KKR Real Estate Finance Trust Inc.(KREF)Q2 2026 法說會逐字稿

Welcome to the KKR Real Estate Finance Trust Inc. Second Quarter 2026 Financial Results Conference Call. Please note this event is being recorded.

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the second 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 Mattson; 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 second quarter of 2026, we reported a GAAP loss of $122 million or negative $1.95 per share. Book value as of June 30, 2026, was $10.24 per share. We reported a distributable loss of $36 million or negative $0.58 per share. Distributable earnings before realized losses was $6 million or $0.10 per share. Lastly, we paid a $0.10 cash dividend with respect to the second 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 by acknowledging our announcement that KREF's Board has initiated a review of strategic alternatives intended to enhance shareholder value. This process will be led by a strategic review committee composed solely of the Board's independent directors. I recognize there may be questions regarding the process. However, given its early stage and the need to preserve the integrity of the committee's review, we do not plan to comment further on this matter. But to preempt any questions, to be clear, KKR has not submitted a proposal for any transaction to date. As the committee does its work, KKR will evaluate its potential participation in any KREF transaction, but there's no guarantee that KKR would make any proposal in the future. KKR's stated goal as manager is to support the committee as effectively as possible. And as the largest shareholder, KKR is aligned with the committee's mandate to enhance shareholder value. We do not plan to comment any further on KKR's perspective on this matter as well. Let me turn to the results next. As we reach the midpoint of 2026, I'd like to focus on the progress we have made executing the action plan we outlined earlier this year. While there is still work ahead, we've made meaningful progress against our key priorities and believe the actions we've taken position KREF for book value stability and longer-term performance. Against that backdrop, we've reported distributable earnings before realized losses of $0.10 per share, covering our quarterly dividend. And as a reminder, we continue to expect $0.40 per year of dividend to be covered by our annual distributable earnings before realized losses as we execute our business plan. Our expectations are for earnings to trough later this year, but remain in this area over the next several quarters before the benefit of our portfolio repositioning emerges. Book value declined 13.7% during the quarter, primarily reflecting actions taken to position our watch list assets and legacy office exposures for monetization. This quarter represents a significant step toward achieving our goals. We have adjusted reserves and carrying values to our current expectations for monetization of these assets. While we are still executing these resolutions and final outcomes could affect ultimate recovery levels, we believe the most significant book value impact is now behind us and that KREF is positioned for greater stability going forward. Let me provide an update on our progress against the goals laid out for the year. Legacy office, legacy office exposure declined to 18% of the portfolio at June 30 compared to 21% at year-end 2025. We remain focused on reducing that exposure below 10% by year-end 2026. Watch list, the watch list represents 16% of the portfolio as of June 30. Nearly half of the assets are currently being marketed, and we continue to target a complete reduction by year-end. Life Science, we ended the year having modified approximately 19% of our Life Science exposure. Today, that figure has increased to 39%, and we believe the vast majority of expected reserves have now been recognized. We remain on track to address substantially all of our Life Science exposure through modifications or other resolutions by year-end. Lastly, new originations. Loans originated between 2024 and 2026 now represent approximately 32% of the portfolio compared with 19% as of 2025 year-end. We are continuing to target increasing newer vintage investments to more than half of the portfolio by year-end. We believe the portfolio we are building today will ultimately be more resilient and better positioned to support long-term earnings growth and book value stability. Importantly, each of these initiatives is interconnected. As we resolve watch list assets, we generate liquidity that can be redeployed into newer vintage investments. This portfolio rotation is well underway and should continue through the remainder of the year. Turning to repayments. During the quarter, we received over $800 million of repayments. As a reminder, we continue to expect more than $2 billion of repayments throughout 2026. To put that in some perspective, this represents over 35% of the portfolio size at the beginning of the year and is larger than the approximately $1.5 billion of repayments in each of 2024 and 2025. This repayment activity has generated liquidity to support our broader strategy, including funding new originations, allowing us to reposition the portfolio into newer vintages and execute share repurchases. Turning to capital allocation. During the quarter, we repurchased $38 million of common stock at a weighted average price of $6.63 per share, generating approximately $0.32 per share of book value accretion. Subsequent to quarter end, we repurchased an additional $10 million of common stock at a weighted average price of $7.24 per share. Future capital allocation decisions on share repurchases will be part of the strategic review process. Overall, we believe the actions we have taken over the past several quarters have meaningfully advanced our transition plan. While there is still work to do, we remain focused on advancing our action plan, resolving certain legacy assets, improving performance of the portfolio and creating long-term shareholder value. With that, I will turn the call over to Patrick.

