KKR Real Estate Finance Trust Inc.

Good morning and welcome to the KKR Real Estate Finance Trust Inc. first quarter 2026 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 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note, this event has been recorded. I would now like to turn the conference over to Jack Svitala. Please go ahead.

Great. Thanks, operator. And welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2026. As the operator mentioned, this is Jack Switala. This morning, 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 gap 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 will go through our results. For the first quarter of 2026, we reported a gap net loss of $62 million or negative 96 cents per share. Book value as of March 31st, 2026 is $11.87 per share. We reported a distributable loss of $4 million or negative 6 cents per share. Distributable earnings before realized losses was $13 million, or 20 cents per share. Finally, we paid a 25-cent cash dividend in April with respect to the first quarter. With that, I'd now like to turn the call over to Matt. Thanks, Jack.

Good morning, everyone, and thank you for joining us. As we outlined last quarter, 2026 represents a transition year for the company. With the goal of narrowing the gap between share price and book value per share, our focus is on two key priorities. First, executing an aggressive resolution strategy across our watch list assets and certain legacy office exposures. And second, positioning a portion of our REO portfolio for liquidity. We have significant liquidity. sitting at $653 million today, and extensive capabilities across KKR to execute both our asset management and REO strategies. Today, I want to provide additional detail on our progress against those objectives and what you should expect over the course of the year. This quarter, book value declined by 9% as we positioned our watch list loans for resolutions. Our action plan is designed to reposition the portfolio to optimize medium and long-term performance. However, as we execute, we may choose to incur book value declines as we seek liquidity on legacy assets to create a higher quality portfolio. As we complete this transition, we see a clear path to redeploy capital in the newer vintage, higher quality investments. which we believe will support a return to book value per share stability, and over time, drive earnings and book value accretion. Overall, our specific goals for 2026, as outlined on page eight of the supplemental, are to reduce our watch list and legacy office exposure, rotate the portfolio into newer vintage, higher quality assets, and reduce our REO footprint. With that, I want to walk through our action plan for 2026 in further detail. First, reduce legacy office exposure from 21% to under 10%. We expect over half of this reduction to come from par repayments, with the remaining driven by resolution of our watch list loans. We've already begun to action both prongs. Our largest office loan, a $225 million loan in Bellevue, was refinanced in the first quarter at par with a CMBS single asset, single borrower transaction. And the property securing our largest watch list office loan is currently being marketed for sale. Second, we plan to resolve all of our current watch list loans by year end. by positioning these assets for sale or modification and accelerating their resolution. Third, address our life science exposure. Our goal is to have 100% of this exposure modified. We already have made progress here, having modified 19%. And when including our Cambridge asset this quarter, we have modified 30% of our life science exposure. We also took a material increase in reserves for our Seaport loan in anticipation of a potential modification. Finally, we are continuing to originate new investments as we reposition the portfolio. As a result of this activity, loans originated between 2024 and 2026 are expected to represent approximately 50% of the portfolio by year end. This highlights the significant turnover into newer vintage assets, which we believe will have improved earnings potential. Let me turn to liquidity and capital allocation, which is another priority for us as a management team for 2026. We announced a dividend reduction to 10 cents per share per quarter, payable on July 15th. This decision is not driven by liquidity constraints. In fact, as we look ahead through the year, we expect to have over $500 million of capital to invest, largely driven by over $2 billion of expected repayments in 2026. Rather, the dividend decision reflects a disciplined approach to capital allocation. At this stage, we see more attractive opportunities, including repurchasing our stock and funding new originations. we have ample liquidity to pay dividends at the current level the new dividend level has the added benefit of being aligned with our expectations for distributable earnings per share before realized losses as we work through repositioning our portfolio while we expect 40 cents per year of dividends to be covered by earnings excluding losses quarterly results may vary in the near term with earnings expected to trough in the second half of 2026 into the first half of 2027. Once we get through this period, we expect distributable earnings per share to increase. Regarding capital allocation, given our current trading levels relative to book value, we believe share repurchases represent an attractive opportunity to drive accretion to book value per share while also providing greater strategic flexibility. We were largely inactive with respect to share buybacks this past quarter due to trading restrictions while we were actively evaluating our dividend policy. With that process now complete and our dividend framework established, those constraints have been lifted. On April 14th, our board authorized a new $75 million share repurchase program, providing us with meaningful flexibility to deploy capital. As a management team together with our board of directors, we have not taken this dividend decision lightly. But given where the stock is trading, we believe the dividend cut and meaningful share buybacks are in the best interest of shareholder value creation. With that, I will turn the call over to Patrick.

