Earnings Call Transcript - KREF Q4 2020

Operator, Operator

Good morning, and welcome to the KKR Real Estate Finance Trust Incorporated Fourth Quarter and Full Year 2020 Financial Results Conference Call. All participants will be in listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Anna Thomas, Head of Investor Relations. Please go ahead.

Anna Thomas, Head of Investor Relations

Thank you, operator. Welcome to the KKR Real Estate Finance Trust earnings call for the fourth quarter of 2020. We hope that all of you and your families are continuing to stay safe and healthy. Today, I am joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Mostafa Nagaty. I would 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.

Matt Salem, CEO

Thank you, Anna. Good morning, and thank you for joining us today. We hope you're all healthy and safe. In a year where we experienced a global pandemic and the resulting health and economic damage, KREF delivered its strongest performance to date with record distributable earnings of $1.95 a share. We held our dividend constant despite a significant decrease in interest rates, and our earnings covered our dividend by 1.13 times. The volatility throughout the year put a spotlight on the industry, allowing us to showcase our defensive investing strategy and increase our investor base. Our financing, which is 83% fully non-mark to market, demonstrated its resilience. This best-in-class liability structure, which was years in the making, demonstrates the tremendous effort across the KKR platform to differentiate KREF. And as transaction activity resumed in the market, we were among the first lenders to take advantage of the new environment and originated $565 million in the fourth quarter. As we look into the year ahead, KREF will continue to benefit from our conservative lending and liability strategy. Turning to our portfolio, as of December 31, the balance was approximately $5 billion, with only $472 million or 9% of our total commitments of future funding obligations. Our almost exclusive senior loan portfolio focuses on institutional real estate and sponsorship and is secured predominantly by Class A lighter transitional, multifamily, and office properties located in the most liquid real estate markets. Our average loan size is $118 million. And our investment portfolio is 98% senior loans, with no direct holdings of securities. Performance on the portfolio remains strong, with interest collected on approximately 98% of the portfolio as of the fourth quarter. Through our robust quarterly asset review process, we evaluate every loan in the portfolio to assign an updated risk rating. Our portfolio had a weighted average risk rating of 3.1 on a 5 point scale, consistent with the weighted average risk rating at September 30th. 84% of the portfolio was risk rated 3 or better. And we feel very confident about the performance on those properties.

Patrick Mattson, President and COO

Thank you, Matt. Good morning, everyone. We hope that you continue to stay safe. As of quarter-end, a market-leading 83% of our in-place asset financing was completely non-mark to market. And the 17% remaining balance was only subject to credit marks. While we will continue to prioritize non-mark to market financing, we expect to maintain a balanced and diversified approach to our secured financing and expect our credit facilities to continue to be an active and efficient form of financing within our capital structure. However, it was our intense focus on non-mark to market financing prior to the pandemic that allowed us to lower the risk of our liabilities while at the same time maintain target leverage levels despite the volatility last year. As of quarter-end, our debt-to-equity ratio and total leverage ratio were 1.9 times and 3.6 times respectively. The leverage ratio reflects a slight decrease from the third quarter, given some recent repayments. As a reminder, we have generally target 3x to 4x leverage ratio on new senior loans, depending on the source of financing. While we've been willing to finance loans at low 80s advance rates on our non-mark to market financing, we would expect our total leverage ratio to remain in this range in the coming quarters and expect our debt-to-equity ratio to be in the low 2x area. As Matt noted, with the company near full deployment, repayments will be a key driver of our near-term origination pace. And while it's always difficult to predict repayments with certainty, our current expectation is for the existing portfolio to have some additional duration this year with repayments weighted more towards the latter half of 2021. In the near-term, KREF will continue to benefit from the in-place LIBOR floors and elevated effective net interest margins. As a reminder, while the portfolio is almost entirely floating rate, 85% of the loan portfolio has a LIBOR floor of at least 1%, while only 2% of our liabilities, excluding the term loan B have a floor above 0. As we experience a rotation in our portfolio through loan repayments and new originations, we expect LIBOR floors on new loans to set close to spot rates. And we expect our effective NIMs to compress over time. Finally, KREF's liquidity position remained strong at over $480 million. This total includes over $110 million of cash and full access to our $335 million corporate revolver. In addition to reported liquidity, at quarter-end, we had approximately $275 million of unencumbered senior loans on the balance sheet that are able to provide additional liquidity when pledged to our existing financing facilities.

