KREF - Earnings call transcript Q1 2018 | KKR Real Estate Finance Trust Inc.

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Operator

Good morning, and welcome to the KKR Real Estate Finance Trust Inc.

First Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. to conference like Hamilton. to now would turn over the Sasha I go Please ahead.

Sasha Hamilton

to Estate today KKR call you. Mostafa Co-CEOs; the Thank Welcome COO; our Real and Salem, first and XXXX. Patrick Mattson, Lee our for quarter Finance I'm Chris joined CFO. by Nagaty, Matt our the earnings Trust

our of these our certain or which performance. in will reconciled would on A our of the measures supplementary I statements. begin, everyone to cautionary we of recently available I financial figures contain events to should to remind refer which and forward-looking for our most that on quick Relations things recap website. statements, which Chris. non-GAAP are earnings This we presentation, before over both call to Please Before the like will the portion filed GAAP in refer results future to not turn release to related guarantee are call, XX-K also factors Investor

of B-Piece accelerated a shortly, quarter. second which up Due detail to CMBS declaration the per was quarter core Matt earnings net of to magnitude more up $X.XX fourth of value Net XXXX. first per dividend $X.XX. $X.XX and income first quarter dividend will in we XX%, XX% $XX.X the XX we from sale, share the million share, up In or million share for April, paid XXXX, March per recent were our or per For quarter. $XX.XX, book $X.XX $XX.X the was GAAP share, discuss as of our with respect the timing the and

yesterday's regular declaration this resume will of stock X.X%. respect the $X.XX price, of to dividend on XX be week, an second expect June on earlier quarter. cadence. reflects the closing shareholders dividend declared we you quarter, of with we our dividend yield a to on Based to the per annualized paid In July XX. The third record share As dividend saw

Our to that, announcement the and like Chris September make board in the will thereafter. over turn shortly to will now With would call meet I Lee.

Chris Lee

thank $X.X active for earnings Good Thank extremely since the We've of We and XX, a originated our IPO. total XXXX, in on our On senior then. been XXXX. loans. marks capacity by our million increased billion we've portfolio today, $XXX March call. to you, billion, initiatives we call, increased from billion few XXX% our Since one-year we've morning, focused earnings are $X.X for by first and $X.X Sasha. since our funded discussed anniversary to joining we key This quarter funding through billion. you month $X floating-rate us last

we've with business continued prudent focus deploy liquid plans. real on market to a prudently estate capital and sponsors, quality First,

brand our competitive in in improved loans. increased us process million up first of The to customary high-quality is our conversion a a of leading perspective. and $XXX the subject capital the million first and the the fourth competition, year in that built believe four on we rate exclusivity with to to million months operations, market closing on for us awareness a transactions. coming experience an market close positive our have that borrowers of allowing cost another resonating loans feedback and loan under senior originate presence, first-class $XXX our of to Despite increased and are year capital commitment a In from currently conditions. we We're providing expect robust competitive have loans. $XXX deployment quarter-end, pipeline Post floating-rate originated we of strong of months to been the and quarter, we closed

sale In current of us example majority feel the increase the highest-quality conditions opportunities. an book CMBS secure April, our value share One B-Piece increase our accretively thing and in we of our ability encouraged pipeline, earnings to value overemphasize opportunistic confident by great transition balance power. to a K recent of are advantage is investments. per lending KREF. This our and we We we the our of and portfolio, our share, cannot executed our to the sell sheet, of of market is in exposure increase attractive the floating-rate taking simplify our deals

asset XX, Our $XXX of affiliation in provides of competitive largest under managers us assets one the KKR, with management March with over billion as global several with advantages.