Thanks, Matt. Good morning, everyone. Let me start with a few changes to the watch list. This quarter, we downgraded our Philadelphia office assets with two smaller Texas multifamily loans from risk rate at three to four. As previously previewed on last quarter's earnings call, we also downgraded our Boston Life Science asset from risk rate at three to five. We upgraded our Cambridge Life Science from risk rate at five to three, following the loan restructuring that includes new sponsor equity commitment and a loan pay down. As a result, we recorded CECL provisions of 74 million, bringing our total allowance to 260 million. These actions are part of our broader action plan to proactively reposition the portfolio. Turning next to our REO portfolio, we are actively managing these assets with a clear focus on monetization and value realization. To help frame it, We've grouped these assets into near, medium, and longer-term monetization buckets, starting with the near-term bucket. West Hollywood Condos, where units are currently listed and actively being marketed, with proceeds returning equity as closings occur. Raleigh, North Carolina Multifamily, where we're completing targeted upgrades to common areas and expect to list the asset for sale by year end. Philadelphia office, where our business plan is largely complete, the asset is now approximately 85% leased, and we plan to sell the property this year. In the medium term bucket, we have Mountain View, California office, where our platform, market positioning, and patience have driven meaningful value creation. As we announced in March, we signed a long-term full property lease with OpenAI. We expect to bring this asset to market within the next 12 to 16 months as we complete the remaining work and the tenant takes occupancy. Portland redevelopment, where we've executed on our plan and are near final entitlement on over 4 million square feet of mixed-use space. and expect to begin our monetization strategy over the course of the year. And finally, in the longer-term bucket, Seattle Life Science, where our focus is on leasing and stabilizing the asset, and we expect to hold it longer given current market conditions. Boston Life Science, currently a risk-rated five loan, which we expect to transition to REO in the second quarter, This is expected to result in a realized loss of approximately 37 million, though we were adequately reserved as of the first quarter. Similar to Seattle, we plan to stabilize the asset and hold the property until market conditions improve. As we monetize these assets and redeploy the capital into new investments, we estimate the potential to generate more than 15 cents per share of incremental quarterly earnings over time. Nearly half of that being driven by our Mountain View REO asset. This reinforces our focus to convert these assets into liquidity and redeploy that capital into higher earning opportunities. Turning to financing and liquidity, at quarter end, we had $653 million of liquidity. including 135 million of cash on hand and 500 million of undrawn capacity on our corporate revolver. Additionally, we had over 500 million of unencumbered assets on the balance sheet. Total financing availability was 7.2 billion, including 2.6 billion of undrawn capacity. Originations totaled 184 million for the first quarter. while repayments were $415 million, with approximately 75 percent of the repayments driven by legacy office. Looking ahead, in the first three weeks of the second quarter, we've already closed or circled over $400 million of new loans. We continue to benefit from our connectivity with KKR Capital Markets, and 77 percent of our financing remains non-mark-to-market provides stability across market environments. We believe we remain well capitalized and positioned to manage the portfolio. Importantly, we have no final facility maturities until 2027 and no corporate debt due until 2030. Our debt to equity ratio was 2.2 times and our total leverage was four times consistent with our target range. As we move through this transition year, we believe we are well positioned. Our focus remains on executing our resolution strategy and redeploying capital into high-quality opportunities, including share repurchases, with a clear path to improving and rebuilding earnings power. We believe the actions we're taking today position the company for long-term value creation. With that, we're happy to take your questions.

We will now begin the question and answer session. To ask a question you may press star then 1 on your touchtone telephone. If you are using a speakerphone please pick up your handset before pressing the keys. To withdraw your question please press star then 2. At this time we will pause momentarily to assemble our roster. Thank you and good morning everybody.

Maybe starting with the portfolio target of 50% newer vintage loans by year end, by our math that implies something in the neighborhood of a billion to a billion two of origination activity over the coming quarters. Are we in the ballpark with that?

Hey, Tom, thanks for the question. It's Matt. I can take that, and thanks for joining the call. That's certainly in the ballpark of what we're looking at. Obviously, it certainly will depend a little bit on the share buyback amount, but that's a good projection for now.

