.

Matthew A. Salem: [inaudible] property types, so office will not be a majority of the use going forward. In terms of timing, because it's a redevelopment, we expect that funding to happen over the course of about 24 months. That's what we're projecting. And then just one thing that I would note, because it wasn't maybe clear from our initial funding and the proceeds that we received back on this asset, this loan is struck at 70% loan to cost.

Speaker Change #125: A couple of different property types, So office will be.

Speaker Change #125: Not a majority of the use going forward.

Speaker Change #125: In terms of timing.

Speaker Change #125: Because it's a redevelopment we expect that funding to happen over the course of about 24 months is is what we're projecting.

Speaker Change #125: And then just one thing that I would note.

Speaker Change #125: Because it wasn't maybe clear from our initial funding.

Speaker Change #125: And the proceeds that we received back on this asset and this loan is struck at 70% loan to cost.

Tom Catherwood: Got it. Really, really helpful. That's it for me. Thanks, everyone.

Speaker Change #127: Got it really really helpful. That's it for me thanks, everyone.

Speaker Change #126: Thank you.

Jade Joseph Rahmani: Again, if you have a question, please press star then 1. The next question is a follow-up from Jade Rahmani with KBW. Please go ahead.

Speaker Change #128: Again, if you have a question. Please press Star then one.

Speaker Change #128: Next question is a follow up from Jade Rahmani with K B W. Please go ahead.

Jade Joseph Rahmani: Thanks very much. Just two quick ones.

Thanks very much.

Jade Joseph Rahmani: Just two quick ones one.

Jade Joseph Rahmani: You know, if the banks are pulling back, do you think that's just a short-term opportunity over 12 to 18 months, or do you see that as permanent? Because that would clearly have implications for takeout financing of transitional loans. And then, number two, any thoughts on M&A, if you see that as the best opportunity for KREF to be able to grow its scale and size.

Jade Joseph Rahmani: If the banks are pulling back do you think that's just a short term opportunity over 12 to 18 months or did you see that as permanent because that would clearly have implications for takeout financing.

Speaker Change #129: Of transitional loans, and then number two just any thoughts on M&A. If you see that as the best opportunity for <unk> to be able to grow it.

Speaker Change #130: Scale and size.

Jade Joseph Rahmani: Thanks Jade.

Matthew A. Salem: Thanks, Jade. Yeah, I guess a little bit deeper dive on the banking dynamic. If we're talking about a four and a half trillion dollar market size, and banks are 40% of that, We don't think they're going to zero. They're a fraction of that 40% today, but we do think they're going to come back online more than they are right now. And as you know better than I do, I think there are 4,000 banks in the United States. To take a broad brush and say they're all out is, I think, too extreme. But I think you can see that 40% come down to. 30%

Speaker Change #131: Yeah, I guess, a little bit deeper dive on the banking dynamic.

Matthew A. Salem: And you could see half a trillion dollars of commercial mortgages coming out of the banking system into alternative lenders like KRAF. I think that's very plausible, at the same time. Keep in mind, in the opening comments we made, they're shifting what they do. They are moving from more of a direct origination model, again, not 100%, but on the margin, from a direct origination model to lending to folks like us on loan-on-loan facilities.

Speaker Change #132: If we're.

Speaker Change #132: We're talking about a $4 five trillion dollar market size and banks.

Speaker Change #133: Our 40, 40% of that we don't think theyre going to zero there, they're a fraction of that 40% today, but we do think they're going to come back online more than they are right now and as you well know.

Speaker Change #134: Better than I do I think it was 4000 banks in that state.

Speaker Change #135: We take a broad brush and say, they're all out I think is.

Speaker Change #135: Too extreme.

Speaker Change #135: But I think you could see that 40% come down to.

Speaker Change #135: 30% and you could see.

Rod: Half a trillion dollars of commercial mortgages come out of the banking system into alternative lenders like Hey, Rod I think that's very plausible at the same time.

Speaker Change #137: Keep in mind in your opening comments, we've made they're shifting what they do they are.

Speaker Change #138: Moving from more of a direct origination model again not 100%.

Speaker Change #139: On the margin from a direct origination model too.

Speaker Change #139: Lending to folks like us on loan on loan facilities, it's more capital efficient to do that and they are becoming much more capital focused it's safer their loss content in those books for the last few years has been de Minimis versus.

Matthew A. Salem: It's more capital efficient to do that, and they're becoming much more capital focused. We all know the CECL reserves that they're taking and losses they're taking on the balance sheet. It's more efficient to manage, and survey on an ongoing basis. So there's a lot of really good reasons why they're going to shift that profile.

Speaker Change #139: We all know the seasonal reserves that they are taking in losses that you're taking on the balance sheet and it's more efficient to manage and.

Speaker Change #140: Survey on them.

Speaker Change #140: Our ongoing basis.

Speaker Change #140: So theres a lot of like really good reasons, why theyre going to shift that that profile.

Matthew A. Salem: So, I don't think it's going to create... distress in the market. I do think the cost of capital will increase a little bit more, as we mentioned, and these alternative fund complexes, whether that's k-ref or debt funds, have to get a lot bigger to be able to, you know, take on that additional capacity that's coming out of the. On the M&A side, I think it's the same answer we always give.

Speaker Change #141: So I don't think it's going to create.

Speaker Change #141: Distress in the market I do think the cost of capital increased a little bit more like like we mentioned and these alternative fund complexes, whether that's K RAF or debt funds have to get a lot bigger to.

To be able to.

Speaker Change #141: <unk>.

Speaker Change #141: Take on that additional capacity thats coming out of the that's coming out of the banks.

Speaker Change #141: On the M&A side I think it's the same answer we always give it.

Matthew A. Salem: I think there'll be consolidation through this period of time, and it's certainly something that we'll look at. There are a number of benefits to being larger from a liquidity perspective and access to different capital sources. So it's certainly something that we'll continue to evaluate as the market evolves.

Speaker Change #141: I think there'll be consolidation through this.

Speaker Change #141: Through this period of time, and it's certainly something that.

Speaker Change #141: That will look at it.

Speaker Change #141: Number of benefits to being larger from a liquidity perspective access to different capital sources. So it's certainly something that we'll continue to evaluate as the market evolves.

Speaker Change #142: Thank you very much.

Jack Switala: This concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.

Speaker Change #142: 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: Well, great. Thanks, operator, and thanks, everyone, for joining today. Please reach out to me or the team here if you have any questions. Take care.

Jack Switala: Well, great. Thanks, operator, and thanks, everyone for joining today, please reach out to me or the team here. If you have any questions take care.

Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Speaker Change #143: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Jack Switala: Yeah.

Jack Switala: [music].