Q3 2024 KKR Real Estate Finance Trust Inc Earnings Call
Operator: Good morning, and welcome to the KKR Real Estate Finance Trust Inc. third quarter 2024 Financial Results Conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.
Good morning, and welcome to the KKR Real estate Finance Trust, Inc. Third quarter 'twenty 'twenty four financial results conference call.
Speaker Change: All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing to Starkey followed by zero.
Operator: 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.
Speaker Change: 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.
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Jack Switala: I would now like to turn the conference over to Jack Switala. Please go ahead. Great. Thanks, operator.
Speaker Change: I would now like to 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 third quarter of 2024.
Jack Switala: And welcome to the KKR Real Estate Finance Trust earnings call for the third quarter of 2024. As the operator mentioned, this is Jack Switala. This morning, 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.
Jack Switala: As the operator mentioned this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem, Our President and C O O Patrick Mattson and our CFO Kendra dishes.
Jack Switala: 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.
Jack Switala: This call will also contain certain forward looking statements, which do not guarantee future events or performance.
Jack Switala: please refer to our most recently filed 10-Q for cautionary factors related to these statements.
Jack Switala: Please refer to our most recently filed 10-Q for cautionary factors related to these statements.
Jack Switala: Before I turn the call over to Matt, I'll provide a brief recap of our results. For the third quarter of 2024, we reported gap net loss of negative $13 million or negative 19 cents per share, driven by a CECL allowance increase of 52 cents per share, following the additional downgrade of two loans. As a result, book value per share decreased 2.6% quarter over quarter to $14.84 per share as of September 30, 2024. Distributable earnings this quarter were $25.9 million or $0.37 per share relative to our Q3 $0.25 per share dividend.
Jack Switala: Before I turn the call over to Matt I'll provide a brief recap of our results.
Jack Switala: For the third quarter of 2024, we reported GAAP net loss of negative $13 million or negative <unk> 19 per share driven by a seasonal allowance increase of 52 cents per share following the additional downgrade of two loans.
Jack Switala: As a result book value per share decreased two 6% quarter over quarter to $14 84 per share as of September 30th 2024.
Jack Switala: Distributable earnings this quarter were $25 $9 million or <unk> 37 per share relative to our Q3 25 cents per share dividend.
Matthew Salem: With that, I'd now like to turn the call over to Matt. Thank you, Jack.
Speaker Change: With that I'd now like to turn the call over to Matt.
Matt Salem: Thank you Jack good morning, everyone and thank you for joining our call today.
Matthew Salem: Good morning, everyone, and thank you for joining our call today. Before going into third quarter results, I'd like to spend some time on a market update. As we enter an interest rate cut cycle, there's increased confidence and growing consensus that lower interest rates will provide tailwinds for commercial real estate property values. We are seeing improved transaction volumes within our own real estate credit pipeline. which currently averages approximately $20 billion a week, up 40% from the beginning of the year. We have strong conviction that there is a significant lending opportunity ahead of us.
Matt Salem: Before going into third quarter results.
Matt Salem: Like to spend some time on a market update.
Matt Salem: As we enter an interest rate cut cycle, there's increased confidence and growing consensus that lower interest rates will provide a tailwind for commercial real estate property values.
Matt Salem: We are seeing improved transaction volumes within our own real estate credit pipeline.
Matt Salem: Which currently averages approximately 20 billion a week.
Matt Salem: Up 40% from the beginning of the year.
We have strong conviction that there's a significant lending opportunity ahead of us.
Matthew Salem: From a KKR real estate equity perspective. 2024 has been our most active year investing since inception. with $4.5 billion year-to-date of equity invested in the United States.
Speaker Change: Okay care real estate equity perspective.
Speaker Change: 2024 has been our most active you're investing since inception.
Speaker Change: Four 5 billion year to date of equity invested in the United States.
Speaker Change: Yeah.
Matthew Salem: Within commercial real estate lending, we've seen U.S. banks continue to shift their preference from direct mortgage origination to financing alternative lenders through loan-on-loan facilities. Given the more efficient capital treatment of loan-on-loan facilities, we believe this will continue. Banks will continue to lend, but our expectation is that their market share will decrease from their historical average of 40%. This should create incremental lending opportunities across non-bank lenders and CMBS, measured in the hundreds of billions.
Speaker Change: Well, then commercial real estate lending, we've seen U S banks continue to shift their preference from direct mortgage origination.
Speaker Change: The financing alternative lenders.
Speaker Change: The loan on loan facilities.
Speaker Change: Given the more efficient capital treatment of loan on loan facilities. We believe this will continue.
Speaker Change: Thanks will continue to lend.
But our expectation is that their market share will decrease from their historical average of 40%.
Speaker Change: This should create incremental lending opportunities across nonbank lenders and see them be as measured in the hundreds of billions.
Matthew Salem: Turning to KRAP. We've reached a point where we believe we have dealt with the majority of our watchlist. and have ample liquidity. Therefore... As we receive future repayments. We will look to actively reinvest that capital and ramp up origination. As part of our investment allocation We will also evaluate share repurchase. As a reminder, CAREF has brought back nearly $100 million of stock since inception.
Speaker Change: Turning to <unk>.
Speaker Change: We've reached a point, where we believe we have dealt with the majority of our watch list.
Speaker Change: And have ample liquidity.
Therefore.
Speaker Change: As we receive future repayments we.
Speaker Change: We will look to actively reinvest that capital.
Speaker Change: And ramp up originations.
Speaker Change: As part of our investment allocation.
Speaker Change: We will also evaluate share repurchases.
Speaker Change: As a reminder here.
Speaker Change: Tariff is brought back nearly $100 million of stock since inception.
Matthew Salem: Turning now to KREF's third quarter results. This quarter represents another significant step forward in addressing our watch list in a proactive and transparent way. As we mentioned on our last call, We've been focused on resolving our last four-rated life science and we are in advanced discussions with our borrower and have accordingly increased our reserves. In addition, we transitioned one of our four-rated multifamily loans to a five-rate. As a whole, we still feel very confident about our multifamily exposure. But as we have messaged previously, we will have some noise in that sector over with those adjustments.
Speaker Change: Turning now to Kbr's third quarter results.
Speaker Change: This quarter represents another significant step forward in addressing our watch list and our proactive.
Speaker Change: And transparent way.
Speaker Change: As we mentioned on our last call.
Speaker Change: We've been focused on resolving our last four rated lifestyle inflow.
Speaker Change: And we are in advanced discussions with our borrower.
Speaker Change: Accordingly increased our reserves.
Speaker Change: In addition.
Speaker Change: We transitioned one of our four rated multifamily loans to a five rating.
As a whole we still look we still feel very confident about our multifamily exposure.
Speaker Change: But as we have messaged previously we.
Speaker Change: We'll have some noise in that sector over time.
Speaker Change: With those adjustments.
Matthew Salem: Book value per share this quarter declined to $14.84 per share, down 2.6% compared to the prior quarter. And most importantly, our four-rater loans. now represent only 3% of our total portfolio. the lowest since the fourth quarter of 2019. KRF reported distributable earnings prior to realized losses of $0.40. covering our $0.25 dividend. While lower SOFR in our REO portfolio will impact earnings. We expect that DEX losses will continue to be higher than our dividend as we head into 2025.
Speaker Change: Book value per share this quarter decline.
Speaker Change: $14.84 per share.
Speaker Change: Two 6% compared to the prior quarter.
Speaker Change: Importantly, our four rated loans now.
Speaker Change: Now represent only 3% of.
Speaker Change: Of our total portfolio.
Speaker Change: The lowest since the fourth quarter of 2019.
Speaker Change: Kara reported distributable earnings prior to realized losses of 40 cents.
Speaker Change: Covering our <unk> 25 cent dividend.
Speaker Change: While lower sulfur and our Oreo portfolio will impact earnings.
We expect that D E X losses will continue to be higher than our dividend as we head into 2025.
Matthew Salem: In the third quarter, we received $290 million in loan repayments compared to $55 million in funding. with full repayments across four loans. multi-family Single-Family Rental. and an office loan secured by a property located in Oakland, California. In addition to this, Post Quarter End We sold a $138 million office loan at par. Retainments have now exceeded fundings in five of the last six quarters. Additionally, future funding obligations are now reduced to 8% of the funded portfolio. Year-to-date, we have received over $1 billion in repayments. compared to our original expectation of $1 billion for the full year.
Speaker Change: In the third quarter, we received $290 million and lower loan repayments compared to $55 million in fundings.
Speaker Change: With full repayments across four loans.
Speaker Change: Putting multifamily.