Perfect, perfect. And actually, bear point on the share buyback, and it's kind of the use of liquidity is something we're thinking of, you know, with leverage ticking up to, you know, kind of the top end of the range in Q1. Will those originations and, you know, the $75 million allocation for buybacks, will those be tied to REO asset sales? Or are you comfortable using liquidity on your balance sheet and then just kind of backfunding that as you sell assets?

Yeah, I can start with Matt again. Let me start off a little bit. I think most of that liquidity, as we commented on the prepared remarks, is really coming from just natural loan repayments. So over the course of the year, we think we're going to have $2 billion of repayments. We got about $400 million or so in the first quarter, second quarter. And to be clear, it's always a little bit hard to predict these things quarter to quarter, but... We look at the second quarter right now, and from what we can see, it could be close to half of that total repayment for the year could come through the second quarter. So I'd say most of this liquidity that we're looking at, which translates into like $500 million of investable capital, if you will, and then we can talk about the sources to your point, is really going to come from that, from the just low repayments and natural velocity within the loan portfolio. Okay.

Okay, so you don't need to line up the timing of REO sales in order to achieve that 50% new loan target? No. Got it. Perfect. And then last one for me. On the watch list, you know, roughly six assets on there when you account for the Boston Life Science loan in 2Q or that's going to go REO. You obviously mentioned Minneapolis office is on the market. For the remaining six, what are your expectations as far as the amount that are repaid versus those you expect to modify or bring on balance sheets?

Yeah, let me jump in again. Maybe just looking on, you know, on page 12 here, you know, the goal is to try to monetize, you know, the vast majority of these. I think on a life science piece of it, you know, we mentioned, you know, We will be taking title to one of those over the course of time here. But outside of that, I think a lot of this will be some combination of modifications, note sales as well. But I think the goal really is to clear all this up by the end of the year. And things like the multifamily component here, I'm sure we'll get questions on this later, so I can just address it later. address it now. These are just coming up on maturity and these are in the process of getting sold. So sponsors outselling these assets. We downgraded these just because the sales price is going to be close to the debt and we may take small losses or not on those loans. We want to make sure we identify those. We don't think that's really indicative of the rest of multifamily. We've always been on these calls saying there can be noise in multifamily, but we don't think there's like material losses in the loan portfolio on the multifamily side. And this is probably a good example of what we're looking at of like, there's going to be a little bit of noise here. We could take small losses as they sell these assets into the market and it trades right around the debt. But some of these will just be sales from sponsors, if you will.

Got it. Got it. Appreciate those answers. Thanks, Matt. Thank you.

Next question is from Chris Muller, Citizen Capital Markets.

Hey guys, thanks for taking the questions. So I just wanted to start with the dividend and just make sure I heard you guys right. So the new 10 cent dividend is well below the 20 cent X loss that you guys put up in the quarter. I also heard the comments on both the new buybacks and also near term pressure as you guys get more aggressive on resolutions. So I guess the question is, do you guys expect earnings X losses to be around that 10 cent level? Or does that just give you some optionality? And I think I just missed what you guys said in the prepared remarks.

Yeah, it's Matt. Let me jump in. We think, you know, earnings are going to trough towards back half of this year, you know, into, you know, into next year. And a lot of that, we start to come out of it as we think about liquidate more of the REO portfolio, especially as you think about Mountain View, you know, where we've obviously signed the lease there. And, you know, and that'll be positioned for liquidity over the next call it 12 to 18 months so that's you know when you think about the light at the end of the tunnel that's a little bit of the timing as to we can build back up um earnings when we mention the 10 cents here you know part of this is just capital allocation right like look about think about where the stock trades today um and we've got pretty good uses of capital right now in terms of just share repurchases so you know obviously it ties into some just overall capital allocation discussions But when we think about it just versus earnings, we expect to cover that on kind of an annualized intermediate basis. But there certainly could be a little bit of noise in certain quarters where we're not fully covering that as we continue to push through and reposition the portfolio.

Got it. And then I guess on the $42 million CMBS investment, Was that a more attractive investment than deploying into bridge loans or was it more just a place to park some cash until it can be redeployed? And should we expect to see more of this going forward?