with the us. broader on real broader about platform, synergies true talked and differentiator is We our a estate influence but have capital to markets our KKR's sourcing access for underwriting the

quarter last nonrecourse Capital discussed April, KKR basis. of structure us that made financing things two on and in this we And We've we entered The term front. liabilities. for non-mark-to-market does improve basis initiative us. the $XXX a work our on to financing significant loan provides a Markets with was million into Another a financing matched-term our cost and facility progress

for compete credits better Company still the lending an quality to return. for First, opportunities the us delivering attractive highest cost the attractive while allows for

of economic more Second, a KKR. the This structure durable puts be ability pipeline financing we Patrick one to create and the with the deployed for on is us a on dividend. of second a is level our cycles. elaborate later end on more This will of quarter. outcomes by our manage XXXX firm our and activity power culture CMBS sheet current improves to positive the near-term integrated and fully substantially risk lot to being to clarity sale, pace and innovate challenging have perspective Including KREF plus facility We the our the call. able advantage from firm market like shareholders. on the recent liquidity great take liability balance the new more a were mark-to-market during of example more

an an We quarterly competitive mentioned, we is yesterday's X.X% As this dividend per yield representing rate to and yield Sasha today's have on environment. share, close. in increased believe attractive our risk-adjusted $X.XX

In team strong Officer, March the progress to with making had meeting Mostafa to forward look to Nagaty, background and of mortgage managing that, continuing and I'll momentum Mostafa operations to Matt. wealth Chief like our to joined months. We're a market REITs. in his add to the and of we've us our remainder look the this new it in the the positioning year strong XXXX. and financials sheet. a Financial origination Lastly, of and pleased forward with the of turn right many you our I are over to our extremely We coming on of summary, him we're balance excited would has start With activity, officially the side you. introduce experience to XX for

Matt Salem

St. LTV loans other in the basis, discussing weighted York, floating-rate five a average are IRR investments. The $XXX average portfolio. in A LIBOR a have respectively. collateralized underwritten coupon everyone. and we In loans properties, morning, loans originated Orlando spot Minnesota a And Chris, New XX% are Paul, by in and of the two by the first on Thanks, these property B+ our quarter, one multifamily our and existing recent Seattle. for multifamily consistent is good and Class with which and and loans office start senior totaling Class five weighted Class levered located in plus X.X%, These I'll A two properties LIBOR, XX% million.

pace quarter. the origination continued has second into Our strong

liquid property warehouse We in the an and of This Long LTV The loan office million to by origination property coupon closed XX% Island in a long-term LIBOR a markets. the has sponsors $XXX already senior secured of XX% is loan a have demonstrates with a City. and most plus X.XX%. occupied largest This is of our largest, Class date lease. operating relationships on KREF's and well-capitalized depth high-quality, B

XX% made XXXX origination months XX, with billion last enhancing the has pace. ability increase period We of In the our XX, significant existing $X.X new our XXXX, increase brand have we our progress May XX to awareness and loans, borrowers. and building in and XX% increased And a XXXX these over full relationships expand year senior May ended originations. same ended originated over a relationships

Our to few the approximately $XXX exclusivity loans close under with five million totaling forward particularly is over pipeline next months. strong

by transitional on always, responsive four providing customary to is existing We are Borrower the important ourselves loans subject high-quality five lending. to relationships This being closing repeat conditions. As and as is of driven these service. in experience pride pipeline borrowers. are

convert repeat process. to speaks borrowers about volumes team Our and our ability borrowers existing to

of property. terms repayment a we million the quarter, hotel received $XX in a a In repayments of secured by loan mezzanine

has portfolio our reminder, of only weighted a average months. XX a As seasoning

expect will not while So we we consistent continue to periodic to see see until XXXX. repayments repayments, do more

to Turning portfolio. our

with multifamily and is our XX% future our The billion is of XX% As in XX% by securities and loans are The had million geographically of XXX% expected. as invested of performing, of and X%. both Also portfolio funding property type retail. three portfolio than across loans a types. another $X.X is funded hotel we senior exposures are performing $XXX portfolio office, XX, our totaling March is and property XX% exposure less largest note, obligations. diversified

to continue on concentrate types. office the multifamily property and We

We plans. of business the cash which of XX%, stabilization. of occupancy the for light our point on illustrate portfolio are transitional properties these creates their office quarter-end, To because flow was near-term short-term, focused further, possibility as this in-place and in the

to defensively target positioned thing incremental to will One continue opportunities, quality. on the we yield and for on credit focused portfolio. portfolio, the are a note highest-quality We creating final trading

of We a the $X market our $XXX market or, additional sale net and April, at in proceeds million represents exit portfolio sold portfolio's me, B-Piece The We of X in XX. we million. as of four value second year-end March for the an at excuse total of and year-to-date. fair for total of majority net the gain a held our $XXX XX% for B-Piece as quarter million five of $X investments a accounts of the mentioned, million Chris securities recorded of from first As CMBS approximately March B-Piece quarter of unrealized million. the – these gain value $XX in

