KKR Real Estate Finance Trust Inc. Q4 FY2025 Earnings Call

Good morning, and welcome to the KKR Real Estate Finance Trust Inc. Fourth Quarter 2025 Financial Results Conference Call. 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 Fourth Quarter of 2025. 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-K for cautionary factors related to these statements. Before I turn the call over to Matt, I'll quickly go through our results. For the fourth quarter of 2025, we reported a GAAP net loss of negative $32 million or negative $0.49 per share. Book value as of December 31 is $13.04. We reported distributable earnings of $14 million or $0.22 per share, and we paid a $0.25 cash dividend with respect to the fourth 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. Before reviewing our company results in more detail, I would like to highlight several key achievements for KREF in 2025. First, we made significant progress strengthening our liquidity position throughout 2025. In March, we closed a 7-year, $550 million Term Loan B, which we later upsized and repriced in September, increasing the outstanding balance to $650 million and reducing the coupon to SOFR+ 250 basis points. During the year, we also upsized our corporate revolver to $700 million, up from $610 million. Second, we closed on our first loan in Europe for KREF. We have been strategically building our real estate credit platform in the region over the last several years. This transaction, along with subsequent European investments in the fourth quarter, represents an important milestone in that effort and positions us to capitalize on relative value across the U.S. and Europe. These transactions also serve as a foundation for continued geographic diversification. During 2025, we continued to experience healthy repayment activity, which totaled $1.5 billion, consistent with 2024 levels. We offset this with $1.1 billion of new originations, and today we are operating at the high end of our leverage ratio and targeted portfolio size. More than 75% of our new originations during the year were concentrated in multifamily and industrial loans, sectors where we continue to see resilient fundamentals and attractive risk-adjusted returns. Multifamily remains our largest property type exposure. And given our significant exposure to Class A product, we continue to observe strong underlying performance across the portfolio. We remain focused on maintaining and selectively growing the portfolio within on-theme asset classes and top-tier MSAs. Looking ahead, 2026 will be a year of transition for the company. Through execution of our business plans, we have positioned much of our REO portfolio for liquidity this year. Additionally, we are going to implement an aggressive resolution strategy for a significant portion of our watch list assets and select office assets. The overall goal is to compress the discount of our stock price to book value and more quickly unlock approximately $0.13 per share embedded in our REO assets. However, this strategy will also put additional pressure on earnings until we're able to fully execute the plan. As it relates to this approach, we will need to be balanced on a few assets. To that end, I want to touch briefly on our Mountain View asset. The market continues to improve meaningfully, and we remain engaged with tenants. If we were able to sign a lease in the near term, we believe the optimal strategy will be a monetization post 2026, given a number of factors, including anticipated CapEx and tenant improvement work. Finally, I want to comment on our dividend. The dividend is something the Board is actively evaluating as part of a broader capital allocation discussion, particularly as we work through a transitional year for the portfolio. Our priority is to make disciplined decisions that balance near-term earnings visibility and long-term shareholder value. With that, I'll turn it over to Patrick.

Thanks, Matt. Good morning, everyone. Looking at risk ratings. During the quarter, we downgraded the Cambridge Life Science and San Diego multifamily loans to risk rating 5. As a result of these developments, we recorded total incremental CECL provisions of $44 million during the quarter. Subsequent to the quarter end, we entered into new modification discussions on our Boston Life Science loan, which is currently risk rated 3. And while the loan continues to make contractual monthly interest payments, we anticipate a ratings downgrade and CECL increase in the first quarter. New originations in the fourth quarter totaled $424 million, which surpassed repayments of $380 million. In 2026, we expect full year repayments of over $1.5 billion, exceeding repayment activity in each of the last 2 years. We'll continue to originate new loans while maintaining our target leverage range alongside other capital allocation strategies. Turning to financing and liquidity. We ended the year with near record levels of liquidity totaling over $880 million, including $85 million of cash on hand, another $74 million loan repayments held by the servicer, as well as $700 million of undrawn capacity on the corporate revolver. Total financing capacity was $8.2 billion, including $3.5 billion of undrawn capacity. Leveraging our internal KKR Capital Markets team, we added to our non-mark-to-market capacity during the quarter, and 74% of our financing remains non-mark-to-market. We remain well-positioned with no final facility maturities until 2027 and the corporate debt due until 2030. The weighted average risk rating on the portfolio is 3.2. Our debt-to-equity ratio is 2.2x, and total leverage ratio is 3.9x, consistent with our target range. Finally, during the quarter, we repurchased over $9 million of common stock at a weighted average share price of $8.24 for the full year 2025; we repurchased $43 million of common stock at a weighted average share price of $9.35, which resulted in approximately $0.32 of accretion to book value per share over the course of the year. As of the end of the fourth quarter, we have approximately $47 million remaining under our current share buyback authorization plan. Our strong liquidity position provides meaningful flexibility in managing the portfolio, allowing us to thoughtfully allocate capital across a range of opportunities, including share repurchases and new originations. Overall, we remain well capitalized and focused on repositioning the loan portfolio for improved earnings. With that, we're happy to take your questions.

