Good morning, and welcome to the KKR Real Estate Finance Trust Inc., First Quarter 2021 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 Jack Switala. Please go ahead sir.

Great. Thank you, operator. Welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2021. We hope that all of you and your families are safe and healthy. As operator mentioned, this is Jack Switala. I recently joined KKR and going forward will serve as the Head of Investor Relations for KREF. I'm looking forward to connecting with you directly.

Thank you, Jack, and welcome to the team. Good morning, everyone and thank you for joining us today. We hope you are all healthy and safe. KREF is off to a great start this year, in terms of financial results another outstanding quarter with distributable earnings of $0.55 per share covering the $0.43 dividend by 1.3x. This is a continuation of the success we had in 2020 where distributable earnings covered our dividend by over 1.1x, despite the global pandemic. Our earnings continue to benefit from strong portfolio performance and existing LIBOR floors. We're seeing good progress on property business plans, which we expect to lead to elevated repayments in the back half of the year, after which earnings will begin to normalize. On the origination front, we remained active with a continued focus on high quality real estate owned by premier sponsors. In the first quarter, we originated three loans totaling 535 million comprised of two office properties and one multifamily property. Net funding this past quarter exceeded 330 million and our portfolio grew to over 5.3 billion as of March 31.

Thank you, Matt, and good morning everyone. As of quarter end a market leading 76% of our asset financing remains completely non-mark-to-market and the 24% remaining balance is always subject to credit marks. Also, as of quarter end, our debt-to-equity ratio and total leverage ratio were 2.1x and 3.7x respectively. Following the preferred stock rates, our debt-to-equity ratio and total leverage ratio sits at 1.7x and 3.1x respectively today. But we expect our leverage ratios to return to the first quarter range in subsequent quarters as we invest the new capital. As we have discussed in the past, we have a robust quarterly asset review process and we evaluate every loan in the portfolio to assign an updated risk rating. The current portfolio risk rating of 3.11 on a five point scale is consistent with the weighted average risk rating last quarter. As we've done in prior quarters, we continue to provide a detailed breakout of our watch list loans in the supplemental presentation. Notably 89% of our loans are now risk rated three or better, which has improved from 84% in Q4. The improvement is the result of 2, 4 risk rated loans being upgraded to a 3 risk rating in Q1, specifically, the Fort Lauderdale Hotel loan and the San Diego multifamily loan. Furthermore, we are seeing improving trends in additional properties, which may lead to positive credit momentum in other assets. Approximately 2% of our portfolio is risk rated a five and is primarily comprised of our Portland retail loan. While the property remains challenged, we continue to dialogue with existing and prospective sponsors regarding the next phase of the property. And we continue to believe there are adequate CECL reserves. We received approximately 244 million of repayments in the first quarter and while it's always difficult to predict repayments with certainty, consistent with our comments last quarter, our expectation remains for increased repayment activity in the second half of the year. In the near term, KREF should continue to benefit from its in-place LIBOR floors and elevated effective net interest margins. While the portfolio is almost entirely floating rate, currently, 69% of the loan portfolio has a LIBOR floor of at least 1% and half of the loan portfolio is subject to a LIBOR floor of at least 1.65%.

We will now begin the question-and-answer session. And our first question today will come from Jade Rahmani with KBW.

I was wondering, Matt, if you could just put a little color around your comments that around the back half of the year elevated repayments after which you expect earnings to normalize. Are you saying that earnings can be elevated in the back half of the year or under pressure in the back half of the year?

Jade, thank you for the excellent question. I think as we look forward over the next couple of quarters, we still feel like earnings could be elevated as we sit with the existing portfolio and the embedded LIBOR floors. We're seeing that our best guess and it's difficult to predict for sure. But our best guess right now is that in the third and fourth quarter, we'll have some pretty heavy repayments and so once we get through those quarters that's when you'll start to see more normalization of earnings.

And will those repayments have an earnings benefit from accelerated prepayment income?

Yes. I mean, we'll get some of that. We will come through, obviously in that particular quarter, and then, following quarter, obviously, we're not benefiting from those LIBOR floors anymore and the excess NIM, but in that -- in those quarters they pay off, we'll see a little bit of that come through.

And the weighted average IRR of 13% to 14% on the pipeline, how does that compare with the IRRs, the company has historically generated?

Yes. If you wanted to think about the market environment today, I guess comment one would be the pipeline is very big. So there's lots of opportunities to look at. So that's certainly a positive in what we're seeing, competitive environment is high. And you certainly see and spread and yield compression of the market. That being said, the way we finance ourselves, there's also a lot of competition in that market. And you've seen cost of capital from the debt side compress. And so you asked about kind of the ROE that we saw kind of in the pipeline, I would say that's slightly higher than what we saw pre-COVID. My guess is some of the loans that we're doing over the next couple of quarters will look a little bit more like we did pre-COVID. So closer to that 11% to 12%, all in IRR context, just as our expectation of the competitive pressures on the market continue.