Speaker Change: Single family rental.
Speaker Change: And an office loan secured by property located in Oakland, California.
Speaker Change: In addition to this call.
Speaker Change: At quarter end.
We sold $838 million office loan at par.
Speaker Change: Repayments have now exceeded fundings and five of the last six quarters.
Speaker Change: Yeah.
Speaker Change: Additionally.
Speaker Change: Future funding obligations are now reduced to 8% of the funded portfolio.
Speaker Change: Year to date, we have received over 1 billion in repayments.
Speaker Change: To our original expectation of $1 billion for the full year.
Speaker Change: Hey, Ralph.
Matthew Salem: As an externally managed vehicle, benefits from access to resources and relationships from KKR's global platform. We are fully integrated into KKR's broader real estate business. which has assets under management of approximately $75 billion. This integration has been instrumental. as we are able to leverage the resources. and capabilities of our team of approximately 140 professionals. with the reputation as a best-in-class investor and solutions provider.
Speaker Change: As an externally managed vehicle benefits from access to resources.
Speaker Change: And relationships from Kkr's global platform.
Speaker Change: We are fully integrated and the broader real estate business, which.
Speaker Change: Which has assets under management of approximately 75 billion.
Speaker Change: This integration has been instrumental.
Speaker Change: As we are able to leverage the resources.
Speaker Change: And capabilities of our team of approximately 140 professionals.
Speaker Change: With the reputation as a best in class Investor.
Speaker Change: And solutions provider.
Matthew Salem: Within real estate credit, we invest a broad range of capital across the risk-reward spectrum. including bank. insurance. and Transitional Capital. And we've been actively investing this capital throughout the cycle. Additionally, our dedicated KSTAR asset management platform, with over 55 people across loan asset management, special servicing, and REO, has a portfolio of over $33 billion in loans and is named special servicer on an additional $46 billion of CMBS.
Speaker Change: Within real estate credit.
A broad range of capital across the risk reward spectrum.
Speaker Change: Including bank.
Speaker Change: Insurance.
Speaker Change: And transitional capital.
Speaker Change: And we've been actively investing this capital throughout the cycle.
Speaker Change: Additionally, our dedicated taste, our asset management platform with over 55 people across loan asset management special servicing and Oreo as a portfolio of over 33 billion in loans and is named special servicer on an additional 46 billion.
Speaker Change: I've see MBS.
Matthew Salem: Overall, We believe we have been proactive and transparent in managing our portfolio and feel confident in how the company is positioned. We are primarily focused on two things as we round out the year and turn the calendar. We maintain our current portfolio size by reinvesting repayments into this attractive vintage of real estate credit. Optimize our REO portfolio.
Speaker Change: Overall.
Speaker Change: We believe we have been proactive and transparent and managing our portfolio and feel confident in how the company is positioned.
Speaker Change: We are primarily focused on two things as we round out the year and turned the calendar.
Speaker Change: First.
Speaker Change: Maintain our current core portfolio size by reinvesting repayments into this attractive vintage of real estate credit.
Speaker Change: Second.
Speaker Change: Optimize our Oreo portfolio.
Matthew Salem: As a reminder... As we repatriate our equity in the REO portfolio, we believe we can generate an additional $0.12 per share in distributable earnings per quarter. with ample liquidity. Stronger Than Expected repayment. as well as our reduced leverage ratio, we're excited about the opportunity ahead.
As a reminder.
As we repatriate our equity in the Oreo portfolio, we believe we can generate an additional <unk>.
Speaker Change: <unk> 12 per share and distributable earnings per quarter.
Speaker Change: With ample liquidity.
Speaker Change: Stronger than expected repayments.
Speaker Change: As well as a reduced leverage ratio.
Speaker Change: We're excited about the opportunity ahead.
Speaker Change: With that I'll hand, the call over to Patrick.
Jack Switala: I'll hand the call over to. Thanks, Matt.
Patrick Mattson: Thanks, Matt Good morning, everyone on the liability side with the assistance of the KKR capital markets team, we have built best in class diversified financing.
Kendra Decious: Good morning, everyone. On the liability side, with the assistance of the KKR Capital Markets team, we have built best-in-class, diversified finance. We are financing capacity totaling $8.3 billion, including $3 billion of undrawn capacity. We continue to maintain high levels of liquidity. with $638 million of availability at quarter end. including $109 million of cash on hand. $475 million of undrawn revolver capacity. 79% of our financing continues to be fully non-mark-to-market. and the remaining balance is marked to credit only. KREF has no final facility maturities until 2026. and no corporate debt due until 2027. The composition of KREF's financing structure remains a true differentiator.
Patrick Mattson: With financing capacity totaling $8 3 billion, including 3 billion of Undrawn capacity.
Patrick Mattson: We continue to maintain high levels of liquidity.
Patrick Mattson: With $638 million of availability at quarter end include.
Patrick Mattson: Including $109 million of cash on hand and.
Patrick Mattson: And 475 million of Undrawn revolver capacity.
Patrick Mattson: 79% of our financing continues to be fully non mark to market.
Patrick Mattson: And the remaining balance is marked to credit only.
Patrick Mattson: Hey, Ralph has no final facility maturities until 2026.
Patrick Mattson: And no corporate debt due until 2027.
Patrick Mattson: The composition of <unk> financing structure remains a true differentiator.
Kendra Decious: and has helped us navigate a challenged real estate market.
Patrick Mattson: And has helped us navigate a challenged real estate market.
Kendra Decious: Turning to our office loan exposure, we've had some positive developments. During the quarter, we received a final repayment on a loan secured by an office property located in Oakland, California. In addition, subsequent to quarter end, we sold a $138 million office loan at par secured by a property located in Dallas, Texas. that we originated in December 2021. On a pro forma basis, Office now represents approximately 18% of our loan portfolio. Our remaining risk-rated three office assets benefit from a weighted average occupancy of 85%. in a weighted average lease remaining term. 10.4 years.
Patrick Mattson: Turning to our office loan exposure we have.
Patrick Mattson: <unk> had some positive developments.
Patrick Mattson: During the quarter, we received a final repayment on a loan secured by an office property located in Oakland, California.
Patrick Mattson: In addition, subsequent to quarter end, we sold a $138 million office loan at par.
Patrick Mattson: Secured by a property located in Dallas, Texas.
Patrick Mattson: That we originated in December 2021.
Patrick Mattson: On a pro forma basis, all fish now represents approximately 18% of our loan portfolio.
Patrick Mattson: Our remaining risk rated three office assets benefit from a weighted average occupancy of 85%.
Patrick Mattson: And a weighted average lease remaining term.
Patrick Mattson: Of 10.4 years.
Kendra Decious: Moving to our CECL allowance and our watch list portfolio. Similar to last quarter, there were no new additions to the watch list. However, we downgraded two of the previously risk-rated four loans. including a life science asset located in the Bay Area and a multifamily asset located in West Hollywood. Related to these downgrades, the CECL reserve increased by $36 million, or $0.52 per share. across our risk-rated five loans. The Weighted Average Fiscal Reserve represents approximately 25% of the outstanding principal balance. The remainder of the loan portfolio remains stable, with over 90% of our portfolio risk rated 3 or better.
Patrick Mattson: Moving to our seasonal allowance and our watch list portfolio.
Patrick Mattson: Similar to last quarter, there were no new additions to the watch list.
Patrick Mattson: However, we downgraded two of the previously risk rated four loans.
Patrick Mattson: Including a life science asset located in the Bay area.
Patrick Mattson: And a multifamily asset located in West Hollywood.
Patrick Mattson: Related to these downgrades the seasonal reserve increased by $36 million.
Or <unk> 52 per share.
Patrick Mattson: Across our risk rate at five loans.
Patrick Mattson: The weighted average useful reserve represents approximately 25% of the outstanding principal balance.
Patrick Mattson: The remainder of the loan portfolio remains stable with over 90% of our portfolio risk rated three or better.
Kendra Decious: Looking more closely at our life science loan. This loan is collateralized by a property located in San Carlos, California, that was renovated in 2023 to Class A life science standard. We're in the final stages of a modification with the sponsor. which we expect to conclude in Q4'24. at which point we expect a reserve to translate to a realized loss. While we generally expect the lower-rate environment to improve the outlook for cyclically-challenged multifamily assets, Our second downgrade this quarter is a multifamily loan. secured by a 37-unit Class A luxury rental located in West Hollywood, California. This particular loan has been on the watch list since Q4, 22.
Patrick Mattson: Looking more closely at our life science loan.
Patrick Mattson: This loan is collateralized by a property located in San Carlos California.
