KKR Real Estate Finance Trust Inc.

Good morning and welcome to the KKR Real Estate Finance Trust fourth quarter 2023 financial results conference call. 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 Jack Switala. Please go ahead.

Great. Thanks, operator. And welcome to the KKR Real Estate Finance Trust earnings call for the fourth 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-K 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 fourth quarter of 2023, we reported a gap net loss of $18.7 million, or negative 27 cents per share. Distributable earnings this quarter were negative $26 million, or negative 37 cents per share, including a write-off of $59 million, or 85 cents per share. Distributable earnings prior to realized losses were $0.47 per share relative to our Q4 $0.43 per share dividend. Book value per share as of December 31, 2023 was $15.52, a decline of approximately 5% quarter over quarter. Our CECL allowance decreased to $3.06 per share from $3.21 per share last quarter. In mid-January, we paid a cash dividend of 43 cents per common share with respect to the fourth quarter. Additionally, the company's board of directors declared a dividend of 25 cents per share of common stock with respect to the first quarter of 2024. The dividend is payable on April 15, 2024, to KREF's common stockholders of record as of March 28, 2024. With that, I'd now like to turn the call over to Matt.

Thank you, Jack. Good morning, everyone, and thank you for joining us today. Before turning to the current market environment, company results, and dividend commentary, I'd like to highlight KRF's achievements during 2023. We have focused our efforts on maintaining high levels of liquidity, fortifying our liability structure, and proactively managing our portfolio, all of which has been critical to KRF's ability to navigate this challenging market. To be specific, we have built and maintained a market leading liquidity position with the help of KKR Capital Markets, with current cash on hand and undrawn corporate revolver capacity of nearly 600 million. Our financing continues to be best in class, which we further optimized by upsizing a repurchase agreement by 160 million and extending the term. KREF has no corporate debt or final facility maturities for two years. 76% of our secured financing as of year end was completely non-marked to market. And the remaining 24% is only marked to credit. We received $767 million of repayments with office loans representing approximately 25% of total repayments. Our unfunded commitments as a percentage of the portfolio are 10% at year end 2023, down from 16% at year end 2022. More than half of our portfolio is supported by multifamily and industrial properties. Multifamily remains our largest property type representing approximately 41% of the portfolio. And we continue to see stable underlying performance across that segment. with weighted average rent increases of 3.9% year over year in our portfolio. Office represents our second largest property type. And since the beginning of last year has decreased as a percent of the portfolio from 26% to 22% today, including a full payoff last month of $173 million previously risk rated for loan secured by a Washington DC property. Access to KKR's broader real estate platform with approximately 150 dedicated professionals and over 68 billion of assets under management has been instrumental in the management of KRES portfolio. Our capabilities have been further bolstered by our affiliated rated special servicer, KSTAR, with a team of more than 45 professionals and over 45 billion of special servicing rights. providing us with extensive expertise and access to sizable, real-time market information. We have been actively using the many tools at our disposal to execute on a variety of workout options, including modifications, restructurings, as well as taking title and managing real estate. Since our last call, the Federal Reserve has indicated an end to their interest rate hikes, with potential rate cuts beginning in the first half of the year. Market sentiment has improved dramatically as some of the tail risk driven by inflation and higher interest rates has subsided. The broader rally in equities and fixed income is impacting the commercial real estate equity and debt markets as well, with significant tightening in CMBS and loan spreads over the past few months. The fear greed factor has clearly shifted and capital is flowing into the markets. We expect acquisition and refinance activity to increase this year, and we are seeing that in our own lending pipeline across our different capital sources. However, despite this strong momentum, challenges remain given the value declines from the post-COVID interest rate environment. Today's higher interest rates and carrying costs combined with interest rate cap costs and near-term maturity dates, continue to stress real estate capital structures. And now, I'll discuss KREF's earnings power and dividend philosophy as we get into 2024. Last year, KREF's earnings potential benefited from a higher interest rate environment, with average run rate distributable earnings before losses of $0.48 per quarter throughout 2023. We stated last quarter that as we determine the run rate earnings potential of the business into 2024, the main drivers will be interest rates, portfolio performance, and the ability to unlock equity held in our risk-rated five assets. We have been proactive and transparent as we work through this market. and we have implemented a variety of strategies to optimize the outcome of our watch list loans. Today, we have a few assets where the best path forward to maximize value will be to take title, operate the real estate and stabilize cash flows before selling. Each has different circumstances, but this is high quality real estate that we have full confidence will lease and stabilize over time. To put it simply, We have great real estate, we have ample liquidity, and we have the resources and expertise to create value. Once stabilized, we believe we can sell the real estate at a higher value than our current mark. We cycle that capital into cash flowing assets and return to a more normal level of operating earnings. However, getting to stabilization will require time and impact earnings in the interim. To that end, the Board of Directors declared a dividend of 25 cents per share for the first quarter. The dividend is set at a level where we can cover with distributable earnings X losses with our performing loan portfolio under a number of different scenarios, including lower interest rates and the potential migration of loans to cost recovery and REO. To be clear, in the near term, we expect DEX losses to be significantly higher than our dividend. Similar to how we've operated in the past, we are taking a proactive approach and making this adjustment now as opposed to waiting for a typical March declaration date in order to provide transparency. Importantly, as we sell our REO portfolio, we can reinvest the capital. into new loan assets to unlock additional earnings potential. To put some context around this, we believe we can generate an additional 12 cents per share in distributable earnings per quarter. And this is just on our existing basis. Of course, the goal is to gain more than that over time. The assets driving this impact include our Portland retail and redevelopment property, our Philadelphia REO, a Mountain View projected REO, and potentially the Seattle Life Science Loan, which combined represent approximately $150 million of equity. Continuing with our transparent reporting, we've added a new page in our earnings presentation highlighting these assets. With that, I'll turn the call over to Patrick.