Our excellent B-Piece portfolio has investment. been an

weighted IRR For we have XX%. date, of exited to the generated a average investments

and book sheet. pleased our going the value per this with positive of sale are is to simplify economic our share sale increase company This impact and and We the the shareholders. for our outcome balance will

in to We of today, made with commitment originations invest the opportunistically we start relative of loans We're portfolio. progress in risk-adjusted since line target pending year. and and good approximately pleased quality will we closing favorable. with continue summary, we or In with the intend through as pace billion return performance in our B-Pieces and $X.X to and value are CMBS of of RECOP, the closed our of the the to when invest is

I'll Patrick. Now the turn over call to

Patrick Mattson

and Thank good Matt, you, morning, everyone.

Our totaled a quarter, average on of at billion a $X.X of prior has scale, the X.X consistent five-point portfolio, risk weighted quarter. the with the which end rating

loans, quarter-end, interest floating-rate in benefit positions of XX% in us increases rates. LIBOR-based, of which short-term well as Additionally, was to the invested portfolio from

enhance to explore continue Looking right-hand at we side Capital KKR the with liquidity. working Markets the of We've a to of funding been our number sheet, balance closely options.

We With April. the we financing outcome allows term facility securing underlying us in believe matched loan to million ranging in expertise to ROEs. for the a with attractive company is a this company, the to help entered depending XX% facility collateral. This for still the sheet of lower differentiated into non-mark-to-market, while relationships, and rates from allowing nonrecourse continue their very for a and and the originations advanced for on $XXX loan XX% balance term spreads maintaining facility positive creates compete high-quality de-risk

you of on keep Markets updated create to progress. work KKR the additional we size this non-mark-to-market, make are Capital continue focused with increasing facility as matched-term capacity. financing and to We'll We

loans to and slightly We We ratio we on three higher we basis. on X.X debt times leverage. continue financing portfolio leverage a non-mark-to-market on the Turning ratio with ratio as target releverage closed and times, fund originations. the to generally a senior of equity to a new new quarter

note increase to level. So balance times we ratio prudent sheet. further closer the to leverage to over other but remain expect on a level at the a two time One

share, beginning As a purchased below available shares we average million share XXX,XXX per price million million we approximately book had program in $XX second strong market quarter. reminder, traded repurchase Year-to-date, for to program current one In a our repurchases the The month to summary, June, $XX.XX weighted of a book repurchase to place for in and the solid a of new, quarter next a of at place, authorized in value. set year. have $XX below value. million we leaving duration start was expire identical price $XXX and repurchase board which authorization another when stock our stock recently future was $XXX

Our robust. origination pace remains

take is performing. your now us And questions. company. for Our to creating Thank significant we differentiated made portfolio again you for the progress happy today. we're financing And joining

Operator

you. Thank

The Instructions] James. the will question begin Laws question-and-answer [Operator We Stephen Raymond now first of will session. come from

Stephen Laws

Hi, good morning.

touch And and were the driven. what in could we First, yields Chris QX and in I new you XXX some what get Matt, investments think like market. looks you're around seeing XXX what's for if plus plus do maybe, QX. comments is and mix driven wanted at versus L to on competition asset L It

Of it a I course, type acquisition including financing. was refinances, little QX some believe seemed LTV to origination of you be had know mainly QX, I of – – an an multifamily.

the So you can asset changes driven what's and yields talk maybe been mix seeing competition about you're what's and in driven?