Patrick Mattson: Renovated in 2023 class a life science standards.
Patrick Mattson: We're in the final stages of a modification with the sponsor which.
Patrick Mattson: Which we expect to conclude in Q4 24.
Patrick Mattson: At which point, we expect a reserve to translate to a realized loss.
Patrick Mattson: While we generally expect the lower rate environment to improve the outlook for cyclically challenged multifamily assets.
Patrick Mattson: Our second downgrade this quarter is a multifamily loan.
Patrick Mattson: Secured by a 37 unit class a luxury rental.
Patrick Mattson: Located in West Hollywood, California.
Patrick Mattson: This particular alone has been on the watch list since Q4 'twenty two.
Kendra Decious: And we're exploring several paths to maximize value, including a potential foreclosure and condo sellout. Your payments have been progressing slightly better than forecasted, driving further deleveraging. As of Q3, the debt-to-equity ratio is 1.8 times and the look-through leverage ratio is 3.8 times. An improvement from Q2. Well, it's always difficult to forecast the precise timing of repayment. And there can be quarter-to-quarter fluctuations. We expect repayment activity to continue to increase with 2025 exceeding 2024 repayment levels. with leverage in our target zone. Meaningful progress on the watch list. and Strong Levels of Liquidity. Additional repayments in excess of future funding needs will be redeployed into new loan origination.
Patrick Mattson: And we are exploring several paths to maximize value, including a potential foreclosure and condo sellout.
Patrick Mattson: Prepayments have been progressing slightly better than forecasted driving further deleveraging.
Patrick Mattson: As of Q3, the debt to equity ratio is one eight times and our look through leverage ratio is three eight times.
Patrick Mattson: An improvement from Q2.
Patrick Mattson: Well, it's always difficult to forecast the precise timing of our payments in.
Patrick Mattson: And there can be quarter to quarter fluctuations.
Patrick Mattson: We expect repayment activity to continue to increase with 2025 exceeding 2020 for repayment levels.
Patrick Mattson: With leverage in our target zone.
Patrick Mattson: Meaningful progress on the watch list.
Patrick Mattson: And strong levels of liquidity.
Patrick Mattson: Additional repayments in excess future funding needs will be redeployed into new loan originations.
Kendra Decious: We're engaging the market to quote new KREF loans and anticipate 2025 will be an active origination year.
Patrick Mattson: We are engaging the market to quote new K rough loans and anticipate 2025 will be an active origination here.
Kendra Decious: As Matt noted on last quarter's call... We continue to believe that while we are not out of the woods yet, we are on the edge of the woods. And as a management team, we remain excited about our business and momentum. We have never felt better about our team and the market position of the real estate credit platform. and believe we have a lot of opportunity ahead of us given the market dynamics.
Speaker Change: As Matt noted on last quarter's call.
Speaker Change: We continue to believe that while we are not out of the woods yet we're on the edge of the woods.
Speaker Change: And as a management team, we remain excited about our business and momentum.
Speaker Change: We have never felt better about our team and the market position of the real estate credit platform.
Speaker Change: And believe we have a lot of opportunity ahead of us given the market dynamics.
Jack Switala: Thank you again for joining us this morning. And now, we're happy to take your questions.
Speaker Change: Thank you again for joining us this morning.
Speaker Change: And now we're happy to take your questions.
Speaker Change: Yeah.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone 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.
Speaker Change: That will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If youre 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.
Rick Shane: And our first question today comes from Rick Shane with J.P. Morgan. Please go ahead. Hey, thanks everybody for taking my question this morning.
Speaker Change: And our first question today comes from Rick Shane with J P. Morgan. Please go ahead.
Rick Shane: Hey, Thanks, everybody for taking my question this morning.
Matthew Salem: Given what you're describing in terms of the operating environment and a little bit more clarity both in terms of loan values and property values, can you give us a sense of what's happening in terms of price discovery or are we starting to see expectations between bid and offer narrow and where is that narrowing occurring within your range of expectations? Hi, Rick. Thank you for the questions and for joining the call. It's Matt. I can take that question. Yeah, I think you are seeing transaction volumes pick up across the industry. And if you look at our own portfolio, we track not only our own pipeline, excuse me, we we track not only the weekly activity coming through it, but the percent of that activity that's acquisition-oriented versus refinance-oriented.
Rick Shane: Given what you're describing in terms of the operating environment.
Rick Shane: A little bit more clarity both in terms of loan values and property values can you give us a sense of what's happening in terms of price discovery or are we starting to see.
Rick Shane: Expectations between bid and offer narrow.
Rick Shane: And where is that narrowing occurring with sort of within your range of expectations.
Matt Salem: Hi, Rick Thank you for the questions and for joining the call. It's Matt I can take that question.
Matt Salem: Yes, I think you are seeing transaction volumes pick up across the industry.
Matt Salem: And if you look at our own portfolio, we track not only.
Matt Salem: Our own pipeline excuse me, we took we track not only.
Matt Salem: The weekly activity coming through it but the percent of that activity Thats, a acquisition oriented versus refinance oriented.
Matthew Salem: Last year, we bottomed out around 10% of our pipeline on a weekly basis was in acquisitions. That's up into, call it, 20-plus percent today. Historically, that's averaged closer to 50%. So we're still below certainly a normal operating environment, but clearly picking up off the bottom, which is what you'd expect. I think there's a lot of transparency in the market today around values, especially in favored asset classes. And as we mentioned on the call, for instance, from a KKR real estate equity perspective, this has been our most active year to date acquiring assets. And certainly there's been competition in those processes.
Matt Salem: Last year, we bottomed out around 10% of our pipeline on a weekly basis was an acquisition that's up into call it 20% today.
Matt Salem: Historically, that's average closer to 50%. So we were still below certainly a normal operating environment, but clearly picking up off.
Matt Salem: Kind of off the bottom, which is what you'd expect.
Matt Salem: I think theres a lot of transparency in the market today around values, especially in the on favor favorite asset classes and as we mentioned on the call for instance from acute care real estate equity perspective. This has been our most active active year to date acquiring assets and certainly theres been competition.
And those processes and.
Matthew Salem: And so whether we're thinking about it from our equity hat or within our own pipeline and our clients, we're seeing a lot of transactions predominantly focused in multifamily, industrial, student housing, some of the assets that have the more identifiable long-term positive trends, obviously versus office. And I think values are settling in around where we would expect. So I don't think we have a very contrarian view to where the market is valuing real estate today. And the big question in my mind over the last year has not been, where are the buyers? I think it's been, where are the sellers?
Matt Salem: So whether we're looking thinking about it from our equity had her or within our own pipeline and our clients like we're seeing a lot of transactions.
Matt Salem: Predominantly focused in multifamily industrial student housing some of the assets that have the more identifiable long term positive trends.
Matt Salem: Obviously versus office.
Matt Salem: And I think values are settling in.
Matt Salem: Kind of around where we where we would expect.
Matt Salem: So I don't think we have a very contrarian view to where the market.
Matt Salem: Is valuing real estate today.
Matt Salem: And the Big question in my mind over the last year has not been where you know where the buyers I think it's been where the sellers.
Matthew Salem: And do the sellers, can they hold out on an existing financing? And do they have time to wait for values to And, you know, values have settled down and cap rates to, you know, potentially come in a little bit. And I think you're starting to see that gap narrow as the cost of capital has come down a little bit. I think we've experienced cap rates coming down across property types over the course of the last couple quarters as the rate complex has cleared up. And so this just feels like it's part of the normal reset within, you know, within real estate.
And do the sellers.
Matt Salem: Are they could they hold out on an existing fin.
Matt Salem: Financing and do they have time.
To wait for values too.
Matt Salem: <unk>.
Matt Salem: Values are settled down and cap rates to potentially come in a little bit and I think youre starting to see that gap narrow as the cost of capital has come down a little bit.
Matt Salem: Experienced cap rates coming down across property types over the course of the last couple of quarters as the rate complex has cleared out.
So this is just it feels like it's part of the normal reset.
Matt Salem: Within within real estate and.
Rick Shane: Our expectation is that 2025 will look like a much more normal year in terms of acquisitions, and overall transaction volume. Got it. Okay, helpful.
Matt Salem: Our expectation is that 2025 will look like a much more normal year in terms of.
Matt Salem: Acquisitions, and overall transaction volumes.
Speaker Change: Got it okay helpful. And then the other question and you May have said this and I might have missed it but.