Thanks, Matt. Good morning, everyone. Overall, we made progress during the quarter as we continue to execute against our priorities. We've taken decisive action to address watch list assets, advance monetization plans across the portfolio, originated attractive new investments and maintained a strong liquidity position that provides significant flexibility as we continue to reposition the portfolio. Let me begin with an update on the portfolio and watch list, where we continue taking proactive steps to align the portfolio with our expectation for asset resolutions. During the quarter, 2 watch list loans were resolved, including a repayment on our Georgetown multifamily loan, previously risk rated 4, as well as the Boston Life Science loan, which transitioned into the REO portfolio with no material impact to book value given prior reserves. Reflecting current market conditions, we downgraded our Chicago office and Carrollton multifamily loans from risk rated 4 to risk rated 5 and a $42 million Dallas multifamily asset from risk rated 3 to 4. Turning to the REO portfolio. Our focus remains on executing business plans and positioning assets toward monetization. We made continued progress across several assets. In Portland, Oregon, we expect to complete the entitlement process this month, positioning us to advance the monetization strategy for the mixed-use redevelopment project. In Mountain View, California, as a reminder, we executed a full building lease with OpenAI this year, and we expect the tenant to take occupancy of a portion of space this quarter, and we currently anticipate bringing the property to market within the next year. In West Hollywood, we closed on the first condo sale this month and are in active discussions with prospective buyers on additional units. As we've discussed previously, we believe the REO portfolio contains embedded value that we can unlock through disciplined execution of these business plans and subsequent redeployment into performing loan assets. As we optimize our REO portfolio, we continue to benefit from resources across the broader KKR Real Assets platform, including our asset management and capital markets capabilities. Turning next to originations. We remained active during the quarter, originating 3 loans for approximately $350 million with a weighted average LTV of 58%. These included a multifamily portfolio loan in Spain, a multifamily loan in Los Angeles and a California office portfolio loan. We continue to identify attractive opportunities where we can be highly selective and disciplined in deploying capital. Finally, I'd like to highlight KREF's strong liquidity position. At quarter end, KREF had over $700 million of liquidity, including $83 million of cash on hand and $350 million of undrawn capacity on our corporate revolver. Our total financing availability was $7 billion, including $2.6 billion of undrawn capacity and 79% of our financing remains non-mark-to-market. Importantly, we continue to expect elevated repayment activity throughout the remainder of the year. We received approximately $1.2 billion in repayments through the first six months and expect total repayments this year to exceed $2 billion. Our debt-to-equity ratio was 2.6x, and our total leverage was 4.3x as of quarter end. As repayments continue, we expect total leverage to naturally move back into our target leverage range of 3.5 to 4x. To summarize, we continue to execute against our action plans and have made meaningful progress during this quarter. Looking ahead, our priorities remain clear. Continue reducing watch list exposure, monetize REO assets where appropriate, redeploy capital into attractive new investments and drive earnings recovery over time. With our strong liquidity position, robust liability structure and the support from the broader KKR platform, we believe we are well positioned to execute on these priorities. With that, we're happy to take your questions.

Your first question comes from Tom Catherwood with BTIG.

Matt, maybe starting with you. You mentioned in your prepared remarks how the increases in reserves and the lower book value really reflect your current expectations for monetization of watch list assets. But if we look back to 4Q and 1Q when you introduced the portfolio repositioning plan, if you will, you also took kind of significant reserves there. I think it was a combined another 12% plus. So maybe if we think of this quarter, how was the loan loss review process and book value assessment different than it was in the prior 2 quarters? And kind of what level of confidence do you have that we've reached book value stability at this point in time?

Yes. Thank you, Tom, for joining us, and I appreciate the question. I'd say a couple of things to highlight. I think last quarter, first of all, we indicated there could be further potential softness as we implemented the action plan. Some of this is discovery as we go through the process—where are the clearing values, what are we seeing in the market? I think this quarter's decline in book value reflects that and reflects our posture toward trying to monetize as much as possible and transitioning to 4 to 5; we've also begun to create liquidity in some of that portfolio through note sales. At this point, we feel we are positioned to execute on that with the watch list and have reserves and pricing around our current expectations of monetizations. As I highlighted in the prepared remarks, we haven't finalized all of these yet. They're in different stages of the process, but we feel the most significant impact to book value is behind us. As we finalize these processes, there could be some small up and down movements, but we believe we've come far enough to understand the clearing values a little better right now.

And do you think, was it really this discovery process? Or was there also maybe an adjustment in the clearing values of these? Was there some level of erosion this past quarter?