Mostafa Nagaty, CFO

Thank you, Patrick, and good morning, everyone. Before I turn to the key financial highlights, let me call out the change in our non-GAAP earnings measure. Historically, we reported core earnings as our key non-GAAP earnings metric to assist the performance of our business. Starting with the fourth quarter and based on updated guidance from the SEC, we renamed the metric to distributable earnings to better reflect the purpose of this metric, which serves as an indicator of our ability to cover and determine our dividend. To be clear, this change and the naming convention does not change the way we historically calculated and reported this metric, which are just GAAP net income to exclude certain non-cash items. Reflecting on 2020, in a very challenging and unprecedented year, we have achieved record distributable earnings of $1.95 per share, comfortably covering our dividend of $1.72 per share for the year. We conservatively managed a strong liquidity position through the initial COVID volatility and ended the year with over $480 million of liquidity. We closed a $300 million term loan B, a $500 million warehouse facility, increased the borrowing capacity on our revolver to $335 million, which remained undrawn at year-end, and maintained a best-in-class liability structure, with over 80% of our secured financing on non-mark to market facilities. We accretively repurchased 2 million shares of our stock totaling $25 million at an average price of $12.27 per share. We also returned to the offense following a market shutdown, with originations over $565 million across seven loans in the fourth quarter. We look forward to continuing to deliver attractive risk-adjusted returns and strong results for our shareholders. Thank you again for joining us this morning. And with that, we're happy to take your questions.

Operator, Operator

We will now begin the question-and-answer session. The first question comes from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani, Analyst

Thank you very much for taking the questions. In terms of your comments surrounding capital management and the companies being in a position of full deployment, with the stock trading at about 99% of GAAP book value and below book value excluding the CECL reserve, what options might you consider? I assume that the unencumbered assets you want to keep as liquidity insurance. And I'm wondering if perhaps you could pursue with CLO as some of your peers are reported to be looking at. I'm wondering if you might consider issuing some form of unsecured debt, whether it'd be a convert or perhaps a preferred. What are you currently considering?

Matt Salem, CEO

Hey, Jade. It's Matt. Thank you for joining us. I appreciate the question. I'd say, right now, we're primarily focused on managing the originations through repayments. Obviously, I think as we look at the stock price and you mentioned where we are versus book value with and without CECL, we'll continue to track that and think about raising capital, if we can do so, accretively. Certainly, the pipeline is very big. Right now, it feels like there's been some pent-up demand over the course of the last six to nine months. And so, we're seeing good opportunities there. I think from the debt side, we're going to take advantage of some of the things you mentioned. The markets are very strong right now on the liability side of the equation certainly. The CLO market has been very active and is pricing at very attractive levels. But I think from a total debt perspective, we're in a good place. So, we don't expect to add debt. But, obviously, we can change forms of debt or refinance existing facilities to take advantage of some of the current environment. So, right now, I think we're again most focused on repayments and potential equity to the extent we can do so accretively.

Jade Rahmani, Analyst

Thank you very much. Looking at the watch list assets, I would agree with your commentary that, overall, there seems to be the potential for improvement in the quarters ahead. The New York condo market has seen a meaningful uptick in sales over the last two months. Everyone knows that Florida is seeing very strong occupancy rates in hotels. So, I assume the Fort Lauderdale Hotel would do well. Even the Brooklyn Hotel, I believe, is a recently constructed asset. So, it could be in a good position. Industrial is doing well. So, Queens Industrial, I assume, would also do well. San Diego multifamily, I also believe is a recently developed property in lease-up. So, that may just be a timing factor, and there's lots of liquidity. So, that leaves the Portland Retail loan, which is total principal of $110 million. $100 a square foot basis seems low. And I know in the past, you've indicated you're comfortable with the location, but it does seem to be potentially a redevelopment. So, I'm wondering if you feel that there is a risk of impairment on that order. How do you think we should evaluate that risk?