Kendra Decious: And then the other question, and you may have said this and I might have missed it, but can you tell us what the quarterly impact on distributable earnings is from loans on cost recovery? Hi Rick, it's Kendra. Thanks for the question. So, for... The two new loans that were downgraded to five, there was a movement of about two cents per share of interest income out of Q3. Besides that, there were no other changes in run rate. Got it. Okay. Thank you very much. Sure. Thank you.
Speaker Change: Can you tell us what the quarterly impact on distributable earnings is from loans on cost recovery.
Speaker Change: Hi, Richard Sandra Thanks for the question.
Speaker Change: So for.
Speaker Change: The two new loans that were downgraded to five there was a movement of about <unk> <unk> per share.
Speaker Change: Interest income out of Q3, besides that there were no other changes and run rate interest income.
Speaker Change: Got it okay. Thank you very much sure.
Rick Shane: Thank you Rick.
Speaker Change: Yeah.
Stephen Laws: And our next question comes from Stephen Laws with Raymond James. Please go ahead. Hi, good morning. Um, Matt, kind of curious, as you turn the origination pipeline back on, you know, where are you going to be focused? I mean, clearly, banks have pulled back. And so there's a void of construction financing, granted, Doesn't get a lot of capital out the door and there's there's unfunded commitments associated with that. Seems like the market's really competitive for cash flowing multi, especially from from CLO players.
Speaker Change: And our next question comes from Stephen Laws with Raymond James. Please go ahead.
Speaker Change: Hi, good morning.
Stephen Laws: Matt kind of curious as you turn the origination pipeline back on you know where are you going to be focused I mean, clearly banks have pulled back and so theres a void of construction financing granted it doesn't.
Speaker Change: It doesn't get a lot of capital out the door and Theres theres unfunded commitments associated with that.
Speaker Change: It seems like the markets are really competitive for cash flowing multi especially from from CLO.
Speaker Change: Players. So can you can you talk about kind of how you expect the pipeline to build and where your focus is going to be as you redeploy capital.
Matthew Salem: So can you can you talk about kind of how you expect the pipeline to build and where your focus is going to be as you redeploy capital? Thank you for the question, Stephen. I'm sure I can take that one. I'm Well, first of all, I don't think it's going to be too different from what we've done in the past. We've always been thematic investors and trying to leverage a lot of the information we have on the equity side of the business, where we own real estate. And so I think that continues to lead us down the path of multifamily, industrial, student housing, etc.
Speaker Change: Yeah.
Speaker Change: Thank you for the question Steven sure I can take that one.
Speaker Change: Hmm.
Speaker Change: First of all I don't think its going to be too different from what we've done in the past we've always been thematic investors.
Speaker Change: And trying to leverage.
Speaker Change: A lot of the information we have on the on the equity side of the business, where we own where we own real estate and so I think that continues to lead us down the path of.
Speaker Change: Multifamily industrial student housing et cetera.
Matthew Salem: Certainly, on the newer front, there's probably two areas that we're actively looking at. One would be data centers, especially hyperscale construction that are net leased. There's a lot of that opportunity in the market today. really go to where we see relative value from Western Europe all the way to the United States will be interesting. And certainly, that's a market where we've had some success over the course of the last year or two investing transitional type of capital.
Speaker Change: Certainly we are on the newer front theres, probably two areas that we're actively looking at one would be data centers, especially hyperscale construction that are that are net leased there's a lot of that opportunity in the market today as you mentioned that.
Speaker Change: It's not a perfect product for <unk>, just given the future funding associated with it but.
Speaker Change: Good going into the ground relatively quickly on that construction project on those type of construction projects. So area, we're certainly looking at it.
Speaker Change: And then the second one I would identify and I think we've mentioned this on the last call as is Europe.
Speaker Change:
Speaker Change: And we've.
Speaker Change: We've built out the team there over the last couple of years are actively lending in that market.
Speaker Change: Think the opportunity for us too.
Speaker Change: <unk>.
Speaker Change: Really go to where we see relative value from Western Europe, all the way the United States will be it will be interesting and certainly that's a market where we've had some success over the course of the last year or two investing transitional type of capital. So I'm, hoping that that market continues to offer those type of opportunities.
Matthew Salem: So I'm hoping that that market continues to offer those type of opportunities and we could potentially have some investing in a new market for us as well. Great.
Speaker Change: We could potentially have some investing.
And that new.
Speaker Change: In a new market for us as well.
Great.
Matthew Salem: And to follow up on your comments and the prepared remarks on note-on-note financing, you know, can you talk a little bit more about that? Do you already have financing providers lined up and you kind of know the parameters of what they're willing to do? Or do you originate the loan first and then go find those note-on-note providers later? And then, you know, what type of spread are you getting on your return versus the note-on-note provider and maybe where are they attached? Yeah, let me see if it's Matt again, I'll let me start and then Patrick, just whatever I missed, you should jump in and answer as well.
Speaker Change: Follow up on your comments in the prepared remarks from nodal note financing you know can you can you talk a little bit more about that do you already have.
Speaker Change: Financing providers lined up and you kind of know the parameters of what they are willing to do or do you originate the loan first and then go find those those node on node providers later, and then you know what type of spread are you getting on on your return versus the node on node provider and maybe where they attaching.
Matt Salem: Yes, let me Stephen it's Matt again, I'll, let me start and then Patrick just whatever I Miss you should jump in and answer as well.
Matthew Salem: First of all, I think we know who the providers are. We've been. We've always had a good dedicated team within our capital markets business that is continuously developing those relationships. We obviously have existing lenders within within KRF, we have existing lenders within private funds that that we manage. So we've got a pretty good pulse on the market, and we've got a global platform. So it is a very much a global effort in terms of developing those types of facilities. So that's for second comment. We are seeing new entrants pop into that market, and we're seeing existing participants expand their programs. So the path of...
Speaker Change: First of all.
Speaker Change: I think we know who the providers are we've been.
Speaker Change: We've always had a good dedicated team.
Speaker Change: Within our capital markets business that.
Speaker Change: Is continuously.
Speaker Change: Developing those relationships, we obviously have existing lenders within within <unk>, we have existing lenders within private funds that we manage so we've got a pretty good pulse on the market and we've got a global platform. So it.
Speaker Change: It is a very much a global effort in terms of.
Speaker Change: Developing those types of facilities.
Speaker Change:
Speaker Change: So that's for a second.
Speaker Change: Comment we are seeing new entrants pop into that market.
Speaker Change: And we're seeing existing participants expand their expand their programs. So the path of.
Speaker Change: Yes.
Matthew Salem: The direction of travel here is pretty identifiable in terms of what the banks are trying to accomplish. And so we should be able to really draft off of that and benefit from that. From a leverage perspective, it's not too dissimilar from where we were previously, called a 75% to 80% advance rate with the banks solving for somewhere in a look-through LTV with a 50% range, low 50% range, typically speaking. Obviously, it's a little bit deal-dependent or property-type dependent. And I'd say that financing is currently priced in the SOFR plus 150 to 175 area for the most part for the types of opportunities that we're focused on, which, as you recall, tend to be more institutional, more light transitional.
Speaker Change: The direction of travel here is pretty identifiable in terms of what the banks are trying to we're trying to accomplish and so we should be able to really draft off of that and benefit from that.
From a leverage perspective.
Speaker Change: It's not too dissimilar from where we were.
Speaker Change: Previously you call it 75% to 80% advance rate with the banks.
Solving for somewhere in a look through LTV in the 50% range.
Speaker Change: Low low 50%.
Speaker Change: Range typically speaking, obviously, it's a little bit deal dependent or property type dependent and I would say that financing is currently priced and so for a plus $1 50 to 175 area.
Speaker Change: For the most part for the for the types of opportunities that we're focused on which as you recall like tend to be more institutional more light transitional certainly that price could widen as you get into.
Patrick Mattson: Certainly, that price could widen as you get into the future. longer dated or heavier business plans. I think the most notable, outside of just the shift in terms of how the banks are thinking about their capital treatment and the magnitude or the quantum of capital in that market today, I'd say the biggest shift is just there is much more of a willingness to do non-mark-to-market facilities than there has been in the past. We used to spend a ton of time scouring the globe looking for relationships where we could develop those non-mark-to-market facilities. I would say that's almost more regular way, maybe not quite there yet, but almost regular way at this point in time for these facilities, and so we'll continue to push that dialogue because obviously that's been an important risk mitigating feature for KREF in particular, but for the industry as a whole.
Speaker Change: Longer dated or heavier business or heavier business plans.
Speaker Change: I think the most notable outside of just.
Speaker Change: The shift in terms of how the banks are thinking about there.
Speaker Change: Their capital treatment.
