Good morning, and welcome to the KKR Real Estate Finance Trust Inc First Quarter 2022 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.
Thank you, operator. Welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2022. 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 Decious. I would 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 first quarter of 2022, we reported GAAP net income of $29.8 million or $0.47 per basic share and $0.46 per diluted share. Distributable earnings this quarter were $29.8 million or $0.47 per share, covering our $0.43 per share Q1 dividend. Book value per share as of March 31st, 2022 increased to $19.46, which includes the cumulative CECL impact of $0.33 per share, as compared to $19.37 as of December 31st. This increase in book value was driven by strong portfolio performance coupled with an accretive equity offering in the first quarter. This is the eighth consecutive quarter in which we have grown book value per share. Finally, in mid-April, we paid a cash dividend of $0.43 per common share with respect to the first quarter.
Based on yesterday's closing price, the dividend reflects an annualized yield of 8.7%. With that, I would now like to turn the call over to Matt.
Thanks, Jack. Good morning, everyone, and thank you for joining us today. Let me start today's call by welcoming Kendra Decious to the KREF team as our Chief Financial Officer. Kendra is a KKR veteran, having joined the firm in 2006, and most recently served as a Managing Director in KKR's finance group. We often talk about the benefits of KREF's integration within KKR, which range from sharing views with our macro and real estate equity teams to differentiated financing by partnering with KKR Capital Markets. We also benefit greatly from a deep bench of talent, and having Kendra join our leadership team is a great example of that. Now, turning to the first quarter, KREF delivered strong financial results with distributable earnings of $0.47 per share, covering our $0.43 per share dividend. We grew our book value for the eighth consecutive quarter.
We also had a strong investing quarter, originating nine senior loans totaling $844 million, bringing our total funded portfolio to a record $7.25 billion, up 36% on a year-over-year basis. Multifamily loans represented 55% of our Q1 origination commitments. It continues to be the largest property type in our portfolio. In addition to multifamily, we are placing emphasis on other strong performing property types demonstrating the highest rent growth, which includes industrial and life sciences. These property types represented 18% and 15% of our first quarter originations, respectively. In the first quarter, increased volatility and heightened geopolitical risk created a more conservative lending environment. Spreads in the senior secured CRE lending market widened slightly by approximately 25 basis points relative to the fourth quarter. We are lending with more conservative terms and structure.
We believe our lending strategy offers strong, risk-adjusted returns in this environment. Our focus on first mortgage loans secured by high-quality real estate owned by institutional sponsors provides a defensive investment with significant equity cushion. Our returns also benefit from the steepening of the front end of the yield curve. Pipelines remain strong with an increase in activity from larger sponsors seeking a balance sheet solution to avoid the volatility in the single asset, single borrower CMBS market. Increases in market rents have also created more transitional lending opportunities for KREF as sponsors need more time to convert in-place rents to market. This has been particularly pronounced in the multifamily and industrial sectors. In short, now is a good time to be making loans, and we are well capitalized to do so with over $750 million of liquidity as of quarter end.
As we look at our pipeline, we continue to see strong activity and have approximately $1.3 billion of loans either closed or under exclusivity subsequent to quarter end. Throughout 2021, we generated mid-teens ROEs as rates declined due to our in-place rate floors on our loan portfolio, while our liabilities in large part were not subject to rate floors. As those loans with higher floors have repaid, we now feel our earnings are neutral to minor increases in rates. Based on the forward curve, we would expect earnings to become positively correlated with rate increases in the second half of this year. Finally, in Q1, we received $282 million driven by four repayments. Given our strong origination volumes and modest repayments, our growth trend continued with net funding of $462 million.
We expect to continue to match our repayments with attractive origination opportunities and feel we are well positioned in the current lending environment. With that, I will turn the call over to Patrick.