Matt Salem, CEO

Yes, it's Matt again. I believe we have a similar perspective on the watch list loans as you do. We've observed ongoing improvement in the hotel sector, particularly in the condo sector, with several sales occurring at that property after COVID, including one in the fourth quarter. Progress continues in that area, and as I mentioned on the call, some of these loans could experience positive credit migration over time. Recently, we made some modifications to one of our hotel loans, which included a principal paydown. Overall, things are definitely moving in a positive direction regarding the watch list.

Jade Rahmani, Analyst

Thank you. I'll get back in the queue.

Operator, Operator

The next question is from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws, Analyst

Hi, good morning. Can you discuss your increased activity in loan origination? What changes have occurred, and what remains the same as you evaluate these new loans compared to a year ago?

Matt Salem, CEO

Sure. It's Matt again, and thank you for the call, Stephen. Our focus remains on a similar area, mainly multifamily properties and lighter transitional assets, including office spaces. The most significant change in our underwriting is related to the timing of how long it will take borrowers to execute their business plans. We are still facing a challenging economic environment for many real estate assets, which will affect how quickly cash flows can increase again. Additionally, we need to consider the concessions related to multifamily properties and rental rates, particularly regarding the potential impact of COVID and how that may affect future rates as we begin to phase out concessions in some larger markets. The key difference in our underwriting now revolves around these concessions, rental rates, and again, the timing aspect. There are numerous opportunities ahead. As I mentioned, there is pent-up demand, and our pipeline has never been larger. We’re also seeing new opportunities emerging from COVID, with growing interest and demand in the industrial sector and the life sciences field. Certain successful real estate properties are in need of financing to create new spaces that can effectively meet this demand arising from developments related to COVID.

Stephen Laws, Analyst

Thanks for the insight, Matt. Could you discuss general and administrative expenses? It seems we have returned to pre-COVID levels, and how should we approach this going forward?

Mostafa Nagaty, CFO

Hello. Yes. In Q4, when we exclude stock compensation, we had a lower G&A load compared to Q3. This was mainly due to higher non-recurring items that occurred in Q2 or Q3 related to the COVID disruption. Looking ahead to 2021, we expect our G&A load to remain fairly consistent with what we experienced in 2020, with a slight expected increase in the first quarter related to some expenses from Q1 concerning the proxy and associated costs.

Operator, Operator

The next question is from Steve DeLaney with JMP Securities. Please go ahead.

Steven DeLaney, Analyst

Thanks for taking my question this morning. Hello, everyone. Matt, I wanted to ask about your co-origination strategy. You completed about six loans in the fourth quarter. You have certainly shown you can manage a $150 million loan independently. Can you discuss the reasoning behind splitting them 50-50 and how that contributes to diversification and reduces exposure to any single project or borrower? How do you view co-origination in contrast to fully funding a loan yourself? Thank you.

Matt Salem, CEO

Thank you for the question, Steve. It's good to hear from you. To start, let's discuss allocation. KREF primarily focuses on senior lending for transitional properties, which means it has priority access to all opportunities in that market segment. The key for KREF is determining how much capital is available and how to optimize various factors such as portfolio diversity, financing options, and returns for each opportunity. If a $150 million loan comes in and we have the capital available, KREF would typically receive the full amount. However, there were some timing issues in the fourth quarter relating to repayments and the issuance of a term loan B that led to uncertainty about available capital at specific times. As a result, some allocations were made to other capital pools. KREF will continue to be prioritized, which is beneficial from a risk management and financing optimization standpoint. It allows KREF to utilize other capital pools to facilitate larger loans. Having availability for $400 or $500 million loans enhances our ability to present a unified solution to clients, which is a significant advantage. I hope this provides more clarity on our approach.

