Yahoo Finance KKR Real Estate Finance Trust Inc. (NYSE:KREF) Q1 2024 Earnings Call Transcript
KKR Real Estate Finance Trust Inc. (NYSE:KREF) Q1 2024 Earnings Call Transcript April 24, 2024
KKR Real Estate Finance Trust Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the KKR Real Estate Finance Trust Inc. First Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. 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 first quarter of 2024. As the operator mentioned, this is Jack Switala. Today, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements, which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements.
Before I turn the call over to Matt, I'll provide a brief recap of our results. For the first quarter of 2024, we reported a GAAP net loss of $8.7 million or negative $0.13 per share. Distributable earnings this quarter were $26.7 million or $0.39 per share. Book value per share as of March 31, 2024 was $15.18, a decline of approximately 2% quarter-over-quarter. Our CECL allowance increased to $3.54 per share from $3.06 per share last quarter. In mid-April, we paid a cash dividend of $0.25 per common share with respect to the first quarter. With that, I'd now like to turn the call over to Matt.
Matt Salem: Thank you, Jack. Good morning, everyone, and thank you for joining us today. I'd like to begin with a brief update on the state of the market. Despite the latest higher-than-expected CPI print, resulting in muted expectations for near-term interest rate cuts, the commercial real estate market continues to heal with increased transaction volume, price transparency and liquidity across most property types. Given narrowing views around interest rates and sustained economic growth, combined with valuation stability, we are beginning to see encouraging green shoots. The lending environment is competitive as a significant amount of capital availability outweighs suppressed transaction volumes. Over the last 24 months, insurance companies, foreign banks and government agencies have been able to meet the needs of the market.
In sympathy with broader macro strength, spreads are tightening with recent lending on stabilized real estate in the mid-100s. With US bank still largely on the sidelines and the increased market activity, our expectation is for this supply demand imbalance to normalize and potentially reverse, creating an attractive opportunity for KREF to fill this void as we resume lending in the next few quarters. But our team has not been dormant. Given KKR's large and diversified CRE credit platform, we have been actively originating loans throughout this cycle. Our bank, insurance and debt funds pool of capital across the US and Europe are actively investing with a budget of approximately $10 billion this year. Our own pipeline demonstrates this return of transaction volumes with an existing pipeline of deals in review or in closing of approximately $20 billion, totaling over 100 opportunities.
This compares favorably to last year's weekly average pipeline of $14 billion. While we expect CRE lending across the US banking activity to remain muted, we are seeing a notable shift in preference from direct mortgage origination to loan-on-loan facilities to institutions like ourselves. This change is driven by more efficient capital treatment, less intense resources and relative safety. In terms of property type fundamentals, the office sector remains challenged, though we are beginning to see more liquidity now than six months ago. In KREF's portfolio, we continue to feel we have identified the potential office issues within our watch list and do not anticipate further negative ratings migration to the watch list from the office sector.
In terms of life science, we remain positive on the sector, given the long-term demand from innovations in science and technology. Though the market has seen a decrease in funding, we downgraded one additional life science loan to our watch list this quarter as a result of challenges posed by the short-term leasing slowdown. Multifamily fundamentals have slowed, given new supply dynamics, but liquidity in the sector is very high. Market research suggests a 50% decline in multifamily construction starts in 2024 versus 2022, leading many investors to look past the elevated rate environment and current rent pressures. Multifamily represents 43% of our portfolio and has performed well with weighted average rent increases of 3.4% year-over-year.
Now, turning to KREF's earnings results for the first quarter of 2024. KREF comfortably covered our $0.25 per share dividend this quarter with distributable earnings of $0.39 per share. As we stated last quarter, we set our dividend at a level that we can cover with distributable earnings ex losses with our performing loan portfolio under a number of different scenarios. Our expectation is that in the near term, DE ex losses will continue to be significantly higher than our dividend. With the help of KKR Capital Markets, KREF continues to maintain high levels of liquidity with $620 million of availability at quarter-end, including $107 million of cash on hand and $450 million of undrawn corporate revolver capacity. We have diversified financing sources across a number of facilities totaling $8.7 billion, with $2.9 billion of undrawn capacity.