Thank you, Matt, and good morning, everyone. I'll focus today on our efforts on the capital and liquidity front, some updates on our watch list and the progress we're making around the LIBOR to SOFR transition. We had a very active first quarter across the entire capital base. On the liability front, there are three notable transactions, all of which enhanced our market-leading liability structure. First, we successfully priced a new $1 billion CRE CLO in February. The CLO issuance, which allowed us to continue to grow our brand in the market, is supported by 100% multifamily properties and achieved an investment-grade advance rate of 84.75%. This CLO priced at a running cost of capital of SOFR + 171 basis points and features a two-year reinvestment period.
Second, in March, we upsized a bespoke, fully non-mark-to-market facility from $500 million to $750 million, which features three years of availability and matched term financing. Finally, also in March, we upsized our existing revolving credit facility from $335 million to $520 million and extended the maturity date with a new five-year term. Subsequent to quarter end, we further increased the size of the revolver to our target $610 million. These achievements increased our fully non-mark-to-market financing to 79% as of quarter end, with the remaining 21% balance only subject to credit marks. We also made significant progress on the equity front.
First, we raised $151 million in net proceeds through a follow-on issuance of our Series A preferred shares at a fixed-for-life cost of 6.5%. Additionally, we raised $134 million of net proceeds through a common equity offering, which is accretive to book value by $0.11 per share. This increase of $285 million in permanent equity in Q1 decreased our total leverage ratio from 3.7 x as of year-end to 3.2 x at quarter end. We are continuing to deploy proceeds from this recent equity offering and would expect leverage to increase back to the target in the mid- to high-3s times range over Q2 and into Q3. Our liquidity position remains very strong and exceeded $750 million as of quarter end.
This total included over $170 million in cash and $520 million in undrawn corporate revolver capacity available to us as of quarter end. In addition to this, we had $377 million of unencumbered and unpledged senior loans. As Matt mentioned previously, we have the opportunity to generate attractive risk-adjusted returns in the current market environment given our strong liquidity position. I also want to update on our watch list. The current portfolio has a risk rating of 2.9 on a five-point scale, in line with last quarter. 95% of our loans are risk rated 3x or better relative to 94% last quarter. Quarter-over-quarter, our watch list has decreased by a net $40 million on a committed basis. Three assets came off the watch list this quarter.
First, in January, our four-rated Brooklyn-based hospitality loan, which was originated in January 2019, was repaid in full through a property refinance with a large money center bank. Second, in February, we originated a new loan to finance the acquisition of the Queens industrial property with a new sponsor coming in with fresh equity. Third, good progress has been made at our 107-unit New York condo conversion loan, and we reduced the loan's risk rating from a four to a three and removed the loan from the watch list. In terms of the asset that remains, and assets that have been added to the watch list.
Our New York luxury condo loan remains on the list. As a reminder, this loan had initial balance of $240 million and is paid down to $32 million, and we're well in margin to where recent sales have been. Just four units remain to be sold with one unit under contract. Lastly, we've added two office loans based in Philadelphia to our watch list. Both loans are performing with in-place occupancy to very strong sponsors, but we placed these loans on the watch list to reflect softer office leasing velocity within the broader Philadelphia MSA. Finally, we made strides on the LIBOR to SOFR transition with the goal of mitigating basis risk throughout this transition period. As of quarter end, 25% of our floating rate liabilities were SOFR-based, and 13% of our assets were SOFR-based.
We expect the transition to SOFR to be non-material to us from an earnings perspective. In summary, KREF finished the quarter with a record $7.25 billion total funded portfolio, which has grown by 36% on a year-over-year basis. We originated nine senior floating rate loans in Q1 for over $840 million and grew the funded portfolio by $462 million. We expanded our permanent equity base by 21% to $1.65 billion and executed on a CLO, upsized a bespoke non-mark-to-market financing facility, and upsized our revolving credit facility by $275 million to a total of $610 million post quarter end. We grew book value per share by $0.09 per share.