Steven DeLaney, Analyst

Yes, that's helpful, especially regarding the capacity and the ability to use $150 million without the need to share it with anyone else. I'm glad to hear that the decision on how to allocate it is entirely yours. Additionally, I want to mention something for Patrick. Financing has certainly been a significant topic in 2020, distinguishing those with strong financing from those without. An 83% rate is outstanding for fully non-mark to market. I have a hypothetical question. In a scenario with no access to credit or market financing, how would that impact a loan going non-accrual? For instance, let's consider a property in Portland, which may not even be financed directly. At what point would the bank inform you that they do not finance real estate owned (REO) properties, and how far does that process extend during a workout?

Patrick Mattson, President and COO

Thanks, Steve. That's a good question. When I think about it, it obviously depends on the financing facility in question. Even with non-mark to market facilities, there are differences in how a defaulted loan might be treated. Typically, in credit facilities and repo facilities, defaulted loans are not meant to be financed. Generally, after a certain period, you are required to purchase the asset off the facility. If it's related to something like a CLO or another type of facility, there is no obligation to buy it back. However, if you encounter enough of these defaults, it could affect your ability to generate cash flow back to the equity, meaning some of your triggers might activate, and you could switch to a sequential pay structure where all lenders receive payment. Ultimately, it depends on the specific asset being financed. Not all assets are the same, and for multifamily properties, the treatment will differ from that of other property types.

Steven DeLaney, Analyst

Yes. Thank you, both, for your comments. Appreciate it.

Operator, Operator

The next question is from Charlie Arestia with JP Morgan. Please go ahead.

Charlie Arestia, Analyst

Hey, good morning, guys. Thanks for taking the questions today. I wanted to ask about the corporate loan. I thought that was interesting, given the focus near-exclusively on senior loans in recent years. Just wondering if you could give a little more color on the decision process on that loan, the underlying business plan. I mean LIBOR plus 12 definitely come either. And I'm wondering if the underlying real estate portfolio there is highly multifamily.

Patrick Mattson, President and COO

Thanks for the questions. Matt, I can address that. This situation is different from our past experiences and is quite unique. First, it's with an existing sponsor, someone we've partnered with multiple times, so we have a strong relationship there and understand how well they manage their assets. We refer to it as a corporate loan, which I think is an accurate term. If you want to view it through a real estate lens, it aligns more with a mezzanine-type position. We were able to apply this structure across the entire portfolio of the company, creating a robust collateral package for the loan and diversifying it across all assets. The underlying collateral consists of multifamily properties, most of which are at some stage of stabilization—built assets that are progressing towards stabilization. Overall, we believe this is a strong credit opportunity, particularly as we focused on leveraging some market pricing opportunities that arose post-COVID. This was again with a sponsor we are very familiar with and appreciate working with, and we are pleased to have completed this deal with them.

Charlie Arestia, Analyst

Okay. Got it. And I'm getting the sense that this was relatively opportunistic and kind of a unique situation. Do you think, going forward, that you guys will kind of diversify the loans that you make in 2021? Or is this kind of like a one-off situation?

Patrick Mattson, President and COO

I believe this is more of an exceptional occurrence. It was a distinctive capital markets activity for the company that created an opportunity in this market and also relates back to the period before COVID. We are positive about the senior lending market for several reasons. Firstly, our clients appreciate it because we provide a comprehensive solution, alleviating their concerns about senior relationships or closing challenges, which ensures execution certainty for them. Secondly, it enables us to capture all the financial benefits and determine the best way to optimize financing for the highest return on equity. Additionally, we like the security package associated with being in a senior loan. Therefore, I anticipate this trend will continue for these reasons.

