KKR Real Estate Finance Trust Inc.

Good morning and welcome to the KKR Real Estate Finance Trust Inc. Third Quarter 2020 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. 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. Please go ahead.

Thank you. Welcome to the KKR Real Estate Finance Trust earnings call for the third quarter of 2020. We hope that all of you and your families are continuing to stay safe and healthy. Today, I am joined on the phone by our CEO, Matt Salem. our President and COO, Patrick Madsen, and our CFO, Mustafa Migati. 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 turn the call over to Matt, I'll provide a brief recap of our results. For the third quarter, we had a record gap net income of $31.4 million, or $0.56 per share, which included a $0.1 million benefit from a lower CECL provision. Core earnings this quarter were $32.5 million, or $0.58 per share, driven by the continued strong performance of our portfolio and the significantly in-the-money LIBOR floors. One change to note. As per SEC guidance, beginning with our fourth quarter results in early 2021, we will begin reporting core earnings inclusive of the change in the CECL provision. Consequently, we will recast prior quarter's results to reflect the change in presentations. Please note that had we adopted the aforementioned change in presentation, core earnings per share this quarter would have benefited by one penny and been 59 cents per share. Post value per share as of September 30th, 2020 increased to 1873, which included the impact of $1.16 per share from CECL as compared to 1857 as of June 30th. Finally, I would note that in mid-October, we paid a cash dividend of 43 cents per share with respect to the third 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. We hope you are all healthy and safe. We had a strong quarter on many fronts. We continue to see the benefits of our company's conservative positioning and on both our lending strategy and liability management, which has allowed us to differentiate ourselves during this volatile market. Since the onset of COVID, we have maintained a best-in-class portfolio comprised of $5 billion of lighter transitional floating rate senior loans with a significant overweight to multifamily and office properties. and only 8% exposed to hospitality and retail. Increased our market leading fully non-mark to market financing to 78% in order to further de-risk our liability set. Increased our liquidity position through the inaugural issuance of a $300 million term loan B, which enables us to take advantage of the current lender friendly market all while delivering record quarterly earnings, which has benefited from net interest margin expansion resulting from our strategically negotiated in the money LIBOR floors. As of September 30th, our portfolio balance was approximately 5 billion with only 462 million or 9% of total commitments for future funding obligations. Our almost exclusive senior loan portfolio focuses on institutional real estate and sponsorship and is secured predominantly by Class A, lighter transitional, multifamily, and office properties in the most liquid real estate markets. Our average loan size is $135 million, and approximately 80% of our loans are secured by properties located in the top 10 markets in the United States. Our investment portfolio is 99% senior loans with no direct holdings of securities. As I mentioned, our two largest property type exposures are multifamily and office, which represent 83% of the portfolio collectively and have a weighted average occupancy in the mid-70s. In addition, 86% of our multifamily loans and 75% of our office loans are secured by Class A properties. underlying tenant collections have been consistently high. As a reminder, none of our office properties are located in New York, San Francisco, or Los Angeles, markets which have seen significant increases to co-working tenants in recent years. Over 99% of our collections are current through October. Through our robust quarterly asset review process, We reevaluate every loan in the portfolio to assign an updated risk rating. Our portfolio has a weighted average risk rating of 3.1 on a five-point scale, consistent with the weighted average risk rating at June 30th. Eighty-four percent of the portfolio was risk-graded three or better, and we feel confident about the performance on those properties. We don't anticipate much transition in our ratings in the near term. As we did in the second quarter, we provided a detailed breakout of our watch list loans in our supplemental presentation. We feel good about our position in many of these properties and are seeing improving trends in a number of business plans. However, we haven't been completely unimpacted. As we have previewed prior, our Portland retail property is most negatively exposed and was downgraded from a four rating to a five rating this quarter. While this loan is current as of October, we expect to be entering workout discussions given the pending maturity. We believe we have adequately reserved against any potential impacts from this loan through the CECL evaluation process. For the second straight quarter, we are beginning to see some signs of normalcy in the broader market, both from an origination and repayment perspective. Starting with repayments, during the quarter, we received approximately $274 million of repayments, including an approximately $30 million pay down on one of our New York condo inventory loans. Subsequent to quarter end, we received an additional $65 million of repayments. It is always difficult to accurately predict repayments and even more so in this market environment. But as a reminder, we have several loans in our portfolio near or at stabilization. On the origination side, while we didn't close any new loans prior to quarter end, we did close three transactions in October. With many lenders on the sidelines, we were seeing a favorable market dynamic resulting in better credits and opportunities to create net interest margins in the mid to high 100s as compared to the low 100s earlier this year pre-COVID. Let me spend a couple of minutes providing incremental details on our recently closed deals. All three are good examples of our return to market and continued focus on the same high-quality real estate we have been underwriting since our IPO. Additionally, they highlight the benefits KREF receives from being part of a leading global alternative asset manager and a growing real estate platform. As you may have noted, KREF co-originated these transactions with other KKR private strategies. KREF is our flagship transitional senior loan strategy and has priority over these investments. But at times where it makes sense, we will share risk dependent on factors such as the timing of commitment, the loan size, and KRF's liquidity position. The first two examples are similar to the loans we were making pre-COVID, refinancing newly delivered luxury Class A multifamily buildings, and markets with strong underlying demographics. Our loan provides our sponsors a better cost of capital and time to lease the property and burn off the initial lease-up concessions. Both properties had commenced leasing, and there were no moving pieces as it relates to construction. We were able to underwrite recently signed leases and extrapolate into a stabilized cash flow, leading to a straightforward underwriting on a simple business plan. In a notable transaction, KREF co-originated a $509 million whole loan, with KREF committing $160 million to a leading real estate development company in the San Francisco Bay Area to acquire and renovate a 1 million square foot Class A office in Oakland, California. We are executing a senior loan sale of approximately $135 million to finance our retained $25 million piece. This financing is a great example of the benefits of having access to a broader asset management platform, utilizing the full KKR brain to lend on high-quality, well-located real estate. The best examples of this are from a sourcing perspective, it was an institutional sponsor that was an existing JV operator for our real estate equity team. From an underwriting perspective, effectively single tenant asset that our corporate credit team was already familiar with and had underwritten. And we had local market knowledge. where KKR Real Estate owns office properties. Finally, from an execution perspective, we work closely with our capital markets team to speak for the whole 509 million while having line of sight on the sale of the senior portion to generate an attractive return. Our forward pipeline remains strong with several loans under exclusivity which are expected to close within the next few months. You will continue to see us focus on investing in defensive property types, in liquid markets, and with top tier sponsors while maintaining our focus on capital preservation. Sitting within the broader KKR platform gives us a unique perspective and a look into risk adjusted returns across asset classes. The combination of KREF's in-place portfolio, our cost of liabilities, and the additional new loans underwritten in today's environment, we believe are delivering attractive risk-adjusted returns relative to other yield proxies. We're excited about our franchise and our competitive positioning in the market and the continued growth opportunities for KRF for the remainder of 2020 and going into 2021. Now, let me turn the call over to Patrick.