Finally, we have ample liquidity to capitalize on the current market backdrop, and we feel we are well positioned to generate attractive risk-adjusted returns in today's lending market. Thank you for joining us today. Now we're happy to take your questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question will be from Jade Rahmani with KBW. Please go ahead.
Thank you very much. Can you talk to the tone in the current market and what you're seeing from borrowers as well as competitor lenders? Also, did your pace of originations underperform perhaps your estimates, relative to where you said, loans and closing were, at the last quarter's comments?
Hey, Jade, it's Matt. Thank you for the question. It's good to hear from you. Just in terms of the, you know, the tone in the market, I think clearly we're seeing, at the macro level a lot of uncertainty, as it relates to inflation, as it relates to, you know, short-term interest rate increases, certainly geopolitical environment. When you look down at the real estate level, things feel pretty healthy, especially in the growth sectors, with some pretty substantial rent increases, across a lot of the property types that, you know, that we invest in.
What we're seeing in the market from our borrowers is trying to navigate that dichotomy and trying to understand, you know, what is going to be the long-term impact on or short-term impact on real estate fundamentals and values. I think we're still seeing an increase in allocation to real estate. If you think about some of the inflation prints that we've seen in the market, you know, I think people view real estate as an inflation hedge, as a good investment within an inflationary environment. There's still a lot of demand for real estate and it's a very active acquisition market today as well. On the lending side, it's more cautious today, for sure.
You've seen the CMBS market reprice pretty substantially in line with other capital markets. That's got a little bit of a knock-on effect on the balance sheet. Lenders are just starting to see more supply come out of the securitized markets into, you know, into our market. We're certainly looking at a number of opportunities that would historically be in the capital market space. From a lender's perspective, it's certainly, as we mentioned in our comments, there's more structure, there's a reduction in leverage and an overall more cautious tone. Whether it's in the security space or in the lending space, everything is functioning.
You can execute in either market, but it's just a little bit, obviously a little bit more costly, and it's got more structure attached to it. I think you had asked around the originations as well. I think we had said we originated around $1 billion a quarter. We were slightly under that in the first quarter, and it's always hard to predict, you know, obviously, and land that exactly.
You can see what we signed up with in the second quarter, and if you add them together, it's pretty close to that $1 billion quarter. It may be slightly behind the first quarter, but there's a number of factors in play. Obviously, the macro environment was changing, and so we were mindful of that and just watching pacing a little bit. The equity raise that we did was towards the back half of the deployment, you know, schedule for the first quarter. Some of that capital probably wasn't available to us. Just a number of factors, but I think if you look across the year, we still feel pretty good about that estimate.
You know, obviously, when you add the two together, it gets close to those numbers.
Thank you. The growth in the non-traded REIT sector has been astonishing. I think, BREIT's raising $3 billion a month. Starwood's non-traded REITs raising, I don't know, $1 billion a month maybe. Blackstone seems to announce a new REIT acquisition every week, which probably has to continue for them to deploy that capital. What impact on the market, if any, do you believe that influence is having, and do you view it as a negative, a positive or, you know, not really relevant to, overall real estate? I mean, the concern would be that they're in fact setting pricing in some areas of the market, and that could be feeding into, for example, multifamily.
Yeah, I mean, I wouldn't wanna comment on how it's impacting the broader real estate markets. I can tell you how it's impacting real estate finance and the things that we do on a day-to-day basis. It's creating just a lot more lending opportunity. You know, if you think about the publicly traded REITs, historically, they would finance themselves, not through the CMBS market, not necessarily through the mortgage market, you know, they would pretty heavily use corporate unsecured. You've seen a transfer of debt from that unsecured market into the mortgage market, and I think that drove a lot of the issuance in SASB last in the single asset, single borrower CMBS market last year.
