Q1 2025 KKR Real Estate Finance Trust Inc Earnings Call
Speaker Change: Good morning and welcome to the KKR Real Estate Finance Trust Inc. 1st quarter 2025 financial results conference call
Speaker Change: 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.
Speaker Change: After today's presentation, there will be an opportunity to ask questions.
Speaker Change: To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two.
Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Jack Switala. Please go ahead.
Speaker Change: Great, thanks operator and welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2025.
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 COO, Patrick Mattson, and our CFO , Kendra Decious
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 gap 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 [inaudible]
Jack Switala: Please refer to our most recently filed 10Q for cautionary factors related to these statements.
Jack Switala: Before I turn the call over to Matt, I'll go through our results. For the first quarter of 2025, we reported a gap net loss of $10.6 million or $15 per share.
Book value as of March 31st is $14.44 per share.
Jack Switala: Distributable Earnings This Quarter with $17 million or 25 cents per share, which is in line with our 25 cent per share dividend.
Matt: With that, I'd now like to turn the call over to Matt.
Matt: Thank you, Jack. Good morning. And thanks for joining our call today.
Matt: Since our last earnings call and tariff implementations, market volatility and recession expectations have increased significantly, creating uncertainty for both businesses and households.
Matt: The early recovery of real estate has likely been put on hold until we have more clarity on the scale and impact of the Terra-free theme.
Matt: That said, we do believe real estate is better positioned for this environment compared to past cycles and other asset classes.
given the reset and values over the last three years.
Matt: In times like this, the first thing we think about is defense of defense.
Matt: It's a get your house in order mentality. And to that end, we were in a very good position.
Matt: We have no corporate machoities until 2030, having just upsized and extended our corporate revolver for new five-year term and the referred answer to our term won't be with the new seven-year facility.
We have ample liquidity with over 700 million today.
Given this secured position, we will remain on offense.
actively looking to reinvest repayments into new originations.
Matt: In terms of what we were seeing in the Real Estate Credit Market,
Matt: It is still functioning in all market participants remain active, including the banking sector.
Matt: Warehouse Financing and Senior Loan Spreaddar Approximately 10-15 Basins Points Wider While the Transitional Loan Sector Spreaddar Approximately 15-20 Basins Points Wider
Matt: The MBS spreads have been more volatile and are currently 50 to 75 basis points wider.
Matt: Many owners are now coming to us for a balance sheet solution to avoid the capital market's volatility.
But an opportunity perspective, it's significant [inaudible]
Matt: A pipeline is the largest it's ever been, totaling over $30 billion in the world.
and is very high quality.
Matt: I expect this market will lead our sponsors to seek out more short-term bridge loans instead of testing the invested sales market.
Interested in Wade?
or repayment expectations have increased since our last call.
Matt: As we articulated last quarter, repayments are expected to exceed $1 billion this year.
and we are tracking well above that.
Matt: We had an active quarter and closed four loans for a total of 376 million. 80% of which were secured by Class A multi-family properties. It had a weighted average LTV of 69% and a coupon of SOFR plus 277 basis points.
Repayments in the quarter were 184 million [inaudible]
Matt: and along with Future Funding from Existing Loans, our net fundings total 222 million.
Matt: We are actively looking at opportunities to diversify our portfolio and add duration.
Matt: To that end, we are focused on the European lending market. We have built a strong team over the last few years.
Chip Position
Back in.
Matt: Lawson Life Science from the three rated to a four rated loan due to current occupancy trends.
Matt: With a two-grap downgrades in the quarter and therefore increased Cecil provisions, book value for shares $14.44, down approximately 2% compared to the prior quarter.
Matt: We will continue to be transparent and proactive in managing the KRF portfolio, and we'll provide updates on those two loans in the coming quarters.
Matt: Before turning it over to Patrick, I will touch on our life science exposure.
Matt: This is a sector that we believe has long-term positive fundamentals
Matt: but faces cyclical headwinds, which could be exacerbated by an economic downturn or an age funding cuts.
Matt: As a reminder, 12% of our loan portfolio is life science, and we have one REO property.
Matt: We thought it'd be helpful to provide additional details in our supplemental.
which is on page 10 of the presentation.
Matt: And a high level, 100% of our loan exposure is located in the top two life science markets, Boston and South San Francisco.
Matt: and we provided construction financing for over half of our exposure.
Matt: So, these are very high-quality and purpose-built for life science
Matt: We've seen some green shoots as well. In March, we executed a 32,000 square foot lease in our Seattle life science Oreo property to the Institute for Protein Design at the University of Washington.