Yeah, so we've been, that number sounds fine. Let me double check the amount for the quarter. We've been evaluating different options for portfolio diversification. whether that's expanding into Europe and leveraging the platform that KKR has built in that market, or just duration as well, and just access to different investing markets like CMBS. So from a relative value perspective, we thought that was a, you know, particularly unique opportunity for us. And I think you're right on terms of the 42. I just want to double check that. But yeah, I mean, we're evaluating everything on a relative value basis. The CMBS is providing a little bit duration. I think in this case, it was a little bit more single asset, single borrower. So solving more of the relative value component of it.

Got it. Makes a lot of sense. And thanks for taking the questions.

Next question is from Jade Ramani, KBW.

Yes. Have you seen any green shoots in leasing in life science?

Hey, Jade. Thank you for joining today. We are. I think it's a little bit market dependent. They're all in a little bit different stages of recovery. I think in South San Francisco, you're seeing two things happening. One, you're seeing a revitalization of office, particularly as it relates to AI tenants and growth, which is creating tension in the overall market. And as you well know, some of these assets, including some that we have, can be leased as office. So there's some pretty tight pockets of office there. And then we're also starting to see life science companies turn back on as well. When we think about our other exposure, our larger exposure, it's in Boston. And I'd say there it's probably a little bit behind what we're seeing in South San Francisco. But we are seeing tenants in the market. Most of the assets that we have there are oriented to big pharma. And there are tenants in the market today, like actively engaged, you know, trying to lease space, including, you know, one of the assets that we have. So we are seeing tenants starting to come back, but it still feels, you know, early, but at least you're having some sense of recovery starting.

And in terms of your REO expectations, From your standpoint today, is it your view that there'll be just one additional life science REO?

That's the current expectation, yes.

And then can you discuss some of your approach to credit risk management? Because I have seen migration from risk three loans to five as maturity approaches. And usually what we see is a risk three to a risk four, then to a risk five. So the skipping ahead makes me a little worried about the risk three loans in the portfolio. I know it's multifamily and you don't expect material losses there, but just generally speaking, how are you thinking about that?

Yeah, that's a great question. I would say the normal progression for us, and obviously the peers as well, is you go three, four, five. And I'd say the vast majority of cases, that's what's happened. And by the way, we do analysis every quarter, evaluating what's happened with our four loans. And it's obviously a dynamic number, but up to this point, roughly half have gone to five and half have gone to three, which is, I think, what a four is supposed to be, right? It's not just an indicator that it goes to five. Obviously, depending on the property type, it may be more heavily weighted to that over time. But in terms of, I think we've had a couple go from three to five. The only one we had this quarter was really the life science deal, which we flagged last quarter as going to get downgraded, depending on what these modification discussions look like. It would be a four or a five. We weren't exactly sure at the time. And we had, you know, went ahead and moved it over to a five. So I'd say it's unusual. The multifamilies we put into the four bucket just because, one, it's not material, we don't think, and two, we're not exactly sure what's, you know, what's going to happen now as these sales processes play out. But I think you're right in the sense that the vast majority of time you're going to have these natural, you know, linear progressions, but sometimes there's jump risk around a maturity date or around a modification discussion. And, you know, we obviously need to just reflect our best case scenario at the time or best guess at the time.

Thank you. And then on the Minneapolis office, it's a risk five loan. So I believe there should be something around 23% loss assumption there, reserves that you currently have. And I think that your slides show that the price per square foot at your basis is 182, but that's before CECL. So, you know, if we stress that for a 25% severity assumption, I'm just curious if you think that is where the market is or if, you know, based on the sale process, there might be some further loss.

Jay, good morning. It's Patrick. I'll take that one. So, yeah, I think the number you're kind of backing into is a blend, is an average. Obviously, as we've seen in the office segment, some of those loss numbers have been higher than average, right, if you think about What's also in that bucket, we've got multifamily as an example. So it's just a proxy. Clearly, that's an asset that we've been working for some time here, and we think it's appropriately reserved for, but the number that you're quoting is just an average.

Okay. Thanks a lot.

Again, if you have a question, please press star then one. Next question is from Gabe Poggi, Raymond James.

Hey, good morning, guys. I've got a couple questions. On capital allocation, capital management, as you guys think about the buyback versus making new loans to kind of keep a DE run rate going, how do you manage that relative to leverage, right? If your total capital right now to equity is around 4x and your leverage to commons 5x plus, how much of that buyback, how do you think about leverage relative to that buyback? That's question one.