Speaker Change: And the magnitude or the quantum of capital that in that market today I'd say the biggest shift is just there is much more of a willingness to do non mark to market facilities and there has been in the past we used to spend a ton of time.
Speaker Change: Scouring the globe looking for.
Speaker Change: Relationships, where we can develop those non mark to market facilities I would say that's almost more regular way, maybe not quite there yet, but but almost regular way at this point in time for for these for these facilities and so we'll continue to push that dialog because obviously that's been an important.
Speaker Change: Risk mitigate feature for <unk> in particular, but for the industry as a whole.
Patrick Mattson: Patrick, anything you'd like to add to that? No, I think that's well covered, Matt. Yeah, that's helpful and definitely seems like banks have a good reason to do it given the capital treatment as you mentioned.
Patrick Mattson: Patrick anything.
Patrick Mattson: Add to that no I think thats well covered Matt.
Speaker Change: Yeah, that's helpful and definitely it seems like banks have a good reason to do it given the capital treatment as you mentioned so I appreciate the comments. This morning. Thank you.
Stephen Laws: So appreciate the comments this morning. Thank you.
Patrick Mattson: Steve.
Jade Rahmani: And our next question comes from Jade Rahmani with KBW. Please go ahead. Thank you very much.
And our next question comes from Jade Rahmani with K B W. Please go ahead.
Thank you very much.
Matthew Salem: Just on the watchlist and REO, could you give some parameters as to timing? Do you expect the bulk of REO and watchlist to be resolved, say, over the next year or how would you frame it?
Jade Rahmani: Just on the watch list and Oreo could you give some parameters as to timing.
Jade Rahmani: Do you expect both the bulk of.
Jade Rahmani: Oreo and wants us to be resolved say over the next.
Jade Rahmani: Year, or how would you frame that.
Matthew Salem: Hey Jade, it's Matt. Thanks for the question. Hard one to say. Obviously, a lot of that timing is out of our control. Let's break it apart a little bit. on the Watch List Loans. I would say those, hopefully over the next year or the next few quarters, we should be able to, you know, to deal with those. I'm unclear which direction those could go. Those are both multi-family loans at this point in time. And as you start to think about where we are, and we highlighted this on the call, we're really very focused on the fact that we haven't put more into that four-rated bucket over the last couple quarters.
Matt Salem: Hey, Jade, it's Matt Thanks for the question.
Matt Salem: Hard one to say, obviously a lot of the some of that a lot of that timing is out of our control.
Matt Salem: Let's break it apart a little bit.
Matt Salem: On the watch list loans.
I would say those hopefully over the next.
Matt Salem: Year over the next few quarters, we should be able to.
Matt Salem: To deal with those.
Matt Salem: Unclear, which direction.
Matt Salem: Could get does could go those are both multifamily loans at this point in time.
Matt Salem: And as you start to think about where we are and we highlighted this on the call.
Matt Salem: We're really.
Matt Salem: Very focused on the fact that we haven't put more into that four rated bucket over the last couple of quarters. So I think thats important that we're not seeing that three to four transition and of course.
Matthew Salem: I think that's important that we're not seeing that three-to-four transition, and of course Unfortunately, I don't love the fact that some went to four to five and we increased reserves. But in some ways, that's a positive thing in the sense that we're getting kind of getting through it and identifying it and moving and moving on. So I'd say the fours are probably a little bit more identifiable, hopefully next few quarters.
Matt Salem: Unfortunately don't love the fact that someone to fortify that we increase reserves.
Matt Salem: But in some ways it's.
Matt Salem: The positive thing in the sense that we're getting kind of getting through it and identifying and moving and moving on so I'd say that for us are probably a little bit more identifiable hopefully next few quarters and then on the Oreo side.
Matthew Salem: And then on the REO side. Let's just talk about each one is probably most helpful. So our Lloyd Center in Portland, that one, we continue to make really good progress in terms of entitlement and hope to submit and receive back kind of city approval called first half of next year, at which point we could begin to have some liquidity events in that particular asset. That's a little bit more identifiable, just how far we are down the road. And that's a pretty exciting project. And so I think we're continuing to push that particular one forward.
Matt Salem: Let's just let's just talk about each one it's probably most helpful. So.
Matt Salem: Lloyd Center in Portland that one we continue to make really good progress in terms of entitlement.
Matt Salem: And hope to submit.
Matt Salem: And received back kind of city approval.
Matt Salem: First half of.
Matt Salem: Next year at which point, we could begin to have some liquidity events in that particular.
Matt Salem: Particular assets, that's a little bit more identifiable just how far we are down the road and that's a pretty exciting project and so I think we're okay.
Matt Salem: Continue to push that that particular one forward.
Matthew Salem: When you think about Mountain View. That one's probably the biggest unknown. It's a campus-like facility. It sets up really well for a single tenant. And this is one where we're just going to have to be patient and wait for the market to come back a little bit. We are on a very short list of assets that gets attention when a large tenant comes into the market and is looking for that unique campus setting. And so we'll continue to try to position ourselves well for that tenant demand. Just given the nature of catching a single tenant, it's really hard to predict when we could resolve that, but certainly could take all of next year.
Matt Salem: When you think about mountain view.
Matt Salem: That was probably the biggest unknown, it's a campus like facility it sets up really well for a single tenant and this is one where we're just going to have to be patient and wait for the market to come back a little bit. We are on a short very short list of assets that gets attention when a large tenant comes into the market and is looking for that.
Matt Salem: Unique <unk>.
Matt Salem: <unk> setting.
Matt Salem: And so we will continue to try to position ourselves well for that for that tenant demand but.
Matt Salem: Given just given the nature of catching a single tenant.
Matt Salem: Really hard to predict when we can resolve that but it certainly could take all of next all of next year.
Matthew Salem: When we think about the Seattle Life Science deal, a little different story because that's multi-tenant. And so we're pushing that business plan forward, thinking about putting an incubator space. We're actively engaged in the market right now with a potential tenant for a floor or two of that. And so that one, I'm hoping that over the next few quarters, while we might not fully resolve it, we can at least provide updates as we begin the leasing on that on more of a granular basis.
Matt Salem: When we think about the Seattle life Science deal little different story, because that's a multi tenant and so we're pushing that business plan forward thinking about putting an incubator space. We're actively engaged in the market right now with a potential tenant for a floor or two of that.
Matt Salem: And so that that one's I'm, hoping that over the next few quarters, while we may not fully resolve it we can at least provide updates as we began.
Matt Salem: The leasing on that on more of a granular basis.
Matthew Salem: And then that leaves the last one, which is the Philadelphia asset. It's two, if you recall, two assets. We have an office and a garage left. We'll likely try to sell the garage probably by the end of the year here. And then the office will likely keep on a longer term hold, but this one's moved around a little bit from an execution perspective over the last couple quarters. So we'll keep you posted. But that's an update as I work through the list of what we have in REO. And hopefully, it's obviously a meaningful component of the portfolio now, not only from just an equity invested perspective, but as we repatriate that capital, gives us the ability to obviously generate more earnings.
Matt Salem: And then.
That leaves the last one which is the Philadelphia asset it's too if you recall two assets, we have an office in a garage left.
We will likely try to sell the garage probably by the end of the year here.
Matt Salem: And then the office will.
Matt Salem: We will likely keep on a longer term hold but this one has moved around a little bit from a execution perspective over the last couple of quarters. So we will keep you keep you posted but.
Matt Salem: That's an update as I work through the list of what we have in Oreo and.
Matt Salem: And hopefully as it's obviously a meaningful meaningful component of the portfolio now.
Matt Salem: Not only from just an equity investment perspective, but as we repatriate that capital gives us the ability to obviously.
Matt Salem: Generate more earnings so we will try to keep everybody updated as we get into.
Matthew Salem: So we'll try to keep everybody updated as we get into 2025.
Matt Salem: 2025.
Matthew Salem: Any assets where you can see upside, it sounds like your commentary was a little more positive around Portland and also maybe the garage, Philadelphia garage. Yeah, I mean, I think they're upside to your base. No, understood, understood. Well, I guess the best way to think about it is When we talk about the potential to drive earnings with that repatriated capital. That analysis, or that math, is based on our current cost, our current hold. It's not based on any, you know, potential increase from there. And I think on some of these, we will do better than that.
Speaker Change: Any assets, where you could see upside it sounds like your commentary was a little more positive around Portland, and also maybe the garage Philadelphia routes.
Speaker Change: Well.
Speaker Change: Yeah, I think that to your basis.
Speaker Change: No understood understood well.
Speaker Change: Well I guess, the best way to think about it is.