We, you know, locally sitting here think it's a net positive, because it gives us more opportunities to lend to high-quality sponsors, and they're typically not, you know, high leverage borrowers either. It's a relatively safe lending profile. If you take one step back out of KREF and think about what we're doing across our, particularly our real estate credit platform, with the insurance capital we have, with securities capital that we have, it certainly created a good investing environment for the debt side of our business.
Okay. You're saying that you are lending to them? I don't think that's a negative. It's a positive probably 'cause they are very low leverage. Is that what you're saying?
Yeah. It's created lending opportunities for well, I'd say investing opportunities for us, both on the direct lending side as well as on the securities investing side away from KREF and some of the private funds that we manage.
Thank you very much.
Sure.
The next question will be from Stephen Laws from Raymond James. Please go ahead.
Yeah. Hi, good morning. Matt, you know, wanted to start at kind of bigger picture, a lot moving around with asset yields, interest rates, financing costs, et cetera. You know, can you maybe walk through, you know, ROE on a, say, a new dollar put into a senior, you know, loan multifamily today versus kind of how that ROE build looked in the fall, you know, maybe looking at, you know, coupon financing costs and the leverage you can get, you know, either through CLOs or your counterparties.
Yeah. Stephen, thank you for the question. I can take a shot at that. I think that the math is relatively straightforward. I would say asset and liability spreads have widened, call it 25 or so basis points on the year. So those are largely offsetting. Leverage available to us as a borrower is largely unchanged. You do have to seek financing in other places, so there's more dispersion in the cost of financing today. Like, CLO market obviously is the wider end of pricing. But there's certainly other alternatives to that that you can use that haven't widened out as materially. So you have to be a little bit more discerning in where you're borrowing.
Overall, I would say from an ROE basis, most of the impact we're seeing is really from the forward curve, and a little bit more obviously conservative lending environment for what we're doing. We're thinking about ROEs now, call it probably up 100 or so basis points, maybe slightly more from the fall of last year. The posture of the market, you know, just away from ROEs, as we mentioned in our call, I mean, the posture of the lending market is certainly very different than the fall of last year. There's much more conservatism in the market today. It's kind of a little bit more of a lender's market, if you will.
Great. Thanks for those comments, Matt. Patrick, shifting to the interest rate sensitivity, you know, appreciate the disclosure you guys provide. Certainly looks it'll become a tailwind here soon. You know, with our information, we tend to do more things on average, but trying to think about any lumpiness in that. Are there any large loans that could repay that have-
Significantly in the money floors or anything we need to look at from a lumpiness and a LIBOR sensitivity standpoint.
Sure. Good morning, Stephen. Thanks for the question. I think that's right. The where we'd have some sensitivity is to the positive, meaning that we still have a few larger loans that have higher LIBOR floors. As we forecast over the course of this year and beyond, those are, as you can imagine, some of the loans that are expected to be repaid. We think that there's modest improvement as those loans get repaid. Obviously, keep in mind that as we make any new loans, those new loans are set at, you know, floors that are at spot or below sort of spot rate. They're, you know, 100% sensitive to the rate movement. This is a snapshot, obviously, as of the first quarter, but as we think into the second quarter, two factors are happening.
One, rates are going higher, and so as you think about the chart, we're kind of shifting our starting point to the right a little bit. Second, we're increasingly turning over those LIBOR loans into new SOFR loans, which also should have a positive, you know, bend to the outlook on this chart in subsequent quarters.
Great. Appreciate the comments, Patrick. Thanks for taking my questions this morning.
Thank you.
The next question is from Don Fandetti with Wells Fargo. Please go ahead.
Yes. Can you talk a little bit about the two Philadelphia office buildings that were added to the watch list? Is it just a situation where the business plans are a little behind schedule? Is it pandemic related? Maybe just broader comments on office. Do you think there's still risk of, like, these laggard office credits popping up into the watch list?
