• GAAP Net Loss: Negative $13 million or negative $0.19 per share.
• CECL Allowance Increase: $0.52 per share.
• Book Value Per Share: Decreased 2.6% to $14.84 per share.
• Distributable Earnings: $25.9 million or $0.37 per share.
• Dividend: $0.25 per share.
• Loan Repayments: $290 million received in the third quarter.
• Loan Fundings: $55 million in the third quarter.
• Financing Capacity: Totaling $8.3 billion with $3 billion undrawn.
• Liquidity: $638 million available at quarter end.
• Office Loan Exposure: Represents approximately 18% of the loan portfolio.
• Debt-to-Equity Ratio: 1.8 times.
• Look-Through Leverage Ratio: 3.8 times.

• Warning! GuruFocus has detected 8 Warning Signs with KREF.

Release Date: October 22, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• KKR Real Estate Finance Trust Inc (NYSE:KREF) reported distributable earnings of $25.9 million or $0.37 per share, exceeding the Q3 dividend of $0.25 per share.
• The company has seen improved transaction volumes within its real estate credit pipeline, averaging approximately $20 billion a week, up 40% from the beginning of the year.
• KREF has ample liquidity with $638 million of availability at quarter end, including $109 million of cash on hand and $475 million of undrawn revolver capacity.
• The company has received over $1 billion in loan repayments year-to-date, exceeding their original expectation for the full year.
• KREF benefits from integration with KKR's global platform, leveraging resources and capabilities from a team of approximately 140 professionals and $75 billion in assets under management.

Negative Points

• KREF reported a GAAP net loss of negative $13 million or negative $0.19 per share, driven by a CECL allowance increase following the downgrade of two loans.
• Book value per share decreased 2.6% quarter over quarter to $14.84 per share as of September 30, 2024.
• The company downgraded two loans to a risk rating of five, including a life science asset and a multifamily asset, increasing the CECL reserve by $36 million or $0.52 per share.
• Future funding obligations are now reduced to 8% of the funded portfolio, indicating limited room for new investments without additional capital.
• KREF's office loan exposure remains a concern, with office now representing approximately 18% of the loan portfolio, and the market for office assets still showing limited liquidity.

Q & A Highlights

Q: Can you give us a sense of what's happening in terms of price discovery in the current operating environment? Are expectations between bid and offer narrowing? A: Matthew Salem, CEO, noted that transaction volumes are picking up, with acquisition-oriented activities increasing from 10% to over 20% of their pipeline. While still below historical averages, there's more transparency in market values, especially in favored asset classes like multifamily and industrial. The gap between buyers and sellers is narrowing as the cost of capital decreases, and 2025 is expected to see more normal acquisition volumes.

Q: What is the quarterly impact on distributable earnings from loans on cost recovery? A: Kendra Decious, CFO, stated that the downgrade of two loans to a risk rating of five resulted in a $0.02 per share reduction in interest income for Q3. There were no other changes in run-rate interest income.

Q: As you turn the origination pipeline back on, where will your focus be? A: Matthew Salem, CEO, mentioned that KREF will continue to focus on multifamily, industrial, and student housing. New areas of interest include data centers, particularly hyperscale construction, and opportunities in Europe. The company is leveraging its global platform to identify relative value across markets.

Q: Can you provide some parameters on the timing for resolving the watch list and REO assets? A: Matthew Salem, CEO, explained that the timing is uncertain, but they hope to address watch list loans over the next few quarters. For REO assets, progress varies: the Lloyd Center in Portland may see liquidity events in the first half of next year, while the Mountain View campus could take longer. The Seattle Life Science asset is actively seeking tenants, and the Philadelphia asset may see a garage sale by year-end.

Q: Are you seeing any uptick in loan portfolio sales from banks or credit risk transfers? A: Matthew Salem, CEO, noted that loan portfolio sales remain muted, with mostly sub-performing or non-performing loans available. However, there is some pick-up in credit risk transfer discussions as banks explore adapting successful consumer and residential models to commercial portfolios.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.