Matt, you talked in your prepared remarks about accelerating resolutions on watch list and REO assets. If KREF executes on this plan, and the stock doesn't materially pull to par if there's just a structural discount for monoline commercial mortgage REITs. Are you willing to take an approach similar to what ARI announced last week and look to revamp your business totally?

Tom, I appreciate you joining us, and thank you for the question. I guess a couple of things there before I've addressed the ARI transaction. I think, first of all, we made a lot of progress on the REO, which is kind of why we're at this point today. We feel like we're in a good position on much of that portfolio to be able to liquidate that over the course of this year. And then obviously, start to think about our Mountain View asset, getting a lease done there, and being able to execute that business plan more fully post 2026. So I think we've made the right decisions in terms of just being patient, taking good real estate back, and now we're at the point where we either advance the business plan, liquidity has returned, and we can get, obviously, some monetization activity there. The question you're asking, I think, is a good question, and it’s kind of why I think we're putting a second phase of this plan in effect, which is let's just not deal with only the REO where we've had progress. Let's also deal with some of the watch list and maybe some other of our select office assets so that when we are through this portfolio strategy, we could show up with a relatively new origination portfolio. A lot of the REO has been cleaned out, and we don't have some of the exposures that the market is I think, focused on right now. So that's really the goal here. And my expectation is if we show up with a clean portfolio, a newer portfolio that the market will price it, I think the market is efficient and will recognize the steps that we've taken and the new portfolio that we've been able to create at that moment. But we'll have to evaluate that. Obviously, when we get to that moment in time, and there's a good amount of distance between now and then. So that's how I would say that. I have optimism that won't occur, that we will get recognized for the portfolio we're going to create here. As it relates specifically to the ARI transaction, listen, I think it's an interesting transaction for sure. It definitely shows how the private markets value some of these portfolios compared to what the public markets do. But I don't want to draw any direct correlation to KREF. I think we've got our business plan. We've got our strategy, and we're really focused on implementing that.

Appreciate those thoughts, Matt. And maybe sticking with this kind of overhaul of the portfolio. When we get to the end of '26, what does success look like? I mean you mentioned Mountain View likely carrying on into '27. Is it all the REOs as of right now resolved? Is it the watch list fully resolved? Is it office has been reduced by 50%, some number out there. Like what does success look like internally? What are those targets by the end of '26.

Thank you for the question. I have a few points to make. First, during our next call, I believe we'll be able to clearly explain our end goals. Looking at our watch list highlighted in our supplemental materials, our aim is to monetize or liquidate the majority of it. I refrain from saying all because some life science assets are currently being modified, and we need to ensure we are ready to proceed with those. Additionally, we must assess the liquidity within that sector. Regarding the office assets on our watch list, we have one multi-deal, and our goal is to address those. We need to differentiate between new high-quality office loans and some legacy deals that don’t meet the same standards. By the year’s end, we hope to demonstrate that we've liquidated problematic assets in our office portfolio and identified any potential future issues for clarity. As for REO, I don't anticipate significant changes compared to our recent earnings calls. The categories we've established for our REO are outlined in our supplemental materials. We have several assets in the short-term category, which we aim to partially or fully liquidate this year, including properties like the West Hollywood luxury condo, Portland redevelopment, Raleigh multifamily, and the Philadelphia office. We'll provide updates on these throughout the year. For medium-term assets, we are focusing on the Mountain View property, where we are actively negotiating leases, given the robust market conditions there. Lastly, the longer-term category consists mainly of life science assets, such as those in Seattle and our Boston loan on the watch list. In summary, we expect to address the majority of these assets this year. If we can successfully manage Mountain View in the intermediate term, we will have substantially improved our portfolio, with only a few life science deals remaining. We've been patient with some of our office properties, which has proven beneficial as the market rebounds. Our REO assets in the life science sector are of high quality, and while the market is currently under pressure, its recovery could bring us advantages in the long run.