Hey, Don, it's Matt. Thank you for joining us, and thanks for the question. A couple comments on the two we added. They were both called light value add lease-up plays, so pretty typical for the office profile lending we would do. Is it COVID related? I certainly think COVID had an impact on, you know, office leasing overall and certainly within the Philadelphia market. I think that it's hard to say that it wasn't impacted by that. Why we put them in, you know, our watch list is 'cause we haven't seen progress on the leasing front there. Certainly the business plans are a little bit behind, but, you know, not materially, but a little bit behind what we would have projected or budgeted from a leasing perspective.
The occupancies are similar to where we originally lent on them. You know, both, I would say, have significant cash equity behind us in terms of at closing capital contributions from sponsors. We'll continue to monitor those and keep everyone, you know, updated. Overall, I'd say on the office sector, it still feels pretty bifurcated. The growth markets and high quality assets, we're seeing a pretty strong leasing demand in those areas. Whereas, as you get into the more stagnant markets or Class B type of office, that's really where you're seeing, you know, the least amount of need for space. I do think that, you know, that will continue to play through the market. That's our expectation going forward.
Got it. Thank you.
The next question will come from Rick Shane from JP Morgan. Please go ahead.
Hey, thank you for taking my call this morning. Look, you've talked a great deal about your emphasis on multifamily and life sciences. Obviously, you continue to participate in all segments of the market. I'm curious, given the competition in and sort of think of it on a continuum basis from multifamily down to probably office or at the other end, can you talk a little bit about how the competitive landscape and how that impacts deal term and pricing? What would you expect, the differential to be at different parts of the continuum?
Hey, Rick, it's Matt. Yeah, I can try to take that. It's you know it's interesting, and I'll kind of give you the update locally here, and what we're seeing. Clearly we're operating in an environment that has more uncertainty than you know than the past. I would say overall, it feels like leverage has dialed back, call it 5% or so, across all property types. I think you were asking more about the relative continuum between office or multifamily at one end and office on the other. I would say that generally speaking, that continuum is probably not as wide as you think.
From a leverage perspective, multifamily is currently in that maybe high 60%-70% LTV on a transitional asset, again, dialed back about 5% from the end of last year. Office leverage, it depends on the amount of transition, but you're probably thinking more around 60%-65% leverage. Again, every office deal is gonna be pretty unique. But if you've got in place a lot of employee's tenancy and you've got some duration to that to those leases, then you could certainly see a 65% leverage profile. Then from a cost of capital perspective, multifamily is at the tight end of the range. We're seeing that pricing in today's market in the call it very high 2s over SOFR. Office is clearly has a you know three handle on it.
Again, a little bit depending on leverage, but call it low- to mid-3s would probably be the office quote, depending on the dynamic there. Hopefully that gives you a little bit of the range in terms of, you know, multifamily and office. I would say, you know, industrial is pricing somewhere in the middle, but probably closer to the multifamily end of things than the office.
No, it's a great answer. I really appreciate the effort to be that specific, so thank you very much.
Sure.
The next question will be from Steve DeLaney with JMP Securities. Please go ahead.
Thanks. Congratulations on a strong quarter, dividend coverage and also the capital markets activity. Let me start with capital markets. You know, the pref deal, the common deal, I guess about $280 million combined. Is there a direct linkage in terms of that equity formation to your ability to increase, you know, your revolver and your term loan facility, the way you did in the quarter?
Hey, Steve. Good morning. It's Patrick.
Hi, Patrick.
Hi there. Certainly, I mean, I think as you looked at what we've done over the last couple of years, you know, as we've grown the equity base, we've gone back to a number of our facilities. There was two examples of that this quarter, both on the non-mark-to-market facility, which we grew from $500 million-$ 750 million, but also the revolver, which we grew from $335 million-$ 610 million, you know, subsequent to quarter end. Certainly we think about, as we increase equity, our ability to increase our liabilities. We did that in the fall with the Term Loan B. We had a $300 million Term Loan B that we repriced and then upsized an additional $50 million.