Matt: The tenant has created AI technologies and computationally designed protein medicines.
Matt: and is led by recent Nobel Prize winner for chemistry.
With that, I'll turn it over to Patrick.
Thanks Matt, good morning everyone.
Matt: This quarter, we work closely with our KKR Capital Markets team to maintain our best in-class financing.
Matt: In March, we closed on a new $550 million term loan B, up sizing from the prior loan of $340 million, and resetting the term for seven years.
Proceeds were used to repay indebtedness [inaudible]
Matt: including our existing term loan B and for general corporate purposes.
Matt: The new term loan fee priced at 99.875%
and Bears Interest at SOFR plus 325 basis points.
This loan, further bolsters, or liquidity position
And enables us to continue to focus on offense. [inaudible]
Matt: In the quarter, we also outsized our corporate revolver to $660M William Catherwood, William Catherwood,
Matt: and extended the maturity for a new five-year term to March 2030.
Eliminating corporate liability maturities over the next several years.
Matt: Additionally, we added a new non-martial market secured loan facility this quarter.
with an initial funded size of $122 million.
and the ability to grow, as new loans are included.
Further diversifying our financing capacity.
Our Financing Availability now sits at 8.3 Bill
including $3.1 billion of undrawn capacity.
At Quarter N, we had 720 million of liquidity available.
including a hundred and sixty million of cash on hand.
and $570 million of undrawn corporate thruval work capacity.
78% of our financing is non-martial market.
and KRF has no final facility maturities until 2026.
and a corporate debt due until 2030.
Matt: In addition to originations this quarter, we also invested capital and share
Matt: In the first quarter, we repurchased 10 million of KRF stock, representing a weighted average price of $11.00, $3.00.
Matt: This raises our total shares repurchased in the past two quarters to 20 million.
at a weighted average price of $11.33.
Our Cecil Reserve increased to $144 million.
with two rating downgrades Matt mentioned.
Our Loan portfolio remains relatively stable.
with 90% of the portfolio, risk-rated, three or better.
as an update on our West Hollywood multifamily loan.
Risk Rate at 5 as of quarter end. [inaudible]
We took title to the asset earlier this month.
and our proceeding on our Condo Execution Strategy.
with Unit Closings anticipated for late summer.
As a result of the assignment in lieu of foreclosure
Matt: We expect to realize the loss tied to this investment of approximately 21 million to three-distribular earnings in 2Q.
which is consistent with our Cecil Reserve as of one Q.
Repatriate Capital and reinvest into performing loans.
heads of the first quarter [inaudible]
Matt: KRF debt equity ratio is 1.9 times and our leverage ratio is 3.9 times.
Matt: Following two repayments, totally 283 million early in the second quarter, on a spot basis, the current leverage ratio is 3.7 times
It's just the midpoint of our target range.
in closing.
Matt: We're positioned well for this market environment, given steps that we've taken over the years to manage our liabilities.
Matt: including our most recent activity in the first quarter to increase and extend our corporate facilities.
We'll continue to make progress on our Oreo assets.
and are supported by a deep inexperienced credit team.
of over 110 associates.
Matt: and who, together with K-Star, managed $37 billion of CRE loans.
Matt: and our named special servicer on over 46 billion of CNBS.
Origination Activity is Picking Up Speed
Fanding our investment opportunity into the European loan market.
and the U.S. CNBS Market.
Matt: Finally, the portfolio grew 4% quarter over quarter and we expect to recycle capital into new opportunities throughout the balance of this year.
Thank you for joining us.
and now we're happy to take your questions.
Matt: We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone.
Matt: If you are using a speaker phone, please pick up your handset before pressing the keys.
To withdraw your question, please press star then two.
Matt: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Rick Shane with JP Morgan. Please go ahead.
Good morning, thanks for taking my question today.
Um, what, um...
Speaker Change: You know, I think there are two things that are going on here. You're working through some of the portfolio issues that you've identified previously. You've raised concerns related to the macro environment. Two things. One, when you think about the macro issues.
Speaker Change: Are you looking at this from a big picture perspective and just saying, hey, risk in uncertainty is increasing or are there specific properties within the portfolio that you identify is for whatever reason being a greater risk?
Speaker Change: and then the second part of the question is, give in the...
Both of those pieces.
Speaker Change: For ages, you guys were in the market this quarter, and I think that's constructive for shareholders, but can you talk a little bit about dividend policy and light of the R&B?