When we calculate the numbers, we're looking at over $800 million in loans that are either real estate owned or on non-accrual. Additionally, we are considering the migration and whether a new loan will be added to the watch list this quarter. Is that going to enter non-accrual as well? We could find ourselves in a situation where about 20% of the portfolio is underperforming in 2026 or facing negative carry.

Rick, it's Patrick. I'll address that question. In terms of specific numbers, I don't have that information available. However, regarding the asset we mentioned that will likely be downgraded, it is currently paying its contractual interest. We expect this will continue in the near term, so from an earnings perspective, we are not seeing any decline there. The factors affecting us in the near term are some of the REO assets we previously discussed, and we will provide more details on the timing of their resolution in the next quarter when we can recover some of that and convert them into earnings-generating assets. While these assets are currently a drag on us, we believe there is an opportunity to improve that situation soon. For the other assets on the watch list, we can review each one, but generally, we are observing that contractual payments are being fulfilled. This does impact us; however, we see significant potential upside. We estimate around $0.13 in value could be gained by converting these REO assets back into performing loans. That's essentially my input on the matter.

Okay. And again, I assume, look you guys talked about dividend policy, and I heard what I would describe as sort of rational financial analysis as opposed to focused on market sentiment and just maintain a dividend for the sake of that, I'm assuming that, that is an indication that as we go through the year, you guys are going to be looking at all of this. And we should be thinking about our dividend very much in the empirical way as opposed to sort of some sort of gauge sentiment.

Rick, it's Matt. I think that's a fair articulation of how we're thinking about it now, which as we look through the course of the year, like I said, and we try to rebalance this portfolio, trying to understand the near-term impact of earnings there.

Matt, I think fair was a good adjective, but clear or straightforward probably wasn't a good adjective to describe my commentary, but thank you for answering the question.

To touch on Tom's question and maybe the underlying issue is that the bid for assets or loans that KREF is originating seems to be stronger in the private credit market than the required yield that mortgage REIT investors require. So there could be an arbitrage there. As a result, perhaps management should pivot its focus to value creation as the top priority, which could include loan sales, share repurchase, unlocking potential gains in the portfolio if there are some such as Mountain View REO. And perhaps that would buy time to reposition the company rather than go with the strategy you've been undertaking which might still result in KREF trading at this very sharp discount to book value. Otherwise, accelerated dispositions could materialize the book value that the market ultimately is projecting, which clearly requires significant losses on the life science, in particular, but perhaps elsewhere in the portfolio. So just wanted to get your thoughts on that potential pivot and if you see that as something management might undertake.

Thank you, Jade. Yes, it's Matt. I’d like to elaborate on that. When you mentioned the various strategies we could pursue, I believe we are already implementing most of them. Regarding our watch list, select office assets, and portfolio repositioning, part of our strategy will indeed involve loan sales. I completely agree that we should focus on unlocking gains from the REO and try to accelerate that process, which we are actively doing. Our plan will reflect this. A lot depends on finding the right timing to sell, as we don’t want to undervalue our assets. The market has its expectations when purchasing an asset. For instance, with Mountain View, even if a lease is signed, there are prerequisites to get the tenant in and the lease effective. There are strategic moments where we can enhance value and liquidity, and we need to be aware of those. Additionally, we have been repurchasing shares, which is certainly part of our strategy. We are assessing all potential options. You may wonder about selling performing loans; that’s something we can consider, but currently, our main focus is on optimizing our portfolio for favorable trading in public markets. All portfolios, including ours and those of peers, have some legacy assets, which, while not all destined to be watch list items or losses, may carry higher loan-to-value ratios than we originally anticipated. With values declining significantly in the real estate sector, that might reflect market sentiment. As we reposition the portfolio and incorporate more newer loans, the valuations may improve. I don’t believe this situation will last indefinitely; these stocks won’t always trade this way. We have just navigated one of the most challenging real estate environments of my career, and as we move forward, I anticipate a rational market will revalue these portfolios.