And just the last question would be, in terms of capital management, capital issuance, the preferred stock issuance with the stock at about 6% above book value, what level would -- it makes sense to issue common equity?

Yes. I think we've been pretty disciplined in the past about access in the market when it's only accretive to the stock. The preferred equity issuance, it took a lot of our near term or solved for a lot of our near term needs for liquidity. So we had a developing pipeline. On the last call, we mentioned, we were focused on equity and we were able to execute a really successful deal on the preferred. So looking ahead and what we're really trying to balance is our expectations of these repayments. And so, as we start to think about the third and fourth quarter and heavy repayments, I'd say that takes a little bit of -- it probably gives us a little bit more caution in terms of raising equity here in the near term, because we did the preferred we can certainly take care of our existing pipeline and then we'll start to get into a repayment schedule. That's not to say things can't change our pipeline could continue to grow beyond what we think our repayments are but that's how we're thinking about it in the near term.

And our next question will come from Stephen Laws with Raymond James.

I guess first maybe to follow up on Jade's questions just kind of, I realize these are all unique loans, but and certainly could be coincidence. But when I look at the subsequent to quarter end loans, it looks like a much lower percentage of that loan was funded than your originations in Q1. As you try and manage your pipeline into that refinance or repayment wave in the second half. You actively trying to increase the unfunded commitment balance to have those draw-downs take place in three or six months or 12 months? Is that something you look to do or is that just coincidental with the post 2Q originations or post 3/31 originations?

I think having some base level of future funding is appropriate and takes a little bit of the pressure off quarter-over-quarter originations. That being said, I think what you're describing is a little bit more coincidental and it's a little bit in response to some of the market opportunities you're seeing, some of that future funding, or most of that future funding is coming from our participation in the industrial sector of the market, where we've rolled out a program where we have some construction lending for, obviously, from new build industrial. So that's driving most of that not all, but most of that kind of future funding component that you're seeing in terms of change quarter-over-quarter. So, it's a sector that, historically, we haven't lent a lot on but obviously, with COVID, and it's a big accelerated sector and with e-commerce and we think it's a really attractive opportunity set. And so we've done a couple of deals and that's driving that number.

Great. And then, pick in common apologies, I hadn't made it through the entire Q yet. What was pick income for the quarter, and then maybe how did that change from a year-over-year basis, which would obviously be a very tough comp for most companies, then maybe how did that change on a sequential basis?

Stephen, it's Patrick, I'll talk about that. So on the pick income, we saw a little bit of change, into the first quarter, it's really driven by just a couple of assets. I think we've talked about some of these assets in the past, including our one hotel loan in Brooklyn, as well as a condo loan in New York. So we've got about 3.3 million in total. I would note that in the quarter, we also saw a reversal of a pick, one of our hotel loans or other hotel loan, which is the Fort Lauderdale hotel loan got modified, there was a $10 million pay down, the true-up of the pick balance and that loan is now current going forward. So it's a modest amount that we had, I think the net change was about 850,000 for the quarter.

Okay, great. So pretty, small debt, especially relative to some peers. Thanks, Patrick. Matt, last question, maybe of the four loans, two New York resi, Brooklyn hospitality, Queens Industrial, can maybe just talk about New York. You guys were there feet on the ground. So can you maybe just give us a bigger picture in New York and how you guys are seeing things as far as the reopening and people returning to the office and other things like that just given you guys are all based there.

Sure. Well, I think you're just starting to see the reopening, as you mentioned and that's impacting, I would say first and foremost multifamily where you've seen see the move ins that number of folks, obviously, that moved out during the pandemic, I think you're starting to see the repopulation to come back as these offices open. And I think New York is a little bit more slow -- it's probably opening more slowly than some of the other markets with people opening. We there are a little bit now but a lot of talk about opening full in the fall from a lot of tenants. But you're just starting to see apartment prices stabilize, start to go up a little bit. We've seen some concessions come down the apartment sector. I think the office market is still delayed in terms of trying to understand where rents are resetting where sublease rates are, where occupancy will settle in has let to a little bit more, I would say uncertain at this point in time. And I said the financing markets are cautious on certainly the office sector and in New York still. And you can, the embedded assumptions and the people are making on new loans are very conservative in Manhattan. In terms of -- specifically on the asset qualities that or the asset property types that we have when we think about the condo, I think the condo inventory loans that we have the two that you mentioned. You're the one that has product readily for sale, it's a little bit later in its business cycle versus business plan, we've seen a lot of progress and a lot of velocity. And I think you're seeing that across the market. Certainly you can read about articles in terms of how much velocity there is on condo sales in New York now and we've certainly seen that at our property, I think we've had almost 50 million of sales since COVID and there's a number of units still under contract that haven't closed yet. So certainly positive in that regard and I think it just shows you that if you lower prices, as the market comes down to meet the market, you can certainly sell units and there's liquidity and clearing levels. Those are the comments I'd make around New York.