Yeah, it's not. Let me start out and try to answer that. I would say we're not changing our leverage targets. I think that's the first thing we're kind of solving for, right? We want to kind of stay in that three and a half to four times range. So I think we ended this quarter around four at the higher end of our range. If we didn't originate any loans, we could bring that leverage way down because we have so many repayments coming in. So we have a lot of flexibility on that, but that's probably the first thing we're solving for, which is like, okay, let's make sure we stay kind of leverage neutral, if you will. And then we're looking at excess capital, you know, beyond that. And then we're trying to think about, okay, what's the appropriate amount of share buybacks first? I would say just given with a stock price trade, you know, how much should we be buying back? The board authorized 75 million. You could put that in context. That's a lot of firepower, right? We have a lot of equity. We have $500 million of liquidity. So what are we going to do with it? $75 million we authorized for buybacks. I mean, that's roughly 25% of the public float. It's a lot of buyback. So that's probably what we're looking at next. And then we have excess capital, right? And that's like, okay, what else should we be doing and thinking about? And that's why we obviously want to think about the ongoing business, supporting a dividend, and not striking the company too much. And that's where the final piece of it, I think, comes in, which is the loan origination side. So hopefully that gives you some context and kind of how we're, you know, from a decision tree perspective going through it.

Yeah, no, that's helpful. Thanks, Matt. Second question is, is there any contemplation from KKR, the manager, during this transition period? regarding a fee cut, fee waiver, just as you guys get from point A to point B, call it mid-2027?

Yeah, thanks. Listen, I think we're evaluating everything, all options, I think, on the table at the KTR level as manager, at the KTR level as the largest shareholder in this company. And then obviously the KRF level and the board. So, you know, I wouldn't, you know, we're looking at a number of different, obviously a number of different options.

Yeah, and I've asked that, you know, just in the context of obviously getting from point A to point B, knowing KKR is a large shareholder and thinking about just kind of getting, you know, more oomph to the bottom line during the transition. There was nothing pointed in that question, just so you guys know. Last question is, is there any more detail you can provide around the Mountain View lease? Just any term details, things of that nature to give folks some granularity on how you're thinking about the potential value there as you think about monetization over the next 12 to 18 months?

Yeah, we're subject to a pretty tight NDA. So we'd love to provide more, but obviously we have a contractual agreement with our tenant. What I can say is that it's a long-term lease that we think will trade like a net lease. And so we can effectively sell it to net lease type of buyers, right? On a long-term lease basis. So that's really what we're looking at. We think that let's just take a step back right i mean where the stock is trading you know today there's a lot of uncertainty in the world clearly um and so it's hard to like project kind of project forward you know what happens whether it's in with the war around oil prices and inflation whether it's you know, AI and, you know, impact on jobs or growth or GDP. So there's just a lot out there, right, I would say right now. But when we look at, you know, book value, we're willing to, I think you saw it this quarter, you know, unfortunately, and, you know, we're willing to pay some bid offer to find liquidity to clean up the portfolio. It is putting pressure on book value for and like we said, we're going to, we've got a little bit of ways to go here. We're going to choose to, to do that going forward, to get to a spot where we can, you know, where we can feel good about it and have a portfolio that's earning well and, and give the all clear. But like when we're, it's like we're sitting here and like looking at this portfolio and our book value and saying, Oh, this is going to, we can get down to like a single digit type of book value per share. So like, we're not exactly sure what the market's pricing. And that doesn't include like back to this discussion around 350 Ellis, where we think we've got a big gain in that asset, right? You know, we've marked that down significantly. Now we have a tenant, we've got a good lease. It's a long-term lease. We feel like we can sell that and liquidate that asset over time. And that'll be a creative to book value. So we can actually start building this back up a little bit. And then of course we share buybacks. We can do the same. So that's a little bit of how we're thinking about it. And I know we've been pressed on this a number of times on Mountain View is, you know, timing. We'll sell this as soon as we feel like we can, you know, optimize value. But we're giving the 12 to 18 months because that's kind of a stabilized moment. And if we have options before that, you know, of course, we'll look at those very, very carefully. But we want to be, you know, I think, conservative and judicious as we think about the timing and what's realistic.

Thanks, Matt. That's helpful.

This concludes our question and answer session. I would like to turn the conference back over to Jack Sweetala for any closing remarks.

Well, great. Thanks, Operator, and thanks, everyone, for joining today. Please reach out to me or the team here if you have any more questions. Take care.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.