The eye of the storm seems to be life science. When you listen to Alexandria's earnings call, it's clear, and they are best in class at this. They expect a very long timeline to turn around this sector, 5 years plus. And AI is also going to wreak havoc on this sector. So you talk about putting in place modifications to get basis to a point of comfort, the weighted average basis today is $830 a foot. Do you have in mind the range or some benchmark that you could provide, which we should think would be a reasonable basis to take this outsized risk beyond the investor horizon that people are contemplating?

Yes. There are a few important points regarding the life science sector that we are closely monitoring. We recognize that it could be a lengthy process. However, I recall when we took over Mountain View, many in the market, including top brokers, said it would take five years to make progress there. I believe it will take less time, and I am optimistic about the value we can create. Situations can change. Concerning technology and AI in life sciences, I don't view this as a negative; it may actually encourage the development of new drugs and lab space. We will observe how this unfolds. We are aware that we need to lower our basis, and we've been actively working on that. This approach applies to our life science sector, just as it does to our other modifications. Unless the sponsor is ready to make a substantial capital investment to reduce our leverage to a comfortable level, we typically proceed to real estate owned (REO) status and sell. In light of our current challenges and recent downgrades, we anticipate our sponsors will invest significant capital to pay us down. In exchange, we may need to establish some form of hope note. However, I prefer not to discuss specifics while we are in the midst of negotiations. Generally, we have been successfully reducing our basis significantly, through not only hope notes but also principal reductions and contributions from borrowers who are recommitting to the assets.

I want to kind of piggyback on what's been asked already, but kind of go a different angle and how do you guys comment through the KKR lens as it pertains to just broad demand for one commercial real estate credit and then commercial real estate in general. Matt, to your point you just made, right, timing is in the eye of the beholder and can change in 5 years to a shorter term. But just what's the bigger KKR machine seeing as it pertains to global demand for domestic real estate, both on the credit side and the equity side? I think it will help us kind of get an angle as to the true value here or value creation probability if we take a little bit longer-term tack.

Thanks, Gabe. I appreciate the question. Let's consider our perspective for a moment. We are observing an increase in allocations to both real estate credit and real estate equity. The sentiment has clearly shifted. Many institutional investors are reviewing their overall portfolios and assessing the value changes over the past five years, noting that real estate has remained relatively stagnant. As a result, there is a noticeable shift back into that sector. Most investments are still focused on opportunistic and value-add areas within equity, and we haven't yet seen a full return of core and core-plus investments, although there are early signs of that emerging. However, the majority of the activity is in the opportunistic value-add segment. Allocations are increasing, and we are starting to see more market activity with some sales occurring. Our pipeline remains largely focused on refinancing for lending, but we are noticing an uptick in acquisitions, indicating increased capital flow, as funds return capital that typically gets reinvested. This reset seems to be beginning. Similarly, on the real estate credit side, there is a growing interest in real estate credit. We've been in a more favorable position in this segment compared to equity for some time, as allocations to private credit have been rising over the last few years. There is a palpable discussion about relative value not only in real estate credit but also in asset-backed securities and infrastructure, especially as investors look to diversify away from corporate credit, which may face challenges. They are exploring credit options that provide yield and safety in the current market. We have definitely seen a shift toward real estate credit, with private funds, including ours and our peers, raising substantial capital in this area, and I expect this trend to continue moving forward.

So we have a couple more rate cuts behind us now, and futures are suggesting another 2 cuts this year. I guess the question is, have those cuts increased interest in your guys' REO assets at all? And I guess what I'm really trying to get at is, have those cuts narrowed the gap between buyers and sellers?

