- GAAP Net Income: $20.2 million or $0.29 per share.
- Distributable Earnings: 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: $0.4 per share.
- Dividend: $0.25 per share.
- Book Value Per Share: $15.24, an increase of $0.06 quarter-over-quarter.
- CECL Allowance: Decreased to $1.65 per share from $3.54 per share last quarter.
- Loan Repayments: $384 million in loan repayments with full repayments across four loans.
- Loan Fundings: $121 million in loan principal for a net reduction of $263 million.
- Leverage Ratio: Current leverage of 3.9 times.
- Multifamily Portfolio Rent Increases: 3.1% year-over-year.
- Liquidity: $644 million of availability, up sequentially from the prior quarter.
- Total Resources: $8.4 billion with $2.8 billion of undrawn capacity.
- Non-Mark-to-Market Secured Financing: 79% of secured financing is non-mark-to-market.
- CECL Reserves: Decreased by $131 million to $115 million.
- Risk Rating: Weighted average risk rating of 3.1 compared to 3.2 last quarter.
- REO Portfolio: Approximately $264 million of net equity or $3.80 per share.
- Repayments: Tracking above $1 billion for the full year, with $384 million received during the quarter and an additional $188 million in July.
- Debt to Equity Ratio: 1.9 times.
- Total Leverage Ratio: 3.9 times.
Release Date: July 23, 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 (KREF, Financial) reported GAAP net income of $20.2 million or $0.29 per share for Q2 2024.
- Book value per share increased by $0.06 quarter-over-quarter to $15.24.
- CECL allowance decreased significantly to $1.65 per share from $3.54 per share last quarter.
- KREF has robust liquidity with $644 million of availability, up sequentially from the prior quarter.
- Repayments have exceeded fundings in four of the last five quarters, allowing KREF to delever the balance sheet.
Negative Points
- Distributable earnings for Q2 2024 were negative $108.7 million or negative $1.57 per share.
- Realized losses amounted to $136 million or $1.97 per share.
- Future funding obligations have declined to approximately 9% of the funded portfolio, indicating limited new investment opportunities.
- KREF's leverage ratio remains high at 3.9 times, despite efforts to delever.
- The company expects DEX losses to continue to be significantly higher than their dividend in the near term.
Q & A Highlights
Q: Hi, good morning. Congratulations on a nice plant and looks like you got a lot done in the second quarter. I think first, I'd like to start with new investments and kind of outlook for leverage. Matt, I think you know, you commented about shifting to offense having that discussion Patrick, you followed up talking about repays outpacing new originations. So should we look at leverage kind of troughing at year end and then growing next year? How do we think about portfolio size in the coming quarters? And as you think about moving to offense, do you see it being more competitive type assets that have a pretty strong bid just given their CLO type eligible collateral, or are you looking at more opportunistic stuff, construction loans or maybe heavier lift stuff off that in financing for that have higher returns?
A: Thanks, Stephen, for the question. It's Matt. I can take that. I think from a leverage perspective, we're going to maintain our target leverage range, which has been the same really through over the last handful of years, which is that high threes leverage. So I don't think we're going to look to increase the kind of overall leverage of the portfolio. But as we start to get additional repayments and obviously we'll have equity there we can redeploy. In terms of what we're looking at. We're going to stick to similar things that we've done in the past. So favored property types, predominantly multifamily, industrial, student. We're seeing a lot of activity in the data center space right now as well. There's an opportunity for us to increase our footprint as well over the last couple of years, we've stood up a team in London that focuses on Western Europe, that's fully integrated with our real estate equity team in Europe. So certainly geographic expansion is on the table as well. As it relates to construction, I do think there's an opportunity there. When you think about the bank retrenchment, it's really across the Board, but it's most acute in construction lending, which tends to be a little bit less capital efficient for the banks and as it become more and more kind of capital focused, they pulled back from that part of the market even more dramatically. So it's an area that will continue to look at. We're going to have to balance out a little bit. Obviously, that comes with a lot of future funding and you don't get dollars in the ground immediately, but I think some percent of our portfolio certainly could be allocated to that opportunity.
Q: When you look at the CECL reserve, kind of what percentage of that do you allocate or roughly across the five watch list loans versus the other parts of the portfolio?
A: Yes, Stephen, thanks. Thanks for the question. We think about it as you might expect that the watchlist loans tend to make up the majority of the CECL. That's been true over the last several quarters and continues to be true today.
Q: When you look at the five watchlist loans before REO assets. So which of those do you think may have resolutions in the second half of this year and which of them assume then the remainder would be longer-term resolution pass?
A: I think, yes, if you look at the existing watch list loans. I think the one that comes to mind first is our four rated life science loans. So as Patrick mentioned, we're entering discussions with the sponsor on that. So my guess is that we'll get some conclusion over the back, over the next quarter or two. It's always hard to time these. We never know exactly how long it's going to take. And then, of course, on our independence, on our Philadelphia office asset, we again, we expect to likely sell those remaining two of those properties by year end and unclear on the timing for the remaining watchlist loans at this point in time. Some of those certainly could continue to go into the 205. But if you recall what we discussed on our last quarterly call, I really break it down by property type a little bit. And the vast majority of the remaining loans are in the multi-family category. And again, while there can be noise there, that can certainly be loans transitioning to four or from four to five. The real question is, is there a material loss content in that sector? And from what we're seeing, there continues to be a lot of liquidity in multifamily. The performance is pretty solid. And so we're not anticipating any real material losses in the multifamily property type at this point in time.
Q: Hey, guys, thanks for taking my questions this morning. And I clearly need the queue in before Steve laws because, it's along the same vein, but look, as you shift to office, I would describe shift as opposed to really move aggressively that way at this point I'm guessing. I'm curious when you look at your geographic exposure concentration in California, concentration in Texas lesser extent, Florida. I'm curious if with the way we see some costs associated with property ownership evolving in some of those regions, if you would expect to sort of continue to keep the same distribution on the geographic side as well as on the property type side?
A: Yes. Thank you for the questions. It's Matt. I do think there's been a little bit of shift in terms of how we think about the geographic distribution of the portfolio and how we would invest and going forward. I think the two things that I would highlight, one of which you mentioned is just costs, especially around insurance. So states like Florida, where we have seen a pretty material increase in insurance costs there. So that's making us certainly evaluate that market a little bit more carefully. The second thing we're watching is supply and there's a number of these sunbelt markets that have a lot of supply coming in. We've seen the highest levels of demand for multi-family that really we've ever seen. So a lot of that is being met with strong demand, but there's certainly some cities that are a little bit more cautious on today. But at the same time, I just want to reiterate that we are an institutional lender. We are a large loan lender. We do focus on the major markets. So we're really a top 30 lender within that top 30 market lender within that, we'll have some preferences, but it will continue to be our focus is winning in kind of the most populous areas where there's the most liquidity and transparency.
Q: Got it. And you brought up something interesting, which sort of resonated with me during your original comments. You talked about the fact that you continue to be constructive on multi-family and that you think the supply demand is sort of reaching a new equilibrium. That's my word, not yours, I apologize. But you also just alluded to the fact demand seems strong, supply is still coming online. When do you expect the supply to sort of crest, given the slowdown in new construction? And so we can really start to see those trends sort of shipped very favorably?
A: Yeah, I would say it's market dependent. And I think what some people are missing, it's not only market dependent, but
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
