KKR Real Estate Finance Trust Inc.

Good morning and welcome to the KKR Real Estate Finance Trust, Inc. Second Quarter 2023 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 a touch-tone phone. 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 Jack Switala. Please go ahead.

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for the second quarter of 2023. 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 Deschis. 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 second quarter of 2023, we reported a gap net loss of $25.8 million, or negative 37 cents per diluted share, including a CECL provision of $56.3 million, or 82 cents per diluted share. Distributable earnings this quarter were $33.1 million, or $0.48 per share. Book value per share as of June 30, 2023, was $16.38, a decline of 4.5% quarter over quarter. Our CECL allowance increased to $3.30 per share from $2.48 per share last quarter. The increase was primarily due to additional reserves on risk-rated five senior office loans, as well as macroeconomic conditions. Finally, in June, we paid a cash dividend of 43 cents per common share with respect to the second quarter. Based on yesterday's closing price, the dividend reflects an annualized yield of 13.5 percent. With that, I'd now like to turn the call over to Matt.

Thanks, Jack. Good morning. And thank you for joining us today. KRF generated another quarter of strong distributable earnings of 48 cents per share relative to our 43 cent per share dividend. Distributable earnings continue to benefit from the higher interest rate environment. While higher interest rates are beneficial from an earnings standpoint, this dynamic has created challenges for commercial real estate with little capital markets liquidity and declining asset valuations. We anticipate the current dislocation and associated volatility will persist for the foreseeable future. Regional banks have begun pulling back from the market, while larger money center banks remain cautious. Borrowers will need to recapitalize, seek equity infusions, or sell assets as approximately one trillion of commercial real estate loans mature in 2023 in 2024. Notably, the CRE lending market is highly competitive for stabilized in-favor assets with insurance capital very active. This environment warrants patience and discipline with a particular focus on liabilities with duration and durability, considerations we have had front of mind in building KRF. Despite the volatility, we have seen progress on a number of initiatives. First, we're in the late stages of a sales process on our risk-rated 5 Philadelphia loan. Second, our borrower is marketing a risk-rated 4 DC office asset with initial indications above our $162 million loan amount after significant progress on the business plan. The property is near stabilization having signed over 70,000 square foot of leases year to date, with total occupancy increasing from the low 60s to the high 80s. Third, many of our other office sponsors are signing leases. Excluding the leases I just mentioned, our office assets have signed over 435,000 square feet of leasing year to date, including the largest lease in Philadelphia in 18 months. Finally, subsequent to quarter end, our Oakland, California office loan was paid down by 68 percent in connection with the lease modification and PACE financing, and we expect full repayment in the summer of 2024. KREF's steady focus on building non-mark-to-market financing sources and maintaining high levels of liquidity over the past few years has proved crucial in navigating this kind of environment. We continue to have ample liquidity, ending the quarter with $800 million of availability, including $208 million of cash and $560 million of corporate revolver capacity. We have no new loan originations this quarter, as we focus on maintaining a robust liquidity position. At quarter end, Nearly 70% of our portfolio was comprised of multifamily, industrial, and risk-rated three office property types. The multifamily portion of our portfolio continues to perform well, with weighted average rent increases of 7.5% year over year. In the second quarter, loan repayments totaled $339 million, creating a net portfolio reduction of $162 million. With floating rate coupons at mid-8% today versus takeout financing closer to 6% for stabilized properties, we are beginning to see borrowers opt for fixed-rate refinancings. Beyond KREF, KKR is actively lending across a diverse CRE capital base, including bank and insurance SMAs and private debt funds, which allows us to stay active in the market and service our strong client relationships. Our integration with KKR's broader real estate business that manages 65 billion of assets provides us with real-time market knowledge across both debt and equity. Our team of approximately 150 professionals has a strong reputation as a best-in-class capital solutions provider. We also continue to benefit from our longstanding banking relationships as part of the broader KKR franchise. As we have previously stated, We expect the portfolio to turn over modestly in 2023 and anticipate future funding should be offset by future repayments for the full year. A lack of capital markets liquidity continues to challenge the office sector. We increased reserves this quarter, primarily driven by a higher reserve on an existing watch list loan that was downgraded to a risk rating of five in the quarter. At this point, we believe we have identified all the potential office issues in our watch list and do not anticipate further ratings migration within the three rated office loans. While we are focused on long-term solutions to resolve watch list loans, we are seeking to maximize shareholder value, and where there is a dearth of liquidity, we have tools at our disposal to seek other options, including modifying loans, and taking title and managing properties. I expect we'll have various outcomes as we work through the five rated loans. KREF was built for moments like this. We were operating KREF with $800 million of liquidity. Seventy-six percent of our secured financing as of quarter end was fully non-mark to market. We upsized the master repurchase agreement from $240 million to $400 million. all while succeeding in terming out our debt, with KRF having no corporate debt or final facility maturities due until late 2025. And we have a robust real estate business with a strong reputation across real estate equity, debt, and asset management. Finally, it is worth mentioning our manager's ownership of approximately 14% of KRF's shares outstanding today, which we believe is the highest percentage held by a manager in the mortgage REIT sector and demonstrates meaningful alignment between KKR and KRF. With that, I'll turn the call over to Patrick.