KKR Real Estate Finance Trust Inc.

Good morning and welcome to the KKR Real Estate Finance Trust Incorporated second quarter 2024 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 second 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 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 2024, we reported gap net income of $20.2 million, or 29 cents per share. Distributable earnings this quarter were negative $108.7 million, or negative $1.57 per share. including realized losses of $136 million, or $1.97 per share. Distributable earnings prior to realized losses were $0.40 per share relative to our Q2 $0.25 per share dividend. Book value per share as of June 30, 2024, was $15.24, representing an increase of $0.06 quarter over quarter. Our CECL allowance decreased to $1.65 per share from $3.54 per share last quarter, primarily driven by realized losses. 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 KREF's second quarter results, I'd like to begin with a brief market update. In mid-July, U.S. core CPI came in at the lowest level since 2021, signaling that inflation is subsiding. Fixed income and equity markets reacted positively. Within commercial real estate, values for most property types appear to have bottomed out at these lower levels. Transaction volume is slowly increasing and investor demand is present. albeit largely for more value-add and opportunistic equity with most core pools of capital dormant. While rental increases have largely subsided, lower new construction starts may lead to supply-demand imbalances over the next few years. On the lending side, new originations benefit from lower LTVs, more cash flow per unit of debt, and a basis well below replacement costs. Given these factors, our expectation is that this vintage of real estate lending will be a very strong credit. We continue to think that the market opportunity, while attractive today, will accelerate as transaction volumes normalize and bank activity remains muted. Banks historically represented 40% of the market, and we expect their participation to come down materially. Our best guess? is that the bulk of the opportunity will occur over the next 18 to 24 months. This dynamic will present KREF with an opportunity to step in as we look to turn to offense and resume lending over the next few quarters. Notably, U.S. banks are demonstrating a shift of preference from direct mortgage origination to originating loan on loan facilities. So senior financing for our investments is readily available as we return to the market. As a reminder, KRF sits within KKR's broader real estate business that manages over $70 billion of capital across both debt and equity globally. Within real estate credit, we have a number of different pockets of capital across first mortgage origination and securities investing. as well as our KSTAR asset management and special servicing platform. Our team of over 100 individuals is actively investing from our bank and insurance SMAs and private debt funds, which allows us to stay active in the market and service our strong client relationships. Our own real estate credit pipeline is robust, totaling over $20 billion, which is up over 40% compared to last year. year's weekly average. And we are converting the pipeline into investment activity. In the second quarter alone, we invested over $4.7 billion across our real estate credit complex. Now, turning to our second quarter results, KREF's distributable earnings prior to realized losses of 40 cents comfortably covered our 25 cent per share dividend. As we stated earlier this year, we set our dividend at a level which we believe we can cover with distributable earnings prior to realized losses with our performing loan portfolio under a number of different scenarios. In the near term, we expect DEX losses to continue to be significantly higher than our dividend. This was an important quarter for us. as we completed the transition of two watch list loans to REO, and while we realized losses, we were appropriately reserved. We have led with transparency, and KREF has remained disciplined in adjusting CECL reserves. Importantly, we did not have any negative watch list migrations this quarter. Book value per share grew by six cents quarter over quarter to $15.24. at the end of the second quarter. This quarter, we received $384 million in loan repayments, with full repayments across four loans, including hospitality, industrial, and multifamily property types, one of which was previously a four-rated loan. We funded $121 million in loan principal for a net reduction of $263 million. Repayments have now exceeded fundings in four of the last five quarters. Future funding obligations have declined to approximately 9% of the funded portfolio. Repayments have also allowed us to de-lever the balance sheet with current leverage of 3.9 times in line with our target leverage. Within our current pipeline across the real estate credit business, We are focused on favored asset classes with strong fundamentals. Our current KREF portfolio is 60% multifamily and industrial, resilient property types with long-term tailwinds. To note, our multifamily portfolios performed well with weighted average rent increases of 3.1% year over year. In terms of other property types, while there is currently decreased tenant demand in the life science sector, We remain positive given the innovations in science and technology, and our loan exposure is located in the deepest markets of Boston and San Francisco, with around half of our loan portfolio in this sector comprised of new trophy real estate. KREF has robust liquidity with $644 million of availability, up sequentially from the prior quarter. With the assistance of KKR Capital Markets, We have built a diversified financing structure, with sources totaling $8.4 billion and $2.8 billion of undrawn capacity. Seventy-nine percent of our secured financing is completely non-mark-to-market, and the remaining balance is mark-to-credit only. ARIF has termed out its debt structure as well. No corporate debt or final facility maturities until 2026. Now, I want to take a step back and discuss how the company is positioned. We've come a long way through the stress induced by the work from home dynamic and the significant Fed hiking cycle. We've approached our issues in the portfolio proactively and transparently. Leveraging the full breadth of the KKR platform, we have taken various approaches to working out our watch list loans, including DPOs, modifications, and foreclosures, always with the mindset of optimizing shareholder value over the long term, despite any near-term noise it may cause. We reduced the dividend in order to give us time to create value in our REO portfolio, and we've maintained ample liquidity throughout. With repayments exceeding funding as anticipated, We've been able to reduce our leverage ratio to within our target range. While I can't say we're out of the woods yet, I do think we're at the edge of the woods and we're starting to see the proverbial light. To that end, we've begun to discuss what a return to offense looks like in the second half of the year. We are evaluating all our options and thinking through relative value to maximize return for our shareholders. With over 75 years of collective experience across our leadership and asset management team and our access to the broader KKR real estate platform, CAREF has the tools to continue to navigate the challenges of today's market. With that, I'll turn the call over to Patrick.