I think as you see us continue to grow the company, we'll have opportunities to size up the debt pieces that we have in place. We are still very focused on diversity as you know. We're not done evolving and continuing to innovate on the financing side. We'll continue to look to add other sources of financing. Clearly growing some of the existing facilities that we have, you know, through the relationships at KKR Capital Markets is, you know, one of our top goals.
Great. Yeah, as I looked over it, I was thinking, you know, okay, you know, you've really got your 79% non-mark-to-market. You've got a lot of diversity in the funding. If I see, you know, any kind of a gap or let's call it an opportunity, you do have the one small convert. I'm curious if you would. You know, you're watching the high-yield notes market, another convert, and with the objective of obtaining some fixed-rate, you know, funding, which would clearly make you more asset-sensitive.
Sure. I mean, those markets, the two that you mentioned, are ones that we track, you know, we watch closely, and I think, you know, going forward, we'll be opportunistic in thinking about having you know, how to access those.
Great. Thanks, Patrick.
Thank you.
The next question is from Eric Hagen with BTIG. Please go ahead.
Hey, thanks. Good morning. I think I have a couple. First, just wanna ask about the coupon spread on the multifamily loans you originated in April and maybe understand a little bit more about what's driving that to come in a little tighter than the spread you have in the back book. On the conditions in the CLO market, I imagine that having the multifamily loans makes it easier to potentially issue going forward. Can you share some detail around how other loan types are financing through CLO right now and your outlook there?
Yeah, I could take the first part. Eric, it's Matt. Thanks for the question. You know, just on the multifamily deals that we did in April, I think these are generally in line with where we see current market spreads. I can go back and compare them to what we did in the first quarter on the multifamily side, but you know, as I mentioned to Rick, I think we see that multifamily market from a spread perspective in that very high twos area. This is sort of in line with that. I'm sorry, Eric, can you repeat your second question?
Yeah, just checking in on conditions in the CLO market. I mean, I imagine that having the multifamily loans makes it a little more seamless to potentially issue another deal going forward. Any detail around how other loan types are financing through CLO?
Eric, it's Patrick . I'll take that question. Certainly, you know, when I think about the range of assets that can, you know, be financed in the CLO market, it's relatively wide. I mean, it fits all of the major asset types that, you know, we think about from an asset selection standpoint. Multifamily, office, life science, industrial, all readily financeable in the CLO market. We did the multifamily-only CLO in the first quarter, and I think that was generally well received. Obviously, we'll continue to have the benefit of that going forward from a reinvestment standpoint. But I think that the market is open to finance all of those property types. I think the range of capital structures and spreads differ a little bit and, you know, probably a different.
There's been more differentiation this year than we've seen in the past, and I think that's not uncommon when you see spreads widen out. I think if you look at where the asset coupons are for those different property types away from multifamily, they can still be financed, you know, relatively efficiently.
Got it. That's helpful. Thank you.
Again, if you have a question, please press star then one. The next question is a follow-up from Jade Rahmani from KBW. Please go ahead.
Thanks very much. Just to follow up on the watchlist loans. The two Philly loans were they put on watchlist merely because the Philadelphia Office Market Index slowed, and that was what triggered that, or are there asset-specific reasons for that?
It really has to do with the business plan, just the leasing profile of each asset, and we just haven't seen a lot of net, you know, absorption or net positive leasing at each of the properties. It's obviously a comment on the broader Philadelphia market, but it's flowing through to these assets in particular.
In your view, does the Philadelphia office market represent more of that sluggish trend that we're seeing in legacy office where there isn't that compelling a need to be back in the office or is it a timing factor? What do you think the main explanation is?
I think Philadelphia is one of those markets that's lagged during COVID.
Okay. Thanks very much for taking the follow-up.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.
Great. Thanks everyone for joining today's call. Please reach out to me or the team here with any follow-up questions. Take care.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.