Speaker Change: <unk>.
Speaker Change: When we talk about.
Speaker Change: The potential to drive earnings with that repatriated capital.
Speaker Change: That that analysis or that math is based on our current cost.
Our current hold.
Speaker Change: It's not based on any potential.
The increase from there.
Speaker Change: And I think on some of these we will do better than that.
Matthew Salem: Obviously, as you go from an unleased asset to a leased asset, depends on the parameters and, you know, where you leased it and other factors. But, you know, I'm hoping that we can do better than kind of where we hold it today on a number of these. But that remains to be seen as we try to execute those.
Speaker Change: As you go from Unlevered asset to at least asset depends on the parameters and where you leased it and other factors.
Speaker Change: I'm, hoping that we can do better than kind of where we hold it today on a number of these.
Speaker Change: But.
Speaker Change: That remains to be seen as we tried to execute those business plans.
Matthew Salem: The Raleigh and San Diego multifamily, it sounds like you expect resolution and be somewhat in line with the. basis, KRF's basis. I think they're, I don't know, we don't know yet, right? They're four rated loans, they're on the watch list. They're both performing. Our experience, I think, has been As loans hit the 4, I think roughly half have gone back to performing and half have ended up in a work-outs area as a 5-rated loan. So I don't think we want to make any predictions right there if we knew that we would likely either have them as a 3 or a 5, but there's still some uncertainty in those.
Speaker Change: The Raleigh, and San Diego multifamily it sounds like you expect resolution and.
Speaker Change:
Speaker Change: It would be somewhat in line with that.
Speaker Change: Your basis Carryout spaces.
Speaker Change: I don't know, we don't know yet right. They are four rated loans are on the watch list. They are both performing.
Speaker Change: Our experience I think has been.
Speaker Change: As loans hit the four I think roughly half.
Speaker Change: <unk> gone back to performing in half.
Speaker Change: Ended up in a workout scenario five rated loan. So I don't think we want to make any predictions right. There. If we knew that we would likely either having there's a 305.
Speaker Change: So theres still some uncertainty in those.
Matthew Salem: I think, you know, they're multifamily deals, so losses in that segment. seem to be relatively contained, and we'll stick with our comments that we've made over the last few quarters that multi is a big part of our portfolio. We've seen a lot of liquidity in that sector, probably more than we would have initially expected if you told me rates were going to go up 500 basis points. But we're not, you know, we're obviously not totally immune from potential losses there, but we think it's going to be relatively contained and certainly more noise than real impact on book value.
Speaker Change: Multifamily deal so losses in that segment.
Speaker Change: Seem to be relatively contained.
Speaker Change: And we will stick with our I think we'll stick with our.
Speaker Change: Comments that we've made over the last few quarters that.
<unk> is a big part of our portfolio, we've seen a lot of liquidity in that sector, probably more than we would have initially expected. If you told me rates, we're going to go up 500 basis points.
Speaker Change: But we're not.
Speaker Change: Obviously not.
Speaker Change: Totally immune from from potential losses, there, but we think it's going to be relatively contained and certainly more noise than than real impact on book value overtime.
Matthew Salem: And West Hollywood, you know, catches the attention because it's such a high dollar amount per unit. Is the plan to convert it to condos? It right now it's operating as a multifamily. You're right to point out that it's a pretty high. It's a high high basis per unit or per foot. It was originally built as condo and and and then operated as multi. My guess is that the best path forward will likely be a condo sellout on Okay, and it can be quite easily entitled for that? Yeah.
Speaker Change: And West Hollywood.
Speaker Change: You know catches the attention because it's such a high.
Speaker Change: Dollar amount per unit is the plan to converted to condos.
Speaker Change: Right now, it's operating as a multifamily youre right to point out that it's a pretty high it is.
Speaker Change: Hi basis per unit or per foot. It was originally built as condo and and then operated as multi.
Speaker Change: My guess is the best path forward will likely be a condo sellout on that one.
Speaker Change: Okay, and it can be quite easily entitled for that.
Speaker Change: Yes, okay.
Matthew Salem: And then just lastly, the San Carlos Life Science. So in your commentary, you flagged Mountain View, California as sort of the biggest risk. saying Carlos might be second. And in the modification. that you're discussing is the goal. to have a longer-term modification, considering the size of the...
Speaker Change: And then just lastly, the San Carlos Life Science. So in your commentary you flagged Mountain view, California, it's sort of the biggest risk I would assume San Carlos might be second and then the modification.
Speaker Change: That you're discussing is the goal too.
Speaker Change: To have a longer term modification considering.
Speaker Change: The size of this project.
Matthew Salem: Yeah, this one I think we need to be a little bit careful on just because we're right in the middle of negotiations. But okay, our first Our first preference is always to work with our existing sponsors, and so if we can get to a deal with them, then hopefully we can create the basis that makes sense for everybody and give the asset more time to implement its business plan. And so that's really path one for us, but let's see what happens. I think we've increased our reserves to try to reflect some of the current dialogue that's going on there, and hopefully we can get to a deal.
Speaker Change: Yeah.
Speaker Change: This one I think we need to be a little bit careful on just because we're right in the middle of negotiations.
Speaker Change: But okay.
Speaker Change: First.
Speaker Change: Our first preference is always to work with our existing sponsors and so if we can get to a deal with them.
Speaker Change: Hopefully we can create the basis that makes sense for everybody and give the asset more time to implement its business plan and so that's really path one for us, but let's let's see what happens I think we've increased our reserves to try to reflect some of the current <unk>.
Speaker Change: Dialogue, that's going on there.
Speaker Change: And.
Speaker Change: Hopefully we can get hopefully we can get to a deal.
Matthew Salem: Okay.
Speaker Change: Okay. Thanks, so much for taking the questions.
Jade Rahmani: Thanks so much for taking the question. Thank you, Jade.
Speaker Change: Thank you Jade.
Don Fandetti: Our next question comes from Don Fandetti with Wells Fargo. Please go ahead. Hi, can you talk about your updated thoughts on the office market? Are you seeing increased debt and equity interest? And then also, what is the buyer profile of the loan that you sold in Q4 in the office? Oh, yeah. Thank you.
Speaker Change: And our next question comes from Don Vendetti with Wells Fargo. Please go ahead.
Don Vendetti: Mike can you talk about your updated thoughts on the office market are you seeing increased debt and equity interest and then also what is the buyer profile of the loan that you sold in Q4 your office law.
Speaker Change: Oh, yeah. Thank you. Thank you Dan for the questions Matt again.
Matthew Salem: Thank you, Don, for the questions, Madigan. I think the office market is beginning. Beginning to show a little bit more liquidity on the capital market side if you look last year, for instance. most of the buyers there were. High Net Worth, Large Family Offices, really no institutional investors in the market for acquisitions. And now I think you're beginning to see signs of institutional investors coming back into the market. And like all these, like, as you'd expect in these type of large downturns, liquidity is coming back for the for the best assets first. So for the highest quality assets, the newest assets the assets that have some long walls associated with them, for instance.
Don Vendetti: Yes.
Matt Salem: I think the office market is beginning.
Matt Salem: It's beginning to show a little bit more liquidity on the capital market side.
Matt Salem: If you looked.
Matt Salem: Last year for instance.
Are the buyers there were.
Matt Salem: High net worth large family offices really no institutional investors in the market for acquisitions and now I think youre beginning to see signs.
Matt Salem: Institutional investors coming back into the market.
Matt Salem: All of these.
Matt Salem: As you would expect in these diseases.
Matt Salem: Of.
Matt Salem: Large downturns liquidity is coming back for the for the best assets first so for the highest quality assets the newest assets.
Matt Salem: The assets that have.
Matt Salem: Some some long Walt associated with them for instance.
Matthew Salem: Um, and And so we'll see if that continues. On the financing side, I think the same is true. There's not a lot of velocity in people's office loan portfolios right now, so there's still a really, really high bar to make a new office loan since you're not getting repaid on any. But you're starting to see lending return, especially in... Submarket. that have shown real strength over the course of the last couple of years, or assets with very long lease terms, as you'd expect. So it's beginning. The capital market's are starting to come back for office.
Matt Salem: And.
Matt Salem: And so we'll see if that continues.
Matt Salem: Financing side I think the same is true.
Theres not a lot of velocity in peoples loan office loan portfolios right. Now. So there is still a really really high bar to make a new office loans getting repaid on any.
Matt Salem: But youre starting to see lending return, especially in <unk>.
Matt Salem: Submarkets that have shown real.
Strength over the course of the last couple of years or assets with very long lease terms as you would expect.