Well, it's hard to say. I think the question is: did the market move on us, or do we simply know more about where the market is? It's difficult to tell in some of these markets, especially with office assets where there is some degree of illiquidity today. So we don't have clear transparency about where values were last quarter versus this quarter. Right now we are in several processes, getting real-time market feedback on levels to sell these, and we are accordingly adjusting our reserves and marks.

The next question comes from Jade Rahmani with KBW.

Starting with Life Science, can you give an update on the risk 5 Boston Life Science loan, not the one that went into REO, but the other risk 5 rated loan?

Yes, Jade, it's Matt. Thank you for joining this morning. We're in modification discussions. Maybe the more important point, which I didn't specifically call out but I think we mentioned in the prepared remarks, is that we believe we're fully reserved on that loan at this point in time. We'll continue with the modification discussions, but do not anticipate negative book value implications on that particular asset going forward.

Okay. And can you say whether you think that will remain a loan or could go REO?

I think it's too early to say that at this point in time. My guess is it will not become REO, but we have discussions ahead of us. If you're thinking about projecting drags on earnings and cash flow, I wouldn't model it that way.

And what are you seeing across the rest of the Life Science book? Maybe you could start with Cambridge, which I know is a Class A asset and was already modified. San Carlos and Redwood City, both have had some leasing and then the REO that you now actually own.

Yes. I mean I'll speak at a high level. I think that we're beginning to see green shoots in the market and some leasing come back. I think it's still early. The markets that are more weighted toward life science, like Boston — Cambridge, Seaport, or South Boston — are further behind. There are still green shoots, but they're lagging some of the West Coast markets you mentioned, which are beginning to see more office demand and a tightening in the market. As you know, many of these assets can be office or life science, so they can capture demand from both, especially as tech and AI leasing picks up in some West Coast markets, which has been helpful. As you move up the West Coast to Seattle, where we have REO, I would say that is beginning to happen as well, with tech- and AI-related office leases starting to tighten that market a bit. We are evaluating opportunities there. We have life science tenants in our asset, but we could also have office tenants as the office market tightens. So I think a lot of it right now is life science starting to come back, but it's early. If you are in any market with AI and tech exposure and that exposure is causing tightening in the overall markets, there can be some overflow into life science. That's how I would characterize it now, but it still feels early on the life science side.

Just overall, on the REO book, which stands at $658 million, it seems that the Mountain View has a reasonable chance of being monetized in the next year. Beyond that, what do you think the expected duration is of what would be remaining? Are we talking multiple years? Is it possible that there could be a strategy to accelerate selling this to more of an opportunistic buyer, developer, some other form of capital that could really see that through and then give KREF the chance to repatriate that capital and drive core earnings growth?

Right. Putting the strategic review committee and how they may view options aside, we haven't changed our view on portfolio duration. We have several assets we consider near-term resolutions, as shown on Page 8 of our supplemental. The West Hollywood condo asset Patrick mentioned is gaining traction and we are selling units now. We still view our Raleigh, North Carolina multifamily asset as a near-term sale. Our Philadelphia office, which is REO, is on the market and we expect liquidation this year. We also have medium-term resolutions: our Mountain View asset, which we continue to target for the second quarter of next year, and our Portland, Oregon redevelopment, where we have made significant progress and are near finalizing the redevelopment rights. Finally, there are two assets we have always considered longer term: the Seattle life-science assets and the South Boston life-science asset. Those two are a bit further behind in leasing demand; we are beginning to see positive signs but they will take time to season, and we do not want to force anything on them. In short, our view remains the same: near term, medium term, and two longer-term assets.

Your next question comes from Gabe Poggi with Raymond James.

Matt, I just want to make sure that I heard you correctly. So the strategic review has been announced. Is KREF able to buy back stock during the strategic review process? Or is that on hold?

I don't think it precludes us from buying back shares, but I think it will be a conversation with that committee. You think about what's underneath that. They'll be reviewing everything. So it certainly should be a part of that when you think about uses of capital.

Right. Okay. Just piggybacking on some prior comments to Tom's question and uses of capital, et cetera, and your prior commentary following the 1Q is obviously, you've been putting money to work and buying back stock. I just wanted to make sure that the review did not preclude additional repurchases. Second question is, Patrick, you mentioned that about half the watch list, the loan watch list is being marketed. I know the Philly office loan is held for sale. Any other color you guys can provide around what loans may be shopped right now?

