KKR Real Estate Finance Trust (KREF) Q3 Earnings call transcript Oct 22, 2024
2min read In the recent earnings call for the third quarter of 2024, KKR Real Estate Finance Trust (KKR Real Estate Finance Trust) provided insights into the company's financial performance and strategic outlook. The call, led by Jack Switala, CEO, Matt Salem, President and COO, Kendra Decious, CFO, and Patrick Mattson, President and COO, revealed a number of key themes and trends, highlighting the company's confidence in its performance and growth opportunities.
Market Update and Confidence in Commercial Real Estate
Matt Salem kicked off the call by discussing the current market environment, expressing optimism about the future of commercial real estate due to the ongoing interest rate cut cycle. This positive outlook is reflected in the company's own real estate credit pipeline, which has seen a significant increase in transaction volumes, up by 40% from the beginning of the year. The company has also been actively investing in equity, with $4.5 billion invested year-to-date in the United States. These investments are expected to provide tailwinds for commercial real estate property values, as lower interest rates are expected to enhance their attractiveness.
Strategic Positioning and Transitioning Loans
The call also highlighted the company's strategic positioning and its ability to transition loans from banks to loan-on-loan facilities. This shift is expected to create incremental lending opportunities for non-bank lenders and CMBS, potentially measured in the hundreds of billions. This transition, driven by the more efficient capital treatment of loan-on-loan facilities, is seen as a significant opportunity for growth and is expected to benefit KKR Real Estate Finance Trust in the coming quarters.
Financial Performance and Outlook
The company reported a GAAP net loss of negative $13 million or negative $0.19 per share in the third quarter of 2024, primarily due to a CECL allowance increase of $0.52 per share following the downgrade of two loans. Despite this, the company's book value per share decreased by only 2.6% quarter-over-quarter to $14.84 per share. The company's distributable earnings for the quarter were $25.9 million or $0.31 per share, covering the $0.25 per share dividend. Looking ahead, the company expects distributable earnings ex losses to continue to be higher than the dividend as it heads into 2025.
Watch List and REO Portfolio
The call also provided updates on the company's watch list and REO portfolio. KKR Real Estate Finance Trust has dealt with the majority of its watch list and has ample liquidity. As repayments come in, the company plans to actively reinvest that capital and ramp up originations. Additionally, the company has bought back nearly $100 million of stock since inception and plans to evaluate share repurchases moving forward.
Liquidity and Financing
On the financing side, the company has a diverse portfolio, with 79% of its financing being fully non-mark-to-market and the remaining balance marked to credit only. KKR Real Estate Finance Trust has no final facility maturities until 2026 and no corporate debt due until 2027. This strong liquidity position, coupled with its global platform, has helped the company navigate the challenging real estate market.
Future Outlook and Strategic Focus
Looking ahead, KKR Real Estate Finance Trust is primarily focused on maintaining its current portfolio size by reinvesting repayments and optimizing its REO portfolio. The company believes it can generate an additional $0.12 per share in distributable earnings per quarter as it repatriates equity in the REO portfolio. With ample liquidity, strong repayment activity, and a reduced leverage ratio, KKR Real Estate Finance Trust is optimistic about the opportunities ahead.
In conclusion, KKR Real Estate Finance Trust's third quarter earnings call painted a picture of a company that is well-positioned for growth, with a strategic focus on capitalizing on the opportunities presented by the commercial real estate market. The company's strong liquidity, diversified financing, and strategic positioning are expected to drive future performance and provide value to shareholders.