Matt Salem: So at the beginning the capital markets.
Speaker Change: I'm starting to come back for office, CBS and South do you have done a number of deals notably rock center.
Matthew Salem: CMBS and SASB have done a number of deals, notably RockCenter, which is obviously a multi-billion dollar transaction or offering in the market. So you think you're beginning to see signs of life on the capital markets front overall. In terms of the loan that we sold, it went to a and effectively an office equity investor. Got it. Thank you.
Speaker Change: Which is obviously a multi multibillion dollar transaction our offering in the market.
Speaker Change: So you think youre beginning to see signs of life on the capital markets.
Speaker Change: Overall.
Speaker Change: In terms of the loan that we sold.
Speaker Change: It went to.
Speaker Change: Effectively in office equity Investor.
Speaker Change: Got it thank you.
Thank you.
Tom Catherwood: And our next question comes from Tom Catherwood with VTIG. Please go ahead. Thank you and good morning, everybody.
Speaker Change: And our next question comes from Tom Catheter word with BTG. Please go ahead.
Tom Catheter: Thank you and good morning, everybody, Matt maybe following up on Rick's question from the start with the increase in transaction activity that you mentioned are you seeing is that for opportunistic and value add type deals that would traditionally be looking for transitional type loans or the transactions.
Matthew Salem: Matt, maybe following up on Rick's question from the start, with the increase in transaction activity that you mentioned, are you seeing that for opportunistic and value-add type deals that would kind of traditionally be looking for transitional type loans or the transactions more core and core plus type assets at the moment? Um, yeah, thank you can take that I would say the market is It's always more weighted towards core core plus type of lending opportunities. So that's always a larger component of the overall market. I do think that over the course of the last 18 months, that transitional type of capital Let's just call it a little bit higher.
Speaker Change: More core and core plus type assets at the moment.
Speaker Change: Yes. Thank you can take that I would say the market is.
Matt Salem: It's always more weighted towards core core plus type of lending opportunities that's always the larger component of the overall market.
Matt Salem: I do think that over the course of the last 18 months that transitional type of capital.
Matt Salem: Let's just call it a little bit higher cost of capital.
Matthew Salem: cost of capital the has been more difficult to live. So when I think about like a KREF shareholder over the last call it 12 to 18 months from like just a new opportunity perspective, there hasn't been it hasn't been you know, like the best, I think, lending environment, certainly values have been down, competition has been down, but the demand for, you know, transitional loans hasn't been particularly high to your point. What we're seeing now is that demand increase for sure. I think it largely is due to two things. Number one, there's just been like a reboot in acquisition activity, and I think this type of capital is more relevant to that.
Matt Salem: <unk>.
Matt Salem: Has been more difficult to lend.
Matt Salem: So when I think about like a <unk> shareholder.
Matt Salem: Over the last call. It 12 to 18 months for Mike just a new opportunity perspective.
Matt Salem: There hasnt been it hasnt been.
Speaker Change: Uh huh.
Speaker Change: The best I think lending environment, certainly values had been down competition has been down but the demand for transitional loans hasnt been particularly high to your point, what we're seeing now is.
Speaker Change: That demand increase for sure.
Speaker Change: It largely is due to two things number one there's just been a like a reboot in acquisition activity in this type of capital is more.
Speaker Change: Relevant to that.
Matthew Salem: to that segment of the market. And then secondly, we've seen a lot of activity in just capital structures are maturing and borrowers don't want to sell or owners don't want to sell, so they need more time. Their existing lenders kind of run out of time. And so a number of the options we're seeing are just a bridge, right? Just purely a – not necessarily the business plan is transitional, it's just the market – the owner wants more time for the market to continue to heal and cost of capital to continue to come down and then they can sell into a better market.
Speaker Change: To that segment of the market and then secondly, we've seen a lot of activity and just capital structures are maturing and borrowers don't want to sell.
Speaker Change: Owners don't want to sell so they need more time their existing lenders kind of run out of time and so a number of the act.
Speaker Change: Obviously as we're seeing are just just a bridge right just purely a not necessarily the business plan is it transitional it's just.
Speaker Change: The market the owner wants more time for the market to continue to heal and cost of capital will continue to come down.
Speaker Change: And then they can sell into a better mark.
A better market. So I'd say that part is picking up.
Matthew Salem: So I'd say that part is picking up and we've seen a lot of that in our own pipeline and our expectation is as we go into next year, there'll be a pretty robust opportunity set as the overall market reboots.
Speaker Change: And we've seen a lot of that in our own and our own pipeline and our expectation is as we go into next year that will be there'll be a pretty robust opportunity set as the market overall market reboots.
Matthew Salem: I appreciate those thoughts, Matt, and kind of along the same lines, last question for me, but does, if transaction activity is beginning to ramp, especially for assets that need transitional loans, plus you're sitting on kind of material liquidity, do you need to wait to get to 2025 repayment activity to start ramping new originations? Or is this something where you could start in the fourth quarter or the first quarter, start putting capital to work and levering up a bit and then bring that back down as you get more repayments? Or does this really have to be match funded as you get those repayments in 25?
Speaker Change: I appreciate those thoughts Matt kind of along the same lines last question for me, but.
Speaker Change: Does if transaction activity is beginning to ramp, especially for assets that need transitional loans.
Speaker Change: Plus you're sitting on kind of material liquidity do you need to wait to get to 2025 repayment activity to start ramping new originations or is this something where you could start in.
Speaker Change: The fourth quarter or the first quarter start putting capital to work and levering up a bit and then bring that back down as you get more repayments or does this really has to be match funded as you get those repayments in 'twenty five.
Matthew Salem: That's a good question. I don't we have enough liquidity. I don't think we need to like completely match these, you know, these things up. I think we could probably get ahead of it a little bit. We're actively in the market today looking at transactions. A little bit. We do have a big election coming up here in the next few weeks. Honestly, I'm not like personally that We're motivated to like put it out in the next two weeks. Let's see what happens at the election, any volatility around that. But certainly from just a KREF perspective, you know, we have the liquidity today that we could try to get ahead of it a little bit.
Speaker Change: Oh, that's a good question Tom.
Speaker Change: I don't we have enough liquidity I think we need to like completely match. These these things out I think we could probably get ahead of it a little bit we're actively in the market today and looking at transactions.
Speaker Change: Okay.
A little bit we do have a big election coming up here in the next few weeks honestly I'm not like personally that.
Speaker Change: Motivated like put it out in the next two weeks, we'll see what happens with the election any volatility around that.
Speaker Change: But.
Speaker Change: Certainly from just okay Rep perspective.
Speaker Change: We have the liquidity today that we could try to get ahead of it a little bit.
Speaker Change: Yeah.
Operator: Got it. Appreciate the thoughts. Thanks, everyone. Thank you. Again, if you have a question, please press star, then 1.
Speaker Change: Got it I appreciate the thoughts thanks, everyone.
Speaker Change: Thank you.
Speaker Change: Again, if you have a question. Please press Star then one.
Steve DeLaney: And our next question today will come from Steve DeLaney with Citizens JMP Securities. Please go ahead. Thanks. Hey, good morning, everyone. I appreciate you taking the question.
Speaker Change: And our next question today will come from Steve Delaney with citizens JMP Securities. Please go ahead.
Steve DeLaney: Thanks, Hey, good morning, everyone. I. Appreciate you taking the question look your comment it's clear that you are.
Patrick Mattson: Look, your comments, it's clear that you're in a process of shifting from defense to off. we look at the loan portfolio. Page 20 of your deck, excluding the REO, you know, you're about $6.8 billion in commitments currently. As you look out to 2025, I'm sure you'll see a lot of growth. Would that number reach as much as, say, $8 billion? Do you have a figure in mind that's sort of your fully invested portfolio, loan portfolio, what would that look like from a size standpoint? Thank you.
Steve DeLaney: You're in a process of shifting from defense to offense.
Steve DeLaney: As we look at the loan portfolio I'm looking at page 20 of your deck, excluding the Oreo.
Speaker Change: You are about $6 8 billion in commitments currently.
Speaker Change: You look at the 2025.
Speaker Change: Because that number.
Speaker Change: As much as say $8 billion.
Speaker Change: Do you have a figure in mind sort of your.
Speaker Change: Fully invested portfolio loan portfolio, what would that look like from a from a size standpoint. Thank you.