How We Characteristics Right Now
Speaker Change: Yeah, happy to. So, I think on the dividend, when we initially cut it, we had a number of different scenarios in mind and
Speaker Change: I think part of that clearly was saking through the REO and giving us time to just defectuate those business plans.
Speaker Change: There's been a lot of change since we initially set that dividend, but I think when we could net net it all together, we still feel pretty comfortable where, you know, where we, you know, where we set it.
Speaker Change: Some drive earnings by 12 cents a share per quarter so...
Speaker Change: We think we're going to do better than that as we implement these business plans. So that's a little bit how we're thinking about the dividend now. You ask about the share buybacks.
Some of the last quarters.
Speaker Change: I think we need to be balanced. The stock we're at trade right now, it's very attractive. So if you saw us buying it back and we've got a long track record of...
Speaker Change: of buying back stock when we thought it was trading at an effective price as it's a very creative to our book's eye for share.
Speaker Change: So I think we'll have to continue evaluate that as an option for capital, especially kind of given where it is today.
Speaker Change: But at the same time, and similar to like you saw us in the first quarter [inaudible]
Speaker Change: We need to invest in our portfolios while we need to make loans. [inaudible]
We need to continue to diversify the portfolio.
from a vintage perspective.
Speaker Change: We talked about, you know, potentially adding Europe and CMS to the portfolio.
Speaker Change: And I think it's important for the market to, you know, to see us front-footed and active and we think the market's pretty attractive from an investing perspective, so
Speaker Change: I think we need to continue to be balanced as we think about allocation of capital across investing and share our repurchases.
Makes sense. Thank you very much.
Speaker Change: We have our next question from Tom Catherwood with BTIG. Please go ahead.
Tom Catherwood: Thank you. Good morning, everybody. Maybe that World War Patrick, you both mentioned Europe and your pair of remarks. And I know this has been a target market for quite some time. What has to be done to start originating there? And do you expect to be active broadly across Europe , or would it be more targeted to start?
Well, thanks, comments, Matt. Yeah, I can take that. It's it's
Tom Catherwood: We've been active in the originating there for a couple of years now, and so I'd expect to close deals in the next quarter or two. I mean, we're recording stuff. It's just a timing.
Tom Catherwood: Western Europe and the UK. So I think you definitely were kind of we've been targeting opportunities. So again in the near term, we expect to add to the portfolio in Europe .
Speaker Change: I appreciate that, Matt, and then obviously it was an active quarter in one queue for Originations, and you mentioned the pipeline being strong as ever, but with that now up to 3.9 times, do you see...
Matt: Originations primarily being tied to repayments, and you mentioned obviously repayment activity tracking ahead of expectations, or how much kind of more do you think you can push that leverage level with Originations?
Matt: Good morning, Tom. I'll take that question. It's Patrick. Yes, we were three times, 3.9 times into the quarter. As I said, we had pretty sizable repayments early in April . So on a spot basis.
Speaker Change: We're actually at 3.7 so we're at the midpoint and part of that is trying to get a little bit ahead of some of these repayments as Matt mentioned feels like we're tracking the head of schedule. We're going to get a little bit ahead of the schedule.
Speaker Change: Some of the repayments that we got in this quarter were deals that we were really forecasting to get repaid in 2026 and we saw an acceleration of those of those repayments so
Speaker Change: We'll be within the range and sometimes we're going to be toward the high end as we anticipate some of those repayments but our target is still the same but knowing that we've got a pretty good pipeline of repayments.
Speaker Change: We're going to be focused on the origination side and making sure that we're staying deployed and that we're maximizing earnings.
Speaker Change: Got it. And just to follow up, Patrick, on those repayments, has your expectation or the pace of those been impacted at all by the tariffs or is it just too early to tell whether there's any link between kind of market dislocation and repayment activity?
Speaker Change: I think it's a little early to tell that there are a number of deals that we're aware of that are in the market seeking refinancing as you recall a lot of these loans when we initially originated them there was typically some lease up strategy involved.
Speaker Change: In the CRE market, we see a lot of liquidity and so while spreads may have backed up 10, 20 basis points, you can think about what those spreads were when we initially had those loans as a lease up
Speaker Change: They're still down and spots are still have an opportunity to improve their cost of capital in this environment so...
Speaker Change: and early to tell whether a dealer to get sort of pushed off because of this, but as of right now, at least in our near term projections, we're not seeing a lot of impact.
Appreciate the answers. Thanks everyone.