Chris Lee

helpful. you we But It's would and of just let think me it see say mix joining and bit Matt, the Stephen. it I appreciate the a Sure, which today, would call. for be driven. thanks – market I where frame is little

previous competitive, of seen the Now market year. statements. the tightening we would spread We've this on as we round mentioned another characterize as

the create opportunities market you on XXXs annual XX is year. as last the look I an segment, these existing our basis the well the handful pricing we've the transitional For over low from points the is of side target the like volume. see, highest-quality over And convert very when and as over you And our demonstrated to at of pipeline for base. approximately tighter efficient if to been to we're and opportunities the has in in robust. of months, look I'd the since points then offset basis LIBOR lowest-risk XX to ability equation, increase supply say LIBOR. to loan then of repeat, our financing That's as client origination XX clients within And now by we new can mid-XXXs you this beginning the really ability from at existing feel our think more

Stephen Laws

you cost. looks side other And miss provide those do that our cost loan? the go? models? is a It should Or thinking – financing term Great. coin basis the declined from standpoint from it? build as cost on Did did average we about of did new I Where about from ROEs, the facilities you financing about points think here think provide you like And of the costs. how a seven your financing can out we

Patrick Mattson

It's the question. Patrick. Thanks for

So to decrease cost, cost to on down focus with quarter-over-quarter, there's repo as been on some the regard and we're side, going that time. to obviously, you continue saw, driving over

in a also itself, have. of facility the number, as to is the And then sense didn't compression On specific within that's market you mid-XXXs, a we've what pricing we the give give but the A of type well. note seen we cost obviously, further that

expect XXXs. originating will of And appetite the market loans many that we're the the so have types A-node that we in somewhere in of

Stephen Laws

there returns here would as – you a expect looking lastly, view risk-adjusted up focus where I Is any Or remain And U.S. may of domestically? number attractive? thinking queued outside thought origination U.S. Great. more all to you've the seems the things your at of the any got of pipeline, to U.K.? about like you opportunities date, the in believe the all Or

Matt Salem

Stephen. would I U.S. is U.S. we're thanks, large the this in focused solely at such at a this Matt market Sure, point. investable It's say, again. point, the that

Stephen Laws

Great. for my Thanks taking questions.

Operator

will KBW. Rahmani The next with be question from Jade

Jade Rahmani

Thanks.

license refinance GSE multifamily capture opportunity assets has the stabilization? kind business joint of of with portfolio, there a some venture concentration to a someone that is those to With – for in hit the some the do once

ChrisLee

We don't much. that Chris. as love It's strategy

And are in larger on is that assets best I really to the there. loan that a tend the we're opportunities belief think lot are in of the size lease-up. what be our risk-adjusted focused highest-quality

a see pretty is benefit And joint real the part think have I sourcing of we last participating venture. in we robust there. So channels any don't

ton be So we that. wouldn't not to situation benefit want economics sharing feeling in and a that a where we're for getting we're of

Jade Rahmani

us leverage Okay. you forward that XX.X% to assuming? Could that IRR you In a of, kind that cited? math those average loan X%. what I LIBOR release on four were the basis? originations on April, you plus of an your L the And walk press had Was around think, coupon through gets

Patrick Mattson

It's Patrick.

regard facility. of to So of One, it's reflective couple assets, with new those our a things.

XX%. range about, in we've the on vary indicated As as advance to prior the mid-XXXs. rates And talked the priced question, on from that's XX%

is the that that part return. of So of driver

Jade Rahmani

release And After would spreads Okay. fees, – the of in be say press representative indicated of levered current you for? spreads that would to that seem the where given shooting that, is funds are that are the indicative types current market. of the those market returns

Matt Salem

were are, earlier, opportunities light the Matt. the is of transitional It's that And the highest-quality that in indication for the range what Stephen all XXXs. our think mid-XXXs. to or I best pricing spreads low to really I mentioned I where very mean, way

so you returns And you we're you opportunities participating. those where then that on we And those place. that's of look really today, question can the attractive market answered. have can that's that on where to that I and think follow-up see And at if just because generate still we we Patrick release, the press one returns. mentioned some are LIBOR, it I given know financing spot in the based Those see

Jade Rahmani

Okay.

XQ you book have do forma estimate pro for the a Lastly, value gain?

Chris Lee

might don't We the in we around that give we CMBS much press extrapolate estimate, I It's to as that release – be No, And gain. detail able provide think Chris. you to try what have so intraquarter. how in first an indicated from the quarter total don't happening activity that given But estimate much we the we of gain. in have relative much we to we but took

Jade Rahmani

taking the Thanks for questions.