Great. Appreciate the color there. Thanks for the comments that Patrick and congratulations on a nice quarter and the recent capital raise.

And our next question will come from Tim Hayes with BTIG.

Matt, I just want to circle back my first question around, I think you might have made a comment about kind of funding costs and how that relates to the -- all in all leads you're seeing on new loans versus pre-COVID. But, are you seeing repo costs come down and/or advance rates move up as the banks are competing with a very hot capital markets backdrop right now? And then, just Part B to that is, a lot of your peers have executed on CRE, CLOs this year? And just curious with your light transitional strategy, I know you already have one -- done one before, but how you feel about that financing strategy in the near term as well.

Tim, good morning, it’s Patrick, I'll take both of those. So first, on the financing cost, yes, we are seeing compression on the liability side. Sometimes these don't always move in tandem. And sometimes there's a delay to what's happening on the asset side. But we're certainly seeing across the board repo spreads compress in the market. I think in part that's driven by what's happening in the broader securitization market, including the CLO side, I think this has been a very active year on the CRE, CLO side. And as you noted some of our public and private peers have access to that market, we're seeing one or two deals come to market a week. So very, very active and is a very efficient cost of capital. So that's an active -- that's a market that we continue to track closely. We have a very attractive cost of capital on our existing CLO. We haven't had a lot of repayments to-date. So even though we're past reinvestment period, we're still benefiting from that very attractive cost of capital. But we're encouraged by what we're seeing, on the liability side, in particular, in the CRE, CLO market, as we're thinking about financing needs over the course of this year.

Got it. That's helpful. And, I guess we'll see what happens there. But just based on kind of what I guess the velocity of those spreads coming in and maybe what you could expect ? Do you think that the trajectory and funding costs would, just partially offset the pressure on asset yield? You're seeing as repayments are recycled into new assets, tighter spreads or lower basis? Or would it partially offset, fully offset or more than offset just curious kind of what your expectations are there. And I guess, just a little more broadly, I'm trying to see if it's really the spread, the NIM spread that's coming in, that's going to put -- I guess bring earnings power to more normalized levels next year, or it's really just maybe expectations for portfolio contraction as repayments pick up.

Sure. So I think about the offset as being sort of partial to what's happening on the assets spread. I think you also have to separate a little bit of the current effective NIMs that we have in the portfolio are really a benefit of -- from these LIBOR floors. So when we originally underwrote those loans that's not the NIM that we were anticipating, but obviously, we've gotten the benefit of over the last year and a half or so. So if I compare that -- if I compare the market today to some of the pre-pandemic levels, and think about that from a NIM standpoint, it's not actually very different from the pre-pandemic market, we're seeing NIMs that are on a relative basis, very attractive. I think if we try to compare them to our effective NIMs today, it will look like a lot of compression. If you look at it, in comparison to the market, pre-pandemic and before we saw a really dramatic drop in LIBOR, they're actually very comparable. So we're obviously pleased with that and the level of activity that's happening on the liability side. I think the other thing that we will likely get the benefit of as some of these loans pay down with these higher LIBOR floors. As I mentioned on the opening remarks, we're resetting a new LIBOR floors to the current spot rates. So 10 to 15 basis point LIBOR floors, which means that at some point in the future, if and when LIBOR does rise, we'll have some positive correlation within the portfolio to that rising LIBOR and we'll get some positive benefit in a higher rate environment.

Right. That one makes sense. And I can go back and see kind of what given in coverage look like, before COVID and that's kind of where NIM is expecting to trend we can kind of attune it together. But I'm just curious if you could just provide some comments around your expectations for dividend coverage, as we get to that more kind of normalized earnings run rate early next year.

Yes. I think our pre-COVID sort of quarters where we were fully deployed, I think are fairly representative. That said, it's really early right to think about that and how that all transpires over the next year or so. So, I think our expectation is that they will normalize, i.e., that some of the elevation that we've had in these earnings will sort of come down. But I think in terms of sort of exact levels in terms of coverage, I think it's too difficult to predict at this point.

