KKR Real Estate Finance Trust Inc. (KREF) Earnings Call Transcript & Summary

Thank you. Good morning and welcome to the KKR Real Estate Finance Trust, Inc. Third Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jack Switala. Please go ahead.

Great. Thanks, Operator, and welcome to the KKR Real Estate Finance Trust earnings call for the third 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 Masson, and our CFO, Kendra Decious. I'd 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 will go through our results. For the third quarter of 2026, we reported GAAP net loss of $6 million, or negative 11 cents per share. The book value as of September 30th was $10.14 per share. We reported a distributable loss of $152 million, or negative $2.64 per share. Distributable earnings before realized losses and strategic review expenses were $5 million or $0.09 per share. Lastly, we paid a 10-cent cash dividend with respect to the third 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 today. Let me begin with a brief update on the strategic review process. As we announced in July, KREF's board established a strategic review committee composed solely of independent directors to evaluate potential strategic alternatives. Since that announcement, the Committee has retained a financial advisor and legal counsel and continues to evaluate the Company's strategic alternatives. Given the review is ongoing, we will not be providing any further commentary on the process during today's call. Turning to the broader commercial real estate market, the recent increase in interest rates has created renewed pressure on property values, presenting both opportunities and challenges for real estate lenders. Existing borrowers will be impacted by higher debt service costs and lower refinancing proceeds, particularly for assets financed at peak valuations in 2021 and early 2022. We expect this environment to extend resolution timelines, and in some cases result in additional credit losses. At the same time, these dynamics should drive increased demand for refinancing and recapitalization capital as borrowers work through upcoming maturities. Importantly, underlying property fundamentals remain generally constructive across most sectors, supported by tenant demand and a meaningful slowdown in new construction activity. As we continue to reposition KREF's portfolio, we believe this environment provides an attractive opportunity to redeploy capital into new loans with compelling credit characteristics, and risk-adjusted returns. Portfolio repayment activity has been particularly strong, with $2.4 billion of repayments year-to-date surpassing our $2 billion expectation for the year. This quarter, repayments totaled $1.2 billion. This quarter's repayments nearly matched our annual repayments for each of 2024 and 2025. Importantly, much of this activity has been concentrated in our older vintage loans, accelerating the natural rotation of the portfolio, and reducing our exposure to loans originated during the 2021 and 2022 market environment. Those vintages accounted for over 80% of the repayments this year. We continue to make substantial progress executing the portfolio action plan we outlined at the beginning of the year. Our priorities have been to accelerate the resolution of watch list and legacy office exposure, address our life science portfolio, and reposition the portfolio toward newer vintage loans with more attractive credit characteristics. During the quarter, we resolved three additional watch list loans. While the pace of resolution has been encouraging, the timing and ultimate valuations of remaining assets is challenging. We continue to actively pursue modernization strategies for these assets, although some transactions previously anticipated to close before year-end are now likely to extend into the first half of 2027. We remain focused on advancing these resolutions while maintaining a disciplined approach to maximizing recovery. Given the more challenging liquidity and valuation environment, we could see an increase in reserves in the near term as resolution processes advance and market conditions continue to evolve. With that, I'll turn the call over to Patrick. Thanks, Matt.

Good morning, everyone. I'll begin with origination activity. During the quarter, we originated $157 million of loans, including a Class A senior housing portfolio secured by four properties across the U.S., and a Class A Texas office property. From a broader market perspective, conditions for new investments remain constructive. Credit spreads have been relatively stable. Financing for loans remains readily available, and liquidity across markets remains healthy. We expect our pace of originations to remain measured. Given our focus on maintaining balance sheet flexibility, we have been deliberate in deploying capital rather than seeking to replace repayments with new loans dollar-for-dollar basis. Turning next to balance sheet and liquidity, the combination of significant repayment activity and our disciplined approach to capital management has meaningfully strengthened KREF's financial position throughout the year. At quarter end, liquidity increased to approximately $853 million, including $166 million of cash, $53 million of loan principal repayments held by a servicer following a repayment on the last day of the quarter, and $600 million of undrawn capacity on our corporate revolver. This represents one of the highest liquidity positions for KREF's history, well above the historical average of approximately $600 million. Importantly, this liquidity provides us with significant flexibility as we continue to execute our portfolio strategy. We also continue to further optimize our financing structure. During the quarter, we exercised optional redemptions on our two remaining CRE CLOs, completing the retirement of both transactions. Given the substantial repayment activity and reduction in the underlying collateral pools, these transactions have become less efficient financing structures relative to other non-market-to-market financing alternatives available to KREF. Strong repayment activity during the quarter also drove a meaningful reduction in leverage. With our debt to equity ratio declining from 2.6 times to 2.2 times, and total leverage declining from 4.3 times to 3.1 times. Below our historical target range, and we expect leverage to remain below the historical range for the fourth quarter. In summary, the third quarter represented another important step in executing the priorities established at the beginning of the year. We maturely reduce the watch list, advance the resolution of legacy exposures, exceeded our full-year repayment expectations ahead of schedule, and further strengthened our liquidity position. With that, we're happy to take your questions.

We will now begin the question and answer session. [Operator Instructions] Your first question comes from Tom Catherwood with BTIG.

Matt, I want to go back to something you said in your prepared remarks about that you could see or we could see more reserves in the near term as the resolution process advances. So the question that pops in my head is kind of what's holding you back from getting ahead of that and taking worst case scenario type marks right now? Is it that you don't have the market comps because transactions are slow or is it something else that's holding you up from kind of getting ahead of that and and kind of creating a worst case baseline?