Operator

be Delaney JMP Securities. with Steve will question from next The

Steve Delaney

you'd Chris, about, you everyone trade. I first to XX. deployed at implied congratulations your the that guess timely. Very fully substantially I morning CMBS good thought ask you Hey, be June want on thing and

Give that us loans, all-in, was – for XX. structured X.X at implies deployed would in fully sense debt-to-equity. with a think, what terms of leverage, have March I So

see could you give where maxing If range a us of kind of it you out.

Patrick Mattson

it's Yes, Patrick.

we're to to levered to three closer we of expect time, over two times. times On on we a look-through basis kind to a ratio. level, the closer On kind leverage fully be of approach expect going that debt-to-equity

Steve Delaney

Wow, okay. in And CLOs note, you have guys couple far, had a of recent months. thus I seen

You move get that could CLO, be place forward, can you tools, Would that CLO that towards – one those of yet. two? three looking Patrick, have be don't help that a a on If push turns you? you guys four would in would from

Patrick Mattson

think, sort market. and I mean, front, that on proactively of absolutely. CLO we track I actively the

think available we of currently, CLO that as said, the really main non-mark-to-market So mix. all is continue produce is about our matched-term, in us bucket. financing is we've to options to financing. in that And obviously, CLO focus as And to

Steve Delaney

And final great. Okay, just thing. one

– detail slide your ratings your your guys the on loan You in credit in your on thanks detail the deck. for Q and

only loan. one have obviously You four-rated

So props that. for

to Just curious Chicago any why if you retail is of kind on catches can give that update And And understand property. like obviously, an XX% us eye. it I'd a LTV four. quick one's

any us you be could So there color give helpful. would

Chris Lee

again. at of the beyond is to into retail. XXXX it Those think with, expiration was that, originated LTV happening two have in being Yes, term. said, tenants. XXX% higher credit XXs moved loan to leased loan that that a low in tenants the our LTV It's credit begin expirations we and lease That on Chris based what's

a strong on very It Avenue. have Michigan asset sponsor We is very well-located North there. a

reason. given But we it the is, about LTV that's and where good there. feel operating four, we just rated the fundamentals So underlying the a

Steven Delaney

for the Understood. comments. Thanks

Operator

from be with JPMorgan. will Shane question next Rick The

Rick Shane

Hey of guys, my for things. this morning. thanks A taking questions couple

investors that's of take you up the in industry. loans the LIBOR newly that historical the curious see with then what finally, you high being following that base, of there did advance you consistent you Or the sort as to in expand a you that I number am X.X%. the sort context. of that I'm and seeing that, facility have there's that. be that you'd about to in and facility is related of question. that of originated the the where low costs? pretty plus a ultimately of CLO. reason in L in sort CLO the would the non-mark-to-market if restructuring second the on term with this a Obviously, a rate then to funding alternative an X.X% quarter about think curious a we're advantage laid be I in the the of And that created difference Steve's is And as consider out terms for something addition point out? quarter investor the all to we You spreads cascade is need to

Chris Lee

in that you a Patrick Yes, spread, these thanks, the It's Chris. quite the we second first of if are going historical we On prior think part. back for in them relative take to the wide the to especially XXXX. over hand and peak Rick. question basis, to part I'm on still spreads have what compare seen

that Matt on XXX-over of historical mentioned and earlier still for, when it, range a these structure. leverage when in XX% XX you of capital I see to the bid capital in XXXX, transitional XXXs of that the the then loans that those you we floating-rate on LIBOR quite – or were we're in mezz spreads AAA of XXXX, system, cetera, think that have seen wide et the CDOs. XX about very, do example, bottom LIBOR. over not think, CMBS basis on the the loan-to-value spreads in very put is cost And financing We borrow are technology the X% – for type for XXX in cost you go low call it get healthy basis. the had and would a talking about to call side could a zero of the that into the a all-in point still environment, to, deals, that range, XX% the had you deep in

what space. return we've we in a is little different the what risk-adjusted than ago So still this seen relative just, like feel of but historically, XX we bit an saw course, attractive to months

Patrick Mattson

are think some on together patrick. in your to questions of With regard Rick, I – sort CLO, the ways. so are questions tied there the

the continue a obviously, most kind question, of base of alternative. broadens focused and we're the CLO to the generating an cost that the company. CLO. did, at kind market and conduct obviously, that we'll broad-based effort us. facility we investor don't base, lower with marketing And regard just execute to structural look to certainly, certainly, really the efficient the financing that's a And investor that's as of you a to for on certainly, kind On savings the With costs, of have required on for