Operator, Operator

The next question is from Tim Hayes with BTIG. Please go ahead.

Timothy Hayes, Analyst

Good morning, everyone. I hope you're all doing well. My first question is about net interest margin. Can you provide some details on the all-in coupons for the current pipeline compared to the existing portfolio? Additionally, you mentioned how accommodating the capital markets are right now. I'm curious if you have options to reduce your funding costs through capital market execution or if you're experiencing any pressure on banks to lower your repo costs due to the current execution environment. I realize that's a couple of questions, but I appreciate your insights.

Patrick Mattson, President and COO

Hey, Tim. Good morning. I'll take that one. And welcome to the call. Good to have you with us here today. So, I guess, first, just thinking about the existing I guess, cost of capital, clearly, the markets improved from a financing standpoint. So, we're seeing that across the liabilities. We're seeing a tightening on the credit facilities. And we can see demonstrations of this in the CLO market. When I think about our net interest margins, if you look at our coupons on our existing portfolio, there are around 480 at the end of last year. That's down 20 basis points from the beginning of the year. And so, that just demonstrates a little bit of the benefit that we had from the LIBOR floors. The LIBOR dropped from about 175 basis points to around 11 basis points today. But we only saw around a 20 basis point drop in our asset spread. So pretty remarkable. And we effectively took what was floating rate loans and essentially made them almost fixed rate loans at that point. Our liabilities obviously dropped. And so, if you look at our effective NIM today, it's something north of 2.5%. Now, pre-COVID, some of those loans were being quoted in a low 100s type of area. And I would say today that, that market is probably closer to mid-100s to high 100s. And so, if you think about the walk a little bit, we've got around a 480 coupon in the portfolio. Look at our senior loans that we originated in the fourth quarter. That was somewhere in the mid 4s. And I would say with the pipeline today, that's somewhere probably on a blended basis in and around the high 3s to low 4% area, just to give some context there. And so, as I look at our liabilities, we're pretty efficient at the moment, just given our existing structure in place. Our existing CLO was priced at a pretty attractive level two years ago. We continue to get benefit there. And our other facilities equally are attractively priced, predominantly in the kind of 100s over spreads and then LIBOR again today, it's 11 basis points. So, we're getting a lot of pull-through with net interest income.

Timothy Hayes, Analyst

Okay. That's a great walk through. I appreciate it. So, I guess, maybe to kind of recap all that, I'm calculating about a core ROE of just over 10% this quarter. I'm curious how you feel about KREF's ability to achieve a double-digit ROE, given this type of environment. And we're going to keep rates static in this example to be able to stay in the vacuum. So just curious how you feel about the ROE you are able to achieve.

Patrick Mattson, President and COO

Yes, we are currently feeling positive. In the fourth quarter, our underwritten internal rate of returns (IRRs) are indicating a figure around 14%, even when factoring in some of the non-senior loans we've discussed. This suggests we are seeing good returns on these types of investments. While we anticipate some asset compression in the market could apply pressure on those returns, it has been a favorable environment for making new loans, allowing us to aggressively pursue new opportunities. Our pipeline looks strong, and we believe we are in a favorable position at this time.

Timothy Hayes, Analyst

Okay. I appreciate those comments there. And then, just one more from me, back to the Portland retail loan. If you could just remind me, I know, obviously, it was placed on non-accrual status this quarter versus last quarter. But was there any major impact in the actual earnings collection that you were accruing for that loan quarter-over-quarter?

Patrick Mattson, President and COO

It's Patrick again. When we consider the transition from third quarter to fourth quarter earnings, that certainly had an impact this quarter. Another factor was the repayments we received earlier in the fourth quarter. We had a strong quarter for originations, but many of those were back-loaded. Additionally, we've mentioned the shift in spread or coupon from the upper 4s to the mid-4s. These were the main driving forces this quarter. We're pleased with where we ended up, but those were the areas where we experienced some quarter-over-quarter impact.