Patrick Mattson: Good morning, Steve. It's Patrick. I'll take that. I'll take that question. I think the way I think the way you should think about it is If you think about our current portfolio today and our future funding obligations, that's probably the steady state for the equity we have today. And so I think what you should be hearing from us is that, you know, as we're getting repayments, we're going to replace those assets with new originations. And so I'm not expecting a lot of change off of that number. We're kind of in our target leverage zone. So I would think about that as kind of being, you know, absent new capital coming in, sort of a portfolio size toward the end of 2025.
Patrick Mattson: Good morning, Steve It's Patrick I'll take that I'll take that question I think the way you should think about I think the way you should think about it is if you think about our current portfolio today and our future funding obligations, that's probably the steady state for the equity we have today and so I think what you should be hearing.
Patrick Mattson: From us is that as we're getting repayments were going to replace those assets with new originations and so I'm not expecting a lot of change off of that number we're kind of in our target leverage zone. So I wouldn't think about that as kind of being.
Patrick Mattson:
Patrick Mattson: Absent new capital coming in.
Patrick Mattson: We have a portfolio size towards the end of 2025.
Patrick Mattson: Okay, got it. Thanks.
Okay got it thanks.
Patrick Mattson: And as far as your CLOs go, as part of this, you know, renewing the activity with lending, do you have some efficiency that you could achieve in CLO financing? I believe you're out of your reinvestment period in all of those, so that they would be there in runoff mode, I assume. Is that accurate that they are? Are you thinking about a new CLO as part of your kind of refreshed lending strategy? Yeah, that's a great question, Steve. So both of our CLOs just exited their replenishment periods this year. And so they were fully invested at the end of those replenishment periods.
Speaker Change: As far as your CLO scope.
Speaker Change: As part of that.
Speaker Change: <unk> the activity with lending you have some efficiency that you could achieve and seal opening ensign.
Speaker Change: So I believe you're out of your reinvestment period.
Speaker Change: And all of those sort of it they would be they are in runoff mode. I assume is that accurate that they are are you thinking about a new CLO as part of your kind.
Speaker Change: Kind of a refreshed lending strategy. Thanks.
Speaker Change: Yes, that's a great question, Steve So both of our CLO has just exited the replenishment periods. This year and so they were fully invested at the end of those replenishment periods at this point, obviously any as any repayments.
Patrick Mattson: At this point, obviously, any S, any repayments. the lever us and slightly increase our cost of capital as we pay back the cheapest liabilities. But given where we sit today, it takes quite a bit of repayments to actually get us to a level that's probably unattractive from a financing standpoint. That said, if you look at the CLO market, you know, over the last couple of months, we've seen a lot of improvement there. We've seen improvement in terms of appetite from investors. And that's driving, you know, the cost of capital down on these new CLOs. So I expect that market to continue to provide some tailwinds overall, you know, sometimes the assets lead, sometimes the liabilities lead.
Speaker Change: Delever us.
Speaker Change: Slightly increase our cost of capital as we pay back the cheapest liabilities, but given where we sit today.
Speaker Change: <unk> quite a bit of repayments to actually get us to a level that's probably unattractive.
Speaker Change: From a financing standpoint.
Speaker Change: That said if you look at the CLO market over the last couple of months, we've seen a lot of improvement there.
Speaker Change: Seen improvement in terms of appetite from <unk>.
Speaker Change: Investors and Thats driving the cost of capital down on these new Clo's. So I expect that market to continue to provide some tailwind overall, sometimes the assets lead sometimes the liabilities lead.
Patrick Mattson: But we're seeing tightening on the liabilities, both in terms of what Matt had referenced from the bank financing, but now also in the capital markets on the CLO side. So as we think about over time... You know, those CLOs becoming less efficient for us, the market is setting up well for us to be able to refinance what's left of those CLOs at some point, and then to add new collateral that we're starting to originate going into 2025.
Speaker Change: But we're seeing tightening on the liabilities.
Speaker Change: In terms of what Matt referenced from the bank financing, but now also in the capital markets on the CLO side. So as we think about over time.
Speaker Change: Those CLO is becoming less efficient for us the market is setting up well for us to be able to refinance.
Speaker Change: What's left of those CLO at some point and then to add new collateral that we're starting to originate going into 2025.
Speaker Change: Great. Thank.
Steve DeLaney: Thank you for the comments, and it's good progress on working through it, and I appreciate all the color on your individual, you know, watch list assets in the REO. That's very helpful, kind of to tell the story about those assets.
Speaker Change: Thank you for the comment.
Speaker Change: Good progress on working through that and I appreciate all the color on your individual what's with that debt when the Oreo that's very helpful.
Speaker Change: To tell the story about those.
Steve DeLaney: Look forward to… wrapping this year up and bigger and better things in 2025. Thank you, Steve.
Yes.
Look forward to.
Speaker Change: The rapid this year up.
Speaker Change: Bigger and better things in 2025.
Speaker Change: Thank you Steve.
Jade Rahmani: And our next question today is a follow-up from Jade Rahmani of KBW.
Speaker Change: And our next question today is a follow up from Jade Rahmani of K B W. Please go ahead.
Jade Rahmani: Please go ahead. Thank you. Just wanted to ask if you're seeing any uptick in loan portfolio sales from banks or credit. transfers, situations like that where perhaps KREF Thank you, Jade.
Jade Rahmani: Thank you just wanted to ask.
Jade Rahmani: If youre seeing any uptick in loan portfolio sales from banks or credit risk transfers.
Jade Rahmani: Situations like that where perhaps K RAF might participate.
Matt Salem: Thank you Jade its Matt again.
Matthew Salem: It's Matt again. On the loan portfolio sale side, it's been pretty muted still. We have not seen a lot come through that channel and what's come what's come through feels more sub-performing, you know, non-performing loan. And honestly, it's less big pools than it is one-off, you know, one or two loans at a time. So it's not an area, honestly, we've been really engaged with, haven't seen. Anything particularly interesting there?
Matt Salem: On the loan portfolio sale side, it's been.
Matt Salem: Pretty muted still.
Matt Salem: Have not seen a lot come through.
Matt Salem: That channel and what's come what's come through fields.
Matt Salem: More sub performing nonperforming loan and honestly, it's less big pools than it is.
Matt Salem: One off one or two loans at a time, so it's not an area.
Matt Salem: Honestly, we've been really engaged engaged with haven't seen.
Matt Salem: Anything, particularly interesting there.
Matthew Salem: On the credit risk transfer side, that we've seen a little bit of pickup in that in that market. I think banks are trying to figure out how do you adapt? where they've had success in more granular loan portfolios you know, on the consumer, on the resi side to commercial where As we know, credits are more idiosyncratic, control is more important, and it's not as much kind of statistical analysis around performance and losses. So it's been interesting to watch as that begins, I would say very beginning stages, but begins to develop, and it's something we'll certainly stick close to.
Matt Salem: On the credit risk transfer side that we've seen a little bit of pickup in that in that market. I think banks are trying to figure out how do you adapt.
Where they've had success and more granular loan portfolios on the consumer on the resin side to commercial.
Matt Salem: Where.
Matt Salem: As we know credits are more idiosyncratic control is more important.
Matt Salem:
Matt Salem: And it's not as much kind of statistical analysis around performance and losses. So it's been interesting to watch as that begins I would say very beginning stages, but begins to develop.
Speaker Change: Well, certainly stick close to and I think another way for the banks to kind of come at.
Matthew Salem: And it's, I think, another way for the banks to kind of come at. Almost like a loan-on-loan facility from... you know, from an existing portfolio perspective. So nothing large in that market yet, but certainly conversations have begun.
Speaker Change: Almost like a loan on loan facility from.
Speaker Change: From an existing portfolio perspective, so nothing.
Operator: So, nothing large in that market yet, but certainly conversations have begun.
Speaker Change: Large in that market, yet, but certainly in conversations have begun.
Matthew Salem: Thanks a lot. Thank you.
Operator: Thanks a lot.
Thanks, a lot.
Speaker Change: Thank you Ted.
Speaker Change: Yeah.
Operator: This concludes our question and answer session.
Operator: This concludes our question and answer session.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Jackson Taylor for any closing remarks.
Jack Switala: I would like to turn the conference back over to Jack Switala for any closing remarks. Great. Thanks, Operator, and thanks, everyone, for joining today. Please reach out to me or the team here if you have any questions.
Jackson Tallah: I would like to turn the conference back over to Jackson, Tallah for any closing remarks. Great. Thanks, operator. And thanks, everyone, for joining today.
Jackson Taylor: 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: Please reach out to me or the team here. If you have any questions, take care.
Jack Switala: Take care.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Operator: The conference is now concluded. Thank you for attending today's presentation.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Operator: You may now disconnect. Thank you.
Speaker Change: Okay.
Speaker Change: [music].