[inaudible]
Jade Ramani: The next question is from Jade Rahmani with KVW. Please go ahead.
Speaker Change: Thank you. This is actually Jason Sabshon on for Jade. Thanks for taking my questions to that. So first, it would be helpful to discuss what about the Raleigh Multifamily that drove the downgrade? Is it a matter of basis, lease of operating costs, location, or all these sectors? It would just be helpful to get some more further. Thanks.
Jason Smith, you know, I can jump in. I think...
Matt: The downgrade has been on our watchlist for a while, and now we're coming up on a maturity date.
Matt: So that was really the reason for the downgrade, from the port of the five, and the reason it stood on the watch list for a while
Matt: You know, this is the loan we made, one of the peak of the market, right? This is a, I think, a late first quarter, early second quarter, 22, loan. So there's been obviously big value declines, but in most of our portfolio on the multi-family side, we've given these numbers in the past.
We just saw a tremendous amount of rental growth [inaudible]
Matt: And in this particular pocket, we just haven't seen the same amount of that in terms of just being able to drive, excuse me, to be able to drive N-O-I higher. So it's really a function of that. I mean, it's a good property. It's performing well. It just hasn't had that same, you know, push in the rental rate as we've seen in most other markets. And then we've got a near-traumaturity here, so we'll have to figure out exactly the go-forward from here. And as we mentioned on the call, could be a modification. We could go...
Matt: title and run the property ourselves, but we'll have to negotiate that with our borrower.
Speaker Change: Great, thank you. And just on life signs, you know, over what time period do you think the capital was patient to wait, just patient enough to wait for it pick up and leasing. And, you know, due to softness in the sector, when you're able to discuss the outlook for the rest of the race.
Speaker Change: Yeah, and this is why we tried to give a little bit more information both in our prepared remarks and as well as added some detail in our
Speaker Change: in our presentation. You know, most of our, excuse me, most of our exposure is kind of in these newer built, purpose built assets that.
are really targeting...
Speaker Change: Large or tenets or big pharma, which we don't think is as susceptible as some of the cyclical issues that the sector is facing. Certainly a part of it, but maybe not as susceptible some of the smaller earlier stage. Thank you.
Stage Company, so...
Speaker Change: We'd expect that to come back earlier. I think it's anybody's guess in terms of just...
Speaker Change: You know, at what point, you really start to see a pickup in overall life science leasing and a lot of that I think will depend on, you know, what happens with with the Terra for Jean and what happens, therefore to the, you know, the overall economic environment that that will certainly weigh on.
Speaker Change: I'm generally speaking how we're thinking about it in terms of the three rated loans that you asked.
Speaker Change: We've modified a couple of those already, and so kind of have dealt with our sponsors and getting them to a better spot. And then, as I just mentioned about half of the three braiding loans, we have three assets that work in construction loans.
Speaker Change: And so we still feel pretty good about those. Those are built now and are mostly built and then just in the lease up period, but just given that they were new, you know, quality there is very high. And so we think it's just a matter of time before, you know, it attracts the right tenants.
Great. Thank you.
Steve DeLaney: The next question is from Steve DeLaney with Citizen's Capital Markets. Please go ahead.
Just in a bar, I just can't [inaudible]
Steve DeLaney: First is what you've maybe seen on average over the last couple of years. I'd love you to compare and contrast that, you know, if you would, in terms of the new opportunities on the list.
Mixer, thanks.
Thank you for the question.
Steve DeLaney: I think you have to start with basis. I think the biggest change right now is just the opportunity
Steve DeLaney: at these, you know, much lower valuations. And, you know, you still have real estate values somewhere around or below.
Wait and two, this vintage and the safety of it.
Steve DeLaney: It's going to be quite strong, so that's probably the first thing [inaudible]
The second thing we're seeing is...
There's more opportunity in less transitional assets.
Steve DeLaney: And let me explain that. I think I mentioned this on maybe our last earnings call.
Steve DeLaney: If you think about what we were doing in 21 and 22, a lot of it was like lending on brand new assets that had just been delivered in their initial lease up period and a lot of that was multi-family [inaudible]
Steve DeLaney: and we'd be lending at a 10% occupancy or 20% occupancy and providing that bridge to occupancy stabilization and burning off of concessions.
Steve DeLaney: Fast forward to today. And we're lending on what I call, you know, we went from kind of a transit to a lender to like an almost stabilized lender. We're lending on assets that are 90% least. And maybe there's a little bit of concession in there, but
Steve DeLaney: The vast majority of the cash flows are in place today. And all we're doing is providing our sponsors a bridge to a better capital markets environment and maybe a little bit lower interest rate environment. So let's go ahead and see what we can do.