Operator, Operator

The next question is from Matthew Howlett with Wolfe Research. Please go ahead.

Matthew Howlett, Analyst

Thank you for taking my question. I have a modeling question. I understand you don't provide forecasts for distributed earnings, but there is strong coverage for the dividend, which has been consistent for a couple of quarters. I appreciate your insights on the NIM, but it seems like there was a slight under-deployment in the fourth quarter. Given your comments on the IRRs, can we expect the cushion for the dividend to remain stable? Additionally, when do you anticipate distributing 100% of your distributed earnings?

Matt Salem, CEO

Hey, it's Matt. I can jump in there. I think there are two major factors we are considering moving forward: repayments, as we mentioned, and the yield on the new loans from the existing portfolio this quarter, previous quarters, and for the year concerning significant amounts, given the LIBOR floors Patrick described. The first priority is to understand what those repayments might look like before returning to more normalized earnings levels seen historically before COVID. As we noted on the call, predicting repayments is challenging. However, based on our ongoing analysis of the portfolio each quarter and our evolving assumptions, both from a credit standpoint and in terms of timing for repayments, we believe that repayments will be more concentrated in the back half of the year. This could support earnings if other factors remain stable, giving us some confidence for the future. Additionally, as Patrick mentioned, we are still able to generate decent returns on the new loans we are making, although not at the same earnings level we experienced over the past few quarters due to the influence of those LIBOR floors. Regarding your last question, we will continue to assess our earnings and the dividend. Currently, we are effectively operating in a 0% interest rate environment on the short end of the curve. The Board will make decisions as we progress, but for now, we are comfortable with our current position.

Matthew Howlett, Analyst

And then, just on the visibility with prepayments, are you just seeing really strong lease-up rates and access to other parts of the market? Is that how you sort of forecast what you think is going to get repaid?

Matt Salem, CEO

We're considering a variety of factors, particularly in relation to the capital markets. COVID has affected our transitional business plan, extending its timeline. Leasing up a multifamily property will take more time, and in this market, we may have to offer more concessions to achieve that leasing. As a result, sponsors might wait an additional quarter or two before leasing it up further or reducing those concessions. This has pushed timelines back. While things are progressing well, they will require more time. Ultimately, we believe we'll benefit from this situation due to the LIBOR floors with our liabilities and the net interest margin in our current portfolio. That's the reality we're encountering on the ground.

Matthew Howlett, Analyst

Great. Just one last question. Regarding the loan participation sale, you're increasing your structural leverage. What is the interest level for this? You haven't done many; how interested are you in proceeding with it?

Matt Salem, CEO

I think for us, we make a loan and then determine how to optimize the return on equity through financing. This does not significantly influence our decisions regarding whether to sell an A note, finance it through a CLO, or use one of our customized financing facilities that we've developed. Each option has different requirements, and we evaluate each loan to see where it fits best among the various financing options available. It's difficult to definitively say right now whether we will pursue sales or lean more towards CLOs. It really depends on the pipeline, the originations, and ultimately how everything comes together.

Operator, Operator

The next question is a follow-up from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani, Analyst

Thank you very much. Besides the loans on the watch list, are there any others that jump out in terms of areas that investors should be focused on in terms of risks?

Patrick Mattson, President and COO

No, I don't think so. During our recent quarterly review of each loan, we feel quite confident about the non-watch list loans and their stability from a credit or ratings perspective. We've already discussed our status on the watch list loans, so there is potential for some positive changes with a few of those.

Jade Rahmani, Analyst

Thank you. You mentioned that you're observing more opportunities in the industrial sector, which seems to be the least favored sector. Are you implementing additional safeguards since you are underwriting? I understand that historically, light warehouse spaces are relatively easy to develop. Therefore, there is a concern that this market could become oversaturated. I assume that you consider this risk in your underwriting process.