Rick Shane

it. when in this, about any how that we amortized to so with much need price just be how And expenses associated in Got we we think of should adding dial we be sort this? can

Patrick Mattson

disclosed in the think events associated I with fees subsequent the of we some the that were facility.

good that's So proxy. a

Rick Shane

Okay, great. Thank you guys

Operator

comes question BTIG. next Ben of from Our Zucker

Ben Zucker

that know quite sheet? morning look do to quarter-end think the is thanks do I on big your portfolio. taking post you loan might balance large-balance that curious, segment. that you target you questions. loan of compared a Good syndicate your I Or you for the guys was But just and portion my to intend off? of to originated rest hold you

Matt Salem

Matt, It's this intend joining it. keep for to thanks and we this point, morning. At

We sponsor. have a loan long-term portfolio. within lease. well is average size particular the to increasing been This loan very It's leased, our high-quality

we'd So point, at like it to keep I all. this think

Ben Zucker

benefit should $X.X For sale following unrealized that expect quickly an million? so have guess core could the that we I purposes, for CMBS I you'll up realized GAAP imagine the net And review that million. million in of gain good XQ a also on we of $X.X GAAP But about is question, loss in XQ? $XX.X Jade's Great. and just accounting

Mostafa Nagaty

No, is Mostafa Nagaty. this

That for million unrealized basis from $X.X I net, So the we QX CMBS million. we have QX for gain. have a think a $XX.X gain or an Post of QX. in on taken unrealized CMBS the quarter net-net $X.X million includes in

Ben Zucker

Got you.

maturity Okay, is that currently Q, your guys other percentage this is have maintenance? portfolio but happen to a I'm can way, fully with without prepayment offhand what would of you repay lastly, think piece to yield subject what sure the in show conjunction to of on percent maybe know Or penalty? Slide extended information And makes nice that's I then you asked sense. in the the XX.

Chris Lee

We months Chris. average is that on XX the our – – future in submit We portfolio. can is weighted provide this about a seasoning

a sort have prepay. are provide So some maintenance us lot the in on But detail. penalty we to that still front can of number right of spread or that We now. existing subject loans of don't

Ben Zucker

most a scale know Okay. still job on of basis. to protected And prepayment to book But the that's helpful the is continuing company. still that nice to

Chris Lee

Thank you.

Operator

Instructions] [Operator Jade is KBW. question The next Rahmani from a follow-up with

Jade Rahmani

The term basis facility, term? there's five-year a I to the going XX that fee. over think Is loan amortized be full structuring point

Patrick Mattson

we consistent That costs going the the amortized would of be the is initial with fee to underlying to is the amortize way that term on which loans, typically loans.

Jade Rahmani

Okay.

So closer to three years?

Patrick Mattson

correct. That's

Jade Rahmani

size loan, little just what you on City loan? the can the of given And Island occupancy the the color Long give a just that current is, what strategy just is

Matt Salem

Sure. Matt. It's

remaining prepared it's And XX% plan business a long-term the property and is the the then vacancy, XX% there's I approximately simple vacancy, a a that and also then that tenant, renovate touched this on up. well the leased and But think pretty of space in their a lease property plan. business remarks. on lease. to about I renovate The to twofold represents

got So this with we've other XX%. consistent around with of to a a case, of And it's terms well-leased the a again, vacancy. start lot loans, building remaining with, lease value-add in our plan in

Jade Rahmani

vacate the tenant, that current XX%, will – And space? the

Matt Salem

mean, a space I No. their renovation. part under is of

think at we'll have occupancy within but well. I have plan, times, some as So floor vacancy we'll

Jade Rahmani

much. very Thanks Okay.

Operator

to would question-and-answer turn conference this remarks. over back concludes to like the for any gentlemen, session. Ladies I and Sasha closing Hamilton our

Sasha Hamilton

Thank you, everyone, again for joining the call.

up Thanks. us If with free to any directly. questions, you feel have follow follow-up

Operator

now has concluded. you for presentation. conference Thank The today's attending

now disconnect. You may

KKR Real Estate Finance Trust (KREF) 12 May 182018 Q1 Earnings call transcript