KKR Real Estate Finance Trust (KREF)2024-10-22 17:58Financial Data and Key Metrics - GAAP net loss of 0.19 per share, driven by a CECL allowance increase of 14.84 per share as of September 30, 2024 [3] - Distributable earnings were 0.37 per share, covering the 290 million in loan repayments compared to 1 billion, surpassing the original expectation of 20 billion per week, up 40% from the beginning of the year [4] - U.S. banks are shifting from direct mortgage origination to financing alternative lenders through loan-on-loan facilities, creating opportunities for non-bank lenders and CMBS [5] - KREF's four-rated loans now represent only 3% of the total portfolio, the lowest since Q4 2019 [6] - Office loan exposure reduced to 18% of the loan portfolio after selling a 0.12 per share in distributable earnings per quarter [10] - KREF is exploring opportunities in data centers and European markets, leveraging its global platform and relationships [24][25] Management Commentary on Operating Environment and Future Outlook - Management believes the company is well-positioned with ample liquidity and reduced leverage, expecting 2025 to be an active origination year [15] - The office market is showing signs of liquidity returning, with institutional investors re-entering the market for high-quality assets [42] - KREF expects to resolve watch list loans and REO assets over the next year, with potential upside in certain assets like the Portland and Philadelphia properties [30][36] Other Important Information - KREF has 3 billion of undrawn capacity, with no corporate debt due until 2027 [11] - The company's K-Star asset management platform manages over 46 billion of CMBS [9] Q&A Session Summary Question: Price discovery and transaction activity trends [17] - Transaction volumes are picking up, with acquisition activity rising to 20% of the pipeline, still below the historical average of 50% [18][19] - Values are settling in favored asset classes like multifamily, industrial, and student housing, with cap rates declining [20] Question: Impact of loans on cost recovery on distributable earnings [21] - The downgrade of two loans to five resulted in a $0.02 per share impact on interest income in Q3 [21] Question: Focus areas for new loan originations [23] - KREF will focus on multifamily, industrial, student housing, data centers, and European markets [24][25] Question: Note-on-note financing and spreads [26] - KREF has strong relationships with financing providers, with leverage typically in the 75% to 80% range and pricing around SOFR plus 150 to 175 basis points [27] Question: Timing for resolving watch list and REO assets [30] - Watch list loans are expected to be resolved over the next year, with REO assets like Portland and Mountain View likely taking longer [31][32] Question: Office market outlook and buyer profile [42] - Institutional investors are returning to the office market, focusing on high-quality assets with long lease terms [42] Question: Transitional loan opportunities and origination timing [45] - Demand for transitional loans is increasing, with KREF having sufficient liquidity to start new originations ahead of 2025 repayments [46][48] Question: Portfolio size and CLO financing efficiency [50] - KREF expects to maintain its current portfolio size, with potential to refinance CLOs as the market improves [51][52] Question: Loan portfolio sales and credit risk transfers [55] - Loan portfolio sales from banks remain muted, but credit risk transfer activity is beginning to develop [55][56]