Matt Salem, CEO

Yes, I believe our underwriting remains consistent from pre-COVID to now, with adjustments made for the increased demand. In the industrial sector, construction is relatively simple, so it's important to consider replacement costs when starting new projects. Many of the developments we are involved in are infill projects, where costs remain high. We are actively engaging in the equity side of our business in this sector, as we have seen strong demand and favorable lease-up rates. Therefore, we plan to continue focusing on and investing in this sector, as we see potential for growth.

Jade Rahmani, Analyst

On the Portland loan, is one of the options potentially a joint venture in which KREF takes an equity stake in a redevelopment of the building or otherwise brings in one of KKR's vehicles to assume some kind of interest?

Matt Salem, CEO

Yes, we haven't ruled out any options at this time. A redevelopment is likely, and the question is who will be involved in that. It's a possibility for us. I don't think we would collaborate with other capital within KKR due to potential conflicts. However, there is considerable interest from developers for that specific site and location. We'll see how it develops, but we are currently keeping our options open.

Jade Rahmani, Analyst

Okay. And just last question, something I've asked some of your peers and a couple of them have been kind enough to provide the answer. Do you have the percentage of loans in the portfolio that to-date have been modified since the pandemic? And I know the sector has a habit of giving this interest collections perspective. But if you modify loan, then you can be able to maintain a high percent of interest collections. So, do you know also the percentage of interest collections relative to, say, a snapshot of the pre-pandemic portfolio, just how that 98% compares to what it would have been previously?

Mostafa Nagaty, CFO

Hi, Jade. It's Patrick. Let me take that one. I think the watch list page is a good place to look. In reality, there have only been a few loans that I would consider material modifications. Modifications are part of business plans, as things progress, whether during a pandemic or not. As we've mentioned before, I've focused on what's happened with interest rates; there have been no cuts in interest rates on any of our loans. We have discussed on the hotel side two loans where we did partial deferments of interest or partial forbearances. Matt mentioned one of those, and since year-end, we have made another modification to that loan. This modification brought the deferred interest current, established a carried reserve, and included a partial paydown on the loan. We would view that as a significant modification. However, I don't think that's the area you're focused on. When I consider that 98% figure, it really reflects the two loans that are on non-accrual. We've talked about those, the small mezzanine loan and the Portland Retail asset. Even when we look at our percentages in the fourth quarter and the first quarter number we've provided, there hasn't been a change in performance. It's a change in the denominator. Those two same loans remain on non-accrual. Everything else is paying on time, and no other loan has had a change in interest rates. That's how we view modifications, and we believe we have a strong track record.

Jade Rahmani, Analyst

Thank you very much, and I appreciate the clarity. It definitely seems like the portfolio is performing well on a relative basis as well. Lastly, regarding the limited capital and the management team's historical experience in the CMBS space, could you comment on whether the sale of the CMBS portfolio, with an equity interest of about $34 million, could be a source of funds, even though it's modest? Additionally, are you considering forming a CMBS conduit? The company has a lot of multifamily assets, and that collateral is likely in high demand in the CMBS market. The GSEs are very competitive, but that could also contribute to CMBS securitizations. Would you consider forming a CMBS conduit to provide longer-duration loans on stabilized assets, which could also enhance the company's earnings?

Matt Salem, CEO

Hey, Jade. From a capital perspective, we obviously have an interest sort of fund that we manage and invest in CMBS. It's a small position. So, I don't think about that, which you mentioned, as like really a source of capital for us if we were to sell that. I think we'll continue to invest in that fund. And, obviously, there are different liquidity investing in a fund and directly in security. So, as it relates to the conduit, origination business, it's not something we're contemplating currently. So, there's been a lot of changes in that market. We're a very large investor in that space. I still think that the best way to play that is on the investing side as opposed to origination and contribution of loans to deals.

Jade Rahmani, Analyst

Thanks very much for taking the questions.

Operator, Operator

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

Anna Thomas, Head of Investor Relations

Hi, everyone. Thank you for joining our call today. Feel free to reach out to me or the team with any follow-ups. Thanks.

Operator, Operator

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