Thanks, Chris. It's Matt. I do think that these rate cuts are helping liquidity in the market. I don't know if it specifically translates to the liquidity we're seeing, but it's certainly part of it. But I think overall, the sentiment for real estate right now is pretty positive. There hasn't really been a lack of buyers in the market. I think there's a lack of sellers personally. Sellers at a price, right, sellers at an opportunistic price, which is why we're seeing a lot of our activity more in the refinance part of the market than the acquisition part. Because you have owners of real estate that own a really good property. That property likely is performing fine from an occupancy and cash flow perspective outside of small pockets where you have some oversupply, you may have a sponsor that owns it at a higher basis than they'd like given just value decline since rate hikes in 2021. And so we're seeing our sponsors really play that forward refinance by time where supply really drops off and they can raise rents and grow their equity value back. So that's the overall market. So as we think about selling our assets, particularly on our REO, I do expect there to be liquidity and unrelated to maybe the rate cuts, we're seeing more liquidity in the office sector, right? Some of those assets that we've taken back or on the watch list didn't historically have a lot of liquidity, just given the uncertainty market there has found some stable ground, and you're starting to see real liquidity in that sector. Again, I'm not sure it's directly related to rate cuts. I think it's more about just time and seeing where leasing is shaking out and finding some stability in the overall occupancy and leasing market.

Got it. That's very helpful. And that's a good segue into my next question on office. And you touched on this a little bit, Matt. But we haven't really seen many new office loans in recent years. So can you guys just talk about your view on that sector? And what makes an office loan attractive these days?

I would say our borrower remains strong. We recognize there may be some volatility ahead regarding technology in real estate, so we must remain cautious. The key opportunity lies in lending on newer, high-quality assets, especially for someone like KREF, focusing on assets with stabilized cash flows, such as leased properties with long-term leases. This is where we find an appealing opportunity at the moment. By doing so, we're minimizing leasing and repositioning risks since we're assured of steady cash flows in favorable markets with significant leasing demand and activity, particularly in top-tier buildings. This is our primary focus. There's substantial data indicating that not only is there liquidity in the capital markets for owning such real estate, but there is also considerable leasing demand. This situation presents an interesting opportunity for us, allowing us to lend on exceptionally high-quality, already leased real estate without taking on substantial repositioning risks.

Got it. Very helpful. And if I could just squeeze one more quick one in. Should we expect originations to mostly be in line with repayments as you execute this more aggressive resolution strategy? Or could we see some net portfolio growth in the coming quarters?

Yes, I believe we need to consider two key aspects. First, we need to focus on repayments and the reinvestment of that capital into new loans. Second, we must ensure that we remain within our targeted leverage ratio. These are the two factors we are managing.

Got it. So REO sales may be the missing piece of that puzzle there?

Yes. And as we liquidate REO, we'll be able to increase portfolio size. It would be the other piece of that as well, you're right.

On Mountain View, could you quantify how much dollars you expect to put in? And do you see a potential gain there?

Jade, it's Matt. I don't think, we don't have a lease yet. I don't think we'd want to comment on potential CapEx, TI, etc., until we have a lease. At that point in time, when we have the final numbers, we can certainly go through that. The answer to your second part is everything we're seeing today, I'll comment again, we don't have a lease done. But everything we're seeing today would suggest that I think we've got significant value in that asset above where we're carrying it today.

Okay. That's good to know. And then office, there's a couple of 2021 and early 2022 vintage risk-free loans. I'm not sure if that's what you're referring to in your office comments, including Washington, D.C., Plano and Dallas. So just if you could comment on that.

Yes. We can provide more details on this topic next quarter. First, I want to clarify that we're not overly concerned about all of our office 3 rated loans. For example, the assets in Dallas are performing well, and our assets in D.C. are also in good shape. I anticipate that we'll see a significant amount of repayments in our office portfolio this year from loans originated in 2021 or earlier. Rather than focusing on each individual asset, I believe most will be repaid. If some loans aren't repaid, we may consider selling them or restructuring the deals with borrowers to ensure we can manage and reduce that part of our portfolio.

This concludes our 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 us this morning. You can reach out to me or the team here with any questions. Take care.

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