I think we try to be as transparent as possible on these calls and give you guys the color that we can. We are in a more sensitive time period now with some of these processes in terms of liquidations or sales, so we want to be mindful as we answer this type of question because we'll try to finalize some of these in the near term. One thing, because we have had some questions on this initially, is that we have some loans and we put a loan in held for sale now. I want to make sure everybody understands that when we look at our portfolio and think about the watch list and tie that back into the action plan, we are looking at every single loan and asking ourselves how we optimize the outcome. There are unique facts and circumstances around what is going on, whether that is the borrower, the asset itself, or the market. We have an array of options to evaluate, such as, can we modify the loan, can we short sale it, and if we cannot do those things, can we note sale it? And where we think there is a business plan and a way to enhance long-term value, we will go to title and take it to REO. When you see these different outcomes, assume we are looking at all these options. We have the full toolkit available to us and we will go down the path that we think creates the best outcome as it relates to moving through the action plan. I know that may not fully answer your question, but I wanted to frame that a little bit because there are questions about how we are approaching it, whether it is a modification, a short sale, a note sale, and so on.

Your next question comes from Chris Muller with Citizens Capital Markets.

So I guess on the EU multifamily origination, LTV is lower than we typically see, especially on multifamily. Is that just the EU market and coupons are more on par with the U.S., but LTVs are lower? And then kind of piggybacking off that, does getting the new facilities, the EU facilities in place mean you guys plan on doing more overseas lending?

Thank you for joining, and I appreciate the questions. I don't view the European market as a different leverage point for multifamily. The business plan is probably a little different because there is a sale component to these multifamily units, so they start at slightly lower leverage than the traditional multifamily loans we typically see in the United States. Roughly 70% loan-to-value is what we would typically see on a multifamily in Europe. As for your second question, I don't think we've changed how we think about Europe as part of the overall portfolio; we still target around 20 to 25 percent. The facilities we're putting in place simply allow us to continue investing in that market, but they haven't materially changed how we view the portfolio position or the relative value that drives it. We think relative value is pretty balanced right now between the U.S. and Europe, and when you consider the relative market sizes, you can translate that into position sizing within the portfolio.

Got it. That's very helpful. And then given the elevated repayments, how are spreads on new loans versus what is paying off? Are you guys able to pick up any incremental yield? Or is that more of a headwind to the bottom line?

Well, spreads are lower for sure because the new spreads have adjusted for the current rate environment. When you think about ROE and the levered returns we can get, those continue to be, historically at least on a new origination or new investment basis, pretty consistent around the 12% area. Of course, some of the loans we have today are outearning that because they were originated in a lower spread environment and therefore had higher spreads and have now rolled up the curve. But in terms of ROE, that hasn't changed much; our target remains in the low double-digit, around 12%. Locally, spreads have been relatively stable, aside from a little volatility related to Warner/Iran, and have been pretty steady over the course of the year. We haven't seen any material tightening or widening over the course of 2026.

Your next question is a follow-up from Jade Rahmani with KBW.

Just wanted to take a step back in terms of where we are in the commercial real estate cycle. You did have one downgrade to risk 4 from risk 3, the Dallas Multifamily. Multifamily is a lower cap rate asset class. Rates have gone up, and there's still a ton of supply in the Sunbelt. So fundamentals haven't really turned more positive, which is weighing on the space. So if you could talk about just broader credit trends and also focus on multifamily and what you're seeing?

Yes, sure, Jade. It's Matt again. I'll take that. On the multifamily side, you're right to highlight that the higher-for-longer rate environment has put more pressure on values, and it certainly wasn't the market's expectation we would be where we are now a couple of years ago. I don't think that changes how we have to think about the credit risk or the loss content in the multifamily component within KREF. We would characterize it the same way we have on many of these earnings calls over the last few quarters: there will be some noise and there will be some losses, but we don't think it is material to book value. We had a big portfolio of multifamily, so if rates go up 500 basis points there will be some impact, but we don't think it is really that material. The recent slightly softer capital markets activity within multifamily is reflected in that view as well. Looking forward, you highlighted that there is still supply being digested in these markets, which is accurate, but we're almost at the end of that. We are somewhat optimistic, and absorption has been higher than we all would have expected, likely because housing is pretty expensive right now. We are relatively optimistic that over the next few quarters into next year the market could see tightening in both rents and occupancy, and the overall capital markets outlook does not really change how we are operating within KREF right now. You can see that in some of the downgrades we have made; some of those were short-selling, and we are effectively forcing people out. We are not going to wait and kick the can down the road. We want to get to a point where we do not have that noise. I would admit there is probably some local softness and pressure on values, but we remain pretty optimistic looking out a few quarters.

This concludes the question-and-answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.

Well, great. Thanks, operator, and thanks, everyone, for joining this morning. You can reach out to me or the team here if you have any questions. Take care.

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