Sure. Okay. And then just on credit, I know you made some comments earlier, but can you maybe give us an idea how interest collection, or just rent collections and properties underlying your portfolio's have trended so far in April, relative to the first quarter?

I think on some of the April numbers, it's probably a tad bit early to get all of that sort of flow through. I would say that from a interest collection standpoint, it remains the same two loans that we're not collecting on, which is the five rated loans. I think when the underlying properties, if I look at the some of the occupancy trends that we're seeing, in particular, on the multi-family assets, we're seeing positive improvement there, from sort of the later quarters of last year. So I think that's encouraging. So directionally, I think it's positive. I don't have an exact figure in terms of what those collections have been, but they've been very high across the portfolio, we've seen very little issue with sort of tenant collections at our assets and I expect that trend to continue.

Great. Well, I appreciate the color there, guys. Congrats on a strong quarter.

And our next question will come from Charlie Arestia with JPMorgan.

Most of them have been covered already, but wanted to follow up, I guess, on Tim's question on the financing side, or I guess realistically asking a similar question in a different way. You guys close the term loan late last year, at like L plus 475 and I think there was 100 bps floor on that. And I believe that started amortizing in March. When you look at the new loans putting that are coming on the portfolio that are inside those spreads. And overall, the more diversified funding structure that you guys have beyond the traditional warehouse lines. Can you just talk a bit about where you see loan origination spreads directionally going from here? And I guess ultimately, how you see the economics of those new loans coming on the book, flowing through to the bottom line versus your all in funding costs?

I could take the first part of it, and then kind of hand it over to you. I would say on the new origination front for light transitional assets we're seeing all in coupons, call it in mid to low 3% context right now. And we've been craving a little bit more return than that playing in some of the sectors we like, like industrial for instance. We get a little -- we can catch a little bit more return there and that's on the construction lending side. So but I would say in that call 3% -- mid, low 3% context, like the very light transitional assets right now. Patrick, I'll hand it over to you for the second part.

Yes. On the financing side, Charlie, the term loan B obviously is one piece of our diversified financing structure. I think we're encouraged by what we're seeing in that market. We've got a soft call date that is expires September 1 of this year. We think that there are potentially a number of deals that we'll see fresh kind of pricing points between sort of now and then. But we're encouraged by what we're seeing in that market and, obviously, there's an ability to kind of reset, right there. But it's one component of what we're doing. And we think about that cost of capital, holistically, and so that, you'll see that we've got a range from our repo facilities, to the CLO to the term loan B that all, aggregate to form this kind of weighted average cost of capital. And I think you've seen we've been very disciplined about one diversifying it, but two driving costs down over time.

Got it. Okay. Thanks for that. And then, just switching gears real quick, looking at the forward pipeline, I saw one of the new April loans secured by single family rental portfolio, we'd love to get your thoughts more broadly on that property type. It seems like, it's been a real growth area over the last couple of quarters post COVID and kind of just curious to get your outlook on the competitive environment there.

Yes, Matt, I can take that one. Yes, it's a sector we like a lot, obviously one of the COVID accelerated areas as well. And so, when you think about what we're doing and cross industrial life sciences would certainly be another area that has benefited from the pandemic. This particular loan is for to build the rent for an institutional sponsor that we covered, pre-pandemic. It's a unique opportunity within Phoenix. This is an area that has a lot of -- area of single family rental broadly, it's got a lot of access to liquidity across both debt and equity. So I don't see this as being a very large part of the portfolio, but we'd like the sector. And if we can find, opportunities like this, we will continue to do these. But there's a lot of liquidity in this sector. So we'll have to find kind of pick our spots in terms of where we can create returns and the risk profile that makes sense for us.

And our next question will come from Don Fandetti with Wells Fargo.

Yes. Jack congratulations on the new role. Matt on the Fort Lauderdale hotel, can you remind us where RevPAR our occupancy was pre-COVID, where it's sort of dipped and where we are today, just to give a sense on the recovery there?

Don, thanks for the question. Let me pull that up. Have those numbers off on the top of my head.

No problem.

Let me give you the current month, occupancy was in the 70s ADR and the high three hundreds. So RevPAR very high two hundreds. If you look back to like a stabilized number, we call it like a pre-COVID, occupancy is in line with that. And ADR is actually higher. So our RevPAR for this current month is beating, is ahead of calling T-12 pre-COVID. Now, keep in mind, this is obviously a good time to be in Florida in terms of vacations and things like that. So we would have expected that, but the performance has been very strong. And clearly the sponsor here is committed to the asset with the most recent modification coming out of pocket and paying off the accrued interest that we had or the pick interest and delevering the loan by $10 million. So, we upgraded this loan from a four to a three for all these performance and the most recent modification, et cetera, so.