Yeah, Tom, thanks for the question. I think it comes – if you think about what's on kind of the watch list now and – the kind of processes we're in, a lot of that is um just a function of like a little bit of opaqueness and some of these markets are relatively illiquid. So we obviously are marketing these and have CECL reserves, appropriate for what we're seeing in the market today. But as we've seen over time, markets can, number one, markets can change. And number two, just given how the liquidity in some of these markets, like we don't know exactly where these processes can end up. So as we kind of continue to work through those, we'll obviously adjust it in real time for what we're seeing. But just understanding kind of where the overall market is today, we wanted to obviously highlight that as we continue to work through the resolutions here.

And you mentioned resolutions on the watch list. I assume that this applies to kind of the remaining legacy loans. Obviously, that amount came down in 3Q with the repayments, but are you expecting more modifications? Are you expecting more things that you think could have reserves or more migrations out that legacy but three rated or better portfolio?

I think everybody, including ourselves, is looking at their portfolios in a new light now, clearly with adjusted values and the interest rate that we're living in today. And, yes. Yes, I think where we're seeing, you know, potential I would say is certainly on some of the multifamily. That feels like it's been the most impacted in kind of the rate hike environment. Those vintages we called out on the call in terms of the 2021 and 2022 vintages. So that's probably the area we're watching closely. We had we've got a lot of repayments and a lot of those loans like we said we this was a huge repayment quarter for us, equaling almost all of last year and the year before. And 80% of that, as we highlighted, was in those vintages. So we are seeing real velocity there. But, you know, values are down a little bit and some of those loans are close to the sun. And so we'll have to continue to kind of monitor those as they come up for, you know, for refinance.

Just a quick follow-up on that one, Matt. Do you have a sense of, for those legacy multifamily loans you mentioned, do you have a sense of where those debt yields sit right now?

I mean, obviously, there's a huge range. I think on average we're well into the sixes, but it's the stuff at the lower end of that range that is going to be the most acute and have the most problematic response. You know, the most problems obviously refinancing. So those are the ones we're, you know, we're really focused on, but, you know, and we'll kind of continue to see how the market evolves from a value perspective. It's changing, I'd say, on a day-to-day basis as the market kind of resets expectations around not only cap rates, but just growth profile as well.

Got it. Appreciate the answers. Thanks, Matt.

Your next question comes from Jade Ramani with KBW.

Can you give any color on the Boston Life Science Resolution? I didn't see clearly in the 10-Q what happened to that loan. So was that sold or acquired? Color would be helpful.

Hey, Jade. Good morning. It's Patrick. Happy to take that. So on that loan, we had financing on that that was non-recourse financing. So, as as values have changed on that asset, we assigned that loan back to the lender. And so what you see reflected in this quarter was the loss on our portion of that loan, and it's obviously removed from the portfolio at this point.

Okay, that's helpful. Thank you. On the multifamily portfolio, can you comment as to what percentage is pre-2023 vintage and what the in-place debt yields are on that? And also, can you further comment if there's a property that has, say, a 5.5% to 6% debt yield. Would that require KREF to absorb a loss? Because that would imply close to 100% LTV, so not necessarily a loss, but it depends on, you know, the friction points and what happens in such a situation.

Yes, I don't have the exact percentage of the kind of 2021 and 22 multifamily in front of me, so we can kind of follow up on that. On the second part of your question, I think the 5.5% to 6% debt yield area. I think certainly we'd be watching those very closely. It really comes down to two things. It's number one, what's the embedded growth in the market? Because the 5.5% and, you know, New York City or San Francisco or some of these markets that are experiencing real growth is very different than some of the Sunbelt markets that are still absorbing supplies, as you well know. So there's going to be a range of, you know, of cap rates, depending on the market. And the second thing, um, is really around sponsor. And number one, what's their kind of liquidity level? What else is in their portfolio that they're dealing with and what's their kind of willingness to continue to play forward and, you know, and try to continue to grow cash flows over time to, you know, enhance their, you know, their outcomes on their equity. These are all in play, and we've seen it across the board. I certainly think having a portfolio outside of KREF as well, that we're seeing marginally more capitulation in the multifamily sector from borrowers just given this latest rate hike. So that speaks a little bit to the second point I'm making that I think you are seeing a little bit more velocity, whereas before we were getting a lot more paydowns and playing it forward. I think there's been slightly more capitulation in the market today around some of that. But those are certainly the ones that were that. Corridor is certainly the ones that we're focused on in terms of their ability to refinance.

A follow-up would be with multifamily as a more liquid asset class and fundamentals potentially nearing a trough, could you devise an alternative strategy to fund REO with leverage and hold some of these assets more so than you've done with, say, uh office? Does that make any sense or do you think the better outcome is to just work these out? So, share in some of the value reduction and take it to the book value.

Well, I think similar to every time we have an issue in the portfolio, we're going to look at all the options available to us and how do we optimize the outcome and maximize recovery for the balance sheet. And you think about what we did in Raleigh, North Carolina, on that multifamily deal, like we felt like we could go in and stabilize everything. Cash flow and operations there and then sell it into a better environment. I think we're proving that out on the operation side for sure, and we feel very good about the occupancy there and where we are in the cash flow basis. Obviously, they carry a lot easier, to your point, I think is what you might be suggesting, than some of the life science we have, for instance, where you don't have the tenants there, and so there's kind of a net cost on an ongoing basis. So that certainly will factor into the analysis. Hard to predict the future. Obviously the market's very dynamic right now, but when I look at our portfolio, I don't see a wave of opportunities to do that, if that's part of the question. I think we could have isolated situations where the loan is closed and we ultimately have to take some reserves on it, but I don't think we're looking at it like, wow, this is going to be a big portfolio of multi that we have to make decisions on. So that may help you think through it a little bit.