KKR Real Estate Finance Trust Inc.

Good morning and welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2020. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Michael Shapiro, Head of Investor Relations. Please go ahead.

Thank you, Operator. Welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2020. We recognize that these are unprecedented times. We hope that all of you and your families are safe and healthy. As you could expect, we are hosting today's call from various locations, so please bear with us should we experience any technical difficulties. Today, I am joined on the phone by our CEO, Matt Salem, our President and COO, Patrick Madsen, our CFO, Mustafa Nagadi, and our recently appointed Vice Chairman of the Board, Chris Lee. I would 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-K precautionary factors related to these statements. Before I provide a brief recap of our results, I want to note two important items this quarter. First, as you may have seen, we look to simplify our income statement reporting by reclassifying our net core earnings as core earnings. Our core earnings this quarter and in quarters going forward is and will be comparable to the net core earnings numbers we've presented in 2019 and prior. Our financials reflect the adoption of the current expected credit losses or CECL standard that went into effect for us and similar sized non-bank public companies on January 1st, 2020. Mustafa will share more information on CECL during his prepared remarks. For the first quarter 2020, we had a gap net loss of 35.2 million or 61 cents per share, which included a 55.3 million or $0.96 per share provision for CECL. Core earnings were $25.3 million, or $0.44 per share. Book value per share as of March 31, 2020, including the impact of $1.22 per share from CECL, was $18.45. Finally, I would note that earlier this month, we paid a cash dividend of $0.43 per share with respect to the first quarter. With that, I would now like to turn the call over to Matt.

Thank you, Michael. Good morning and thank you for joining us today. Our first priority is the health and safety of all of our stakeholders. While we have spoken to many of you recently, our thoughts and prayers are with you and all those who have been impacted by the COVID-19 pandemic. Our entire team is working remotely and continues to be highly efficient. Given the recent volatility, we have increased our level of communication with our board members, shareholders, borrowers, and lenders to ensure transparency and proactively address potential issues. While it seems like many months ago now, we announced this past quarter that my partner in the business, Chris Lee, has joined our board of directors as vice chairman. I want to thank Chris for his leadership with KRF since its inception. We will continue to work closely with Chris on all of our investing and strategic initiatives. Also, as part of the board transition, Craig Blanchard from McKenna recently stepped down from the board. We want to thank Craig for his leadership since the IPO and to thank McKenna for being one of our lead pre-IPO investors. Craig, we wish you all the best. Since our IPO almost three years ago, we have been focused on conservatively managing the company. across both our assets and liabilities. As of quarter end, the company had approximately 450 million of liquidity, including approximately 370 million of cash. While we have been laser focused on lowering the risk profile of our liabilities by diversifying and increasing our funding sources away from traditional bank repurchase facilities to those that are non mark to market. As of quarter end, 73% of our outstanding secured financing was completely non-mark-to-market. While none of us could have predicted this pandemic, our portfolio was purpose-built for the later stages of an economic and real estate cycle. Our conservative investment strategy is primarily concentrated on the lighter transitional segment of the market, lending on institutional quality real estate located in the most liquid real estate markets, owned by well-capitalized, high-quality sponsors. Today, our average loan size is $130 million, and approximately 80% of our loans are located in the top 10 markets in the U.S. Our investment portfolio is 99% first mortgage senior loans. Our two largest property type exposures are multifamily and office, which represent 85% of the portfolio collectively. In addition, 88% of our multifamily loans and 75% of our office loans are secured by Class A properties. Hotel and retail properties represent only 8% of the portfolio. Also, the company benefits from its affiliation and integration with KKR, not only through the shareholder alignment that comes from KKR's 36% ownership stake in KREF, but through the integration with KKR's significant and growing real estate platform. As of year end, KKR's global real estate business had over $10 billion of assets under management and controlled approximately $8 billion of real estate throughout the U.S. Our extensive portfolio across real estate equity and credit gives us a differentiated view of real estate fundamentals, trends, and values across a broad range of markets and business plans. Turning to our portfolio activity for the quarter, we originated three loans totaling just over $350 million. All of these loans closed prior to March and were previewed during our fourth quarter earnings call. As the market became more volatile, we began prioritizing the preservation of our high amount of liquidity. Before I turn the call over to Patrick, let me spend a few minutes on our asset management. While we remain confident in our underlying portfolio, we do not expect to be completely unaffected by the impact of COVID-19. It is more important than ever to have the experience and ability to manage assets. As a reminder, we hired Christine Patterson to oversee our asset management activities in 2018. Chris brought over 20 years of asset management experience to our team and is responsible for managing all of our sponsor discussions, which has been very active. Given our focus on the larger loan segment of the market, we have a manageable portfolio of 40 loans. This allows us to have very frequent conversations with all of our borrowers and manage our portfolio efficiently. The experience of our team and that of our sponsors through many different economic cycles is an invaluable asset in times like these. All of our borrowers made required interest payments in both the first quarter and April. An analysis of our underlying property collections during April in our multifamily portfolio showed consistent trends to that of March, while our office portfolio showed only minor decreases in underlying tenant collections. Consistent with our robust quarterly asset review process, we re-evaluated every loan in the portfolio to assign an updated risk rating. Our portfolio, which totals $5.2 billion, at the end of the quarter has a weighted average risk rating of 3.0 on a five point scale, an increase from the 2.9 risk rating at the end of the fourth quarter. We did move 14% of the portfolio to a four rating, given our view of the environment and the property's underlying business plans. The migration was driven by our more COVID sensitive property types, such as hospitality, retail, and for sale housing, to which collectively we have very limited exposure. In our supplemental, we provided some incremental disclosure on our two hospitality loans. Both loans are financed on non-mark-to-market facilities and were previously cash flowing and stabilized properties. The loans collectively represent approximately 4% of the overall portfolio. We are working closely with both our hotel sponsors to help them navigate this environment and expect to modify those loans, which will include new sponsor equity and partial debt service deferral. During the quarter, we received 180 million of repayments. It is always difficult to accurately predict repayments, even more so in this market, but as a reminder, we have several loans in our portfolio near or at stabilization. Those sponsors are in active dialogue with lenders to refinance our loans. We are taking a conservative posture today and will remain very selective in deploying our capital. However, should some of our more stabilized loans repay, we believe we will be well-positioned to take advantage of what should be an attractive lending environment. Finally, We believe that the actions we took coming into this environment have and will continue to position KREF well. With that, let me turn the call over to Patrick.