Got it. Thanks for the details. I guess also on the shift to a little bit leading order into industrial. I would think that sort of these developments that you, it sounds like is in the pipeline for ecommerce would be pretty competitive. Are you seeing a lot of competition in those types of deals? Or is there enough sort of construction risk to where you can, like create some value?

It's a competitive sector, but it does feel like there's a lot of opportunity here. The construction component of industrial obviously is a little bit more simple than a multi-storey building, whether that's multi or office. However, just the fact that it is construction does limit the capital base, especially from some of the regulated institutions. And so, I think there's certainly opportunity here and it's an area if you think about the equity side of our business, we have millions of square feet of exposure and market knowledge. And so I think it works nicely with our overall theme of investing in areas that we have a lot of knowledge that we can use to overlap from what we're doing on the equity side, on the credit side and vice versa. So I do think there's -- we're certainly seeing a lot of opportunity just given the increase in demand in that sector. So I'm hoping that will continue through the year.

And our next question will come from Steve DeLaney with JMP Securities.

I would also like to welcome Jack, we look forward to working with you moving forward. Guys, obviously, everything has been covered pretty thoroughly. The only thing I have left on my list is the 1.6 million reduction in the CECL provision. Is that specifically related to the two, four loans that were upgraded to three? And given that there are several other four rated loans? If those would also be upgraded could there be additional CECL recoveries and in the year ahead? Thanks.

Good morning, Steve. This is Mostafa Nagaty. Hope you're doing well. Thanks for your question. Yes, good question. So we're going to stick to the CECL obviously, we had the 1.6 benefits. And this is a and it kind of resulted in this net decrease our reserve quarter-over-quarter. For most it's really that macro economic scenario that we implemented this quarter, which is pretty much in line slightly better than prior quarter. So that's resulted for a good portion of the increase. There were some offsetting factors, I think on some of the upgrades that we had, namely the Fort Lauderdale hotel that were also resulted in -- about a good portion of the decrease. That will also offset by some of the originations, keep in mind that this quarter, our originations were double the repayments. So there were some offsetting factors, but I think the two key factors here kind of the upgrade for the hotel loan that you just touched on as well as the macroeconomic assumption.

Okay. Well, I know you guys have taken a lot of questions. So I will leave it there. And it sounds like you're in a great position set up for 2021. So congratulations. Thank you.

And our next question will come from Arren Cyganovich with Citi.

You mentioned your pipeline is fairly large and you've had some nice activity post quarter. What's the activity of the sponsors? Are you seeing that kind of continue to increase? Is it? Are the sponsors coming with a lot of the similar type of properties? Are you seeing a more broadening of sponsor activity related to your business?

I definitely think we see increased activity from all of our sponsors. That's just a continuation really of -- I would say what we saw in the fourth quarter of last year, certainly ramping up into this year. And I think there was a lot of pent up demand, both on the refinance side, but as well as on the acquisition side and the flow of capital continues in the alternative space and specifically within real estate. And if you think about the real estate set up right now, from a macro view, in a low interest rate environment, where there's potentially long-term concern around inflation, real estate sets up pretty nicely. It's got a yield component to it and can be a hedge against inflation. So our expectation is that you'll see continued capital flowing into the sector, which will obviously benefit our sponsors and create the activity for us. In terms of where we see the focus, it's similar to what I think we described on the call, there's a lot of haves. And in the real estate world now that and there's a much more clear bifurcation between the haves and have nots. And so sectors with the most interest are all the housing sectors. So obviously multifamily, single family, rental, I think there's a lot of demand for coming back for student housing as schools announced the back-to-school programs for the fall. The senior housing is probably a little bit behind all that, given the unique impact of COVID on that sector. But then, you're seeing things like life science, industrial, a lot of activity in those sectors. And that's not just from capital base, it's obviously from the tenant base as well, that's driving this activity. And there's a real need for converted space or new space in some of these sectors. And that's great for our capital base, because that's really what we're set up to do is to on that level of transition. I still think there's a big question mark, for most of our sponsors around how to play some of the office sector, how to play the retail sector. Obviously, the retail sector is not something we've historically did not involved in. But, certainly you've seen a big pause, therefore, here for the obvious reasons. So I'd say nothing too unexpected, just continue the activity and a real focus on where people have identified growth.

Then this will conclude the question-and-answer session. I'd like to turn the conference back over to Jack Switala for any closing remarks.

Great. Hey, everyone, thanks for joining our call today. Feel free to reach out to me or the team here with any follow ups. Thanks everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.