Steve DeLaney: And as we all know, just with values down so much, I think many institutional owners.
Steve DeLaney: They don't want to sell right now. They hold out another year or two or three. They're getting into this supply dynamic where they're back in the market raising rents pretty substantially and they can kind of dig themselves out of a basis in 21 that is just not very favorable today. [inaudible]
Steve DeLaney: So that's probably part of the big change in terms of the business plan that we're lending on locally here, I don't know how long this will last last.
There's a big opportunity in sizeable transactions.
Steve DeLaney: as we mentioned in the in the prepared remarks, with the CNDS market having widened much more than the loan market.
Steve DeLaney: We're seeing a lot of sponsors coming to us and set you 500 million dollar loan, a billion dollar loan which should have been SASB or should be SASB
issuance.
Steve DeLaney: Coming to Austin saying, can you guys help with this because we don't know what's going to happen tomorrow in the market's volatile and in the CNBS market.
Steve DeLaney: Yeah, that's kind of a local opportunity that we're focused on right now, but I don't, again, I think that that market will heal and be more effective as we progress to be year.
Steve DeLaney: And then lastly, I would just comment that one of the big changes in my mind from like pre-rate high-conflation pressures today will be how the banks participate in the market. They've always been kind of loan-on-loan.
Steve DeLaney: providers, but it is much more pronounced now in terms of just their-
Steve DeLaney: William Smith and their focus on putting some of their capital entities loan on loan facilities, just given how much more capital efficient is for them, how much safer it is for them to lend to other lenders than it is to make a direct more. [inaudible]
So I'm just curious how much of your new financing
Steve DeLaney: is going in side-by-side with new equity into a project rather than you just refinancing the original developer.
Yes.
Steve DeLaney: Our pipeline and our activity is still heavily weighted towards refinance and it gets right now it's around back. If you look at our pipeline it's around 70% refinance like 30-ish percent.
Steve DeLaney: acquisitions, and I'll slow down a little bit, just given the market volatility here, you know, since the tariff increases, but historically that may have been 50% acquisitions and 40% refinance, so it's a little bit turned upside down there.
as it relates like the construction side.
Steve DeLaney: I know you didn't ask this question directly, but it's probably somewhat relevant here. There's debt capital available. You can go get a construction loan, but we're making one right now.
Steve DeLaney: in the fourth quarter we did a big data center loan. You can definitely access the financing markets for construction and the challenges the equity. I just don't think it pencils out very well right now and now you've got a scenario where costs are increasing with tariffs, but it's going to get even more difficult. I think when you talk about the 60-70% decline and
Steve DeLaney: and some of this construction, maybe early on, it was driven by...
Steve DeLaney: in the month of April for sure. Given that the stock has last nice close, 928, down about 15%. You know,
You have any similar to the question asked earlier?
Steve DeLaney: I don't think our view has really changed that much. The stocks come down a little bit, so it's certainly more attractive from a buyback perspective, but we need to be balanced and...
Steve DeLaney: as we approach the market, we need to invest capital, we need to diversify the portfolio, but we certainly feel like we have ample liquidity right now and so we'll take a balance approach to allocate in that capital across the buybacks and the...
The No Reginations
Got it. Really appreciate your comments, Matt. Thank you.
Speaker Change: Our next question comes from Don Fandetti with Wells Fargo, please go ahead
Speaker Change: With repayments coming in a little bit higher, how are you feeling about net portfolio growth? I know you're more on offense now do you think that you're in a situation where every quarter to 25 you're seeing a little bit of portfolio growth?
Don, it's Patrick. I can take that. I think that-
Speaker Change: You know, as we think about the rest of the year, there's probably some incremental growth that we can have, but we're getting pretty close to, I think, what's our target size when you factor in.
Speaker Change: Our leveraged targets, the capital that we have here, I think just what you'll see, though, is us looking to, as we've said, kind of match those repayments. So, if those repayments...
Speaker Change: Start to kick up even more, we'll accelerate on the origination front, but I don't think there's a lot more incremental size because we're approaching our upper limit of our target leverage.
Speaker Change: Got it. And then on some of the originations, the multi-family, this quarter, we'll click the spreads, we're in the 230 basis range. Are those sort of, you know, what are the leverage returns on those loans and are those examples?
For attending today's presentation, you may now disconnect
. . . . . .