78% of our secured financing is completely non-mark-to-market, with the remaining balance mark-to-credit only. KREF has no corporate debt or final facility maturities until 2026. Composition of KREF's financing structure remains a true differentiator. This quarter, we received $336 million in loan repayments, including full repayments of $173 million on our previously 4-rated D.C. office loan and $151 million on our previously 4-rated New York City condo loan. We funded $103 million for loans closed in previous years for a net reduction of $232 million. Repayments have now exceeded fundings in four of the last five quarters. And we expect this to continue with aggregated projected repayments throughout 2024 of over $1 billion. KREF has an externally managed vehicle benefits from access to resources, relationships and expertise of KKR's global real estate platform that manages nearly $70 billion of assets across both debt and equity.
Our dedicated team of approximately 150 real estate professionals has a strong reputation as a full-service capital solutions provider. This integration provides us with an optimal toolkit to implement a variety of strategies and maximize value across our portfolio. In addition, K-Star, our affiliated rated special servicer with a team of more than 45 professionals and over $45 billion of special servicing rights, representing over 5,000 properties provides us with extensive access to an expert team with sizable real-time market information. We will continue to proactively and transparently navigate this challenged real estate market. As we mentioned last quarter, we will patiently optimize our REO portfolio, and as we sell those assets, we believe we can reinvest the capital to generate an additional $0.12 per share in distributable earnings per quarter.
And with that, I'll turn the call over to Patrick.
Patrick Mattson: Thank you, Matt. Good morning, everyone. I'll begin with updates to our CECL allowance and watch list. CECL reserves increased $33 million this quarter, driven primarily by collateral dependent loan reserves, resulting in an aggregate $246 million of CECL. This was largely related to a further downgrade of our $37.5 million retained mezzanine loan backed by an office property located in Boston. As we mentioned last quarter, KREF is currently in modification discussions, and we anticipate subordination of a portion of our mezzanine loan to new equity contribution from the existing sponsor. Regarding our risk rated 5 Seattle life sciences loan and Mountain View office loan, we are working with those respective sponsors to take ownership through a deed in lieu foreclosure in Q2 as we explore the path of joint venture partners and continue to evaluate the go-forward business plans.
Further details on these loans as well as our existing REO portfolio is reflected on Page 13 of our supplemental. We experienced no realized losses in the first quarter of 2024. However, during the second quarter, as we anticipate taking title to the Mountain View in Seattle assets, we expect a significant portion of our collateral dependent loan reserve to flow through distributable earnings. Coupled with the anticipated modification on our Boston office loan, we project realized losses to total approximately $140 million in Q2 or approximately $2 per share, in line with our existing reserves across these three assets. For our Philadelphia assets that became REO last quarter, we have an agreement in place to sell two of the four buildings with a closing date tracking for Q2.
We're comfortable holding the remaining office building and parking garage longer term. However, we may have an opportunity to sell those properties as well, and we'll update everyone on the next call. KREF is well-capitalized with a debt-to-equity ratio of 2.1 with look-through leverage ratio of 4.1 as of Q1, slightly lower than year-end. We expect deleveraging to continue through the remainder of 2024 as repayments are anticipated to outpace future funding obligations. KREF's weighted average risk rating on the portfolio remains 3.2, and 85% of our portfolio is risk rated 3 or better. KREF has built a fortified liability structure that is diversified across two CRE CLOs, a number of matched-term lending agreements and asset-specific financing structures as well as our corporate revolver.
KREF's substantial liquidity position of over $600 million at quarter-end, including $450 million of undrawn revolver capacity, is a key component of our ability to navigate this dynamic credit and interest rate environment. Coupled with our best-in-class financing, over 75% of which is fully non-mark-to-market, and our long-standing relationships with our financing partners and borrowers, KREF has the tools at its disposal to withstand the challenges of today's market environment. Thank you for joining us today. Now, we're happy to take your questions.
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