KKR Real Estate Finance Trust Inc. Q2 FY2025 earnings call

• Real estate credit market: Transaction activity and loan demand recovered from initial volatility, loan pipeline near record levels, competition returned but lending opportunity remains attractive with value in lending on reset values below replacement costs.
• Second quarter results: Originations totaled $211 million, with $450 million in repayments, projecting nearly $1 billion of incremental repayments in the second half. Focus on diversifying geographically into Europe and creating duration through CMBS investments, with active European loan pipeline and closed B-Piece investment.
• Risk ratings: Downgraded Boston life science asset from 4-rated to 5-rated and Chicago office loan from 3-rated to 4-rated due to market conditions.
• Watchlist and REO assets: Progress on West Hollywood condo sellout, Raleigh Multifamily assignment and REO foreclosure, updates on Mountain View office, Portland development, and Philadelphia garage sale; REO portfolio represents approximately $352 million of pro forma equity.
• Share repurchases: Repurchased $20 million of stock in Q2, with $40 million repurchased over last 3 quarters, and $137 million since buyback plan inception.

For the second quarter of 2025, KKR Real Estate Finance Trust reported a GAAP net loss of $35 million or negative $0.53 per share. Book value per share as of June 30, 2025 was $13.84. There was a distributable loss of $3 million primarily due to taking ownership of the West Hollywood property; prior to realized losses, distributable earnings was $16 million or $0.24 per share. The life science sector is 12% as of the second quarter, comprised of 6 assets located in the top 2 life science MSAs of Boston and South San Francisco, with 60% being newly constructed and purpose-built properties targeting larger pharmaceutical tenants.

• Anticipate nearly $1 billion of incremental repayments over the second half of 2025.
• Active pipeline in European loan market with new originations expected by end of 2025.
• Focus on diversifying portfolio geographically into Europe and creating duration through CMBS investments, with closed B-Piece investment showing attractive returns.

• Downgraded Boston life science asset from 4-rated to 5-rated and expects to extend loan through February 2026.
• Chicago office loan downgraded from 3-rated to 4-rated due to continued market deterioration, already modified twice with loan balance reduction.
• Life science sector cyclical issues, though 60% of life science exposure is newly constructed and purpose-built properties targeting larger tenants less susceptible to cyclical issues.

Q: Can you talk about the level of ROEs that you're able to achieve in the market and give some color around loan spreads?

A: Matt Salem mentioned pipelines are at record levels, spreads compressed back to pre-tariff announcement levels, with transitional lending in institutional segment around mid-200s, and closed deals in the 240 area.

Q: You mentioned the $1 billion in repayments you expect in the second half. Can you talk about what kind of originations you expect in the second half?

A: Matt Salem said they're trying to match repayments with new originations, mindful of low leverage ratio, and pipeline is active with new opportunities from sponsors buying time to hold assets.

Q: Always tough to be after Jay because he asked great questions and covered a lot of what I was interested in. The thing I'd like to talk about is it sort of dovetails with the last topic you guys were on. 2026, you have $2 billion, $2-plus billion of maturities, $2.7 billion. Obviously, those are pretty big walls I think the conversation we just had was about near-term maturities. But as you really look into the heavy lift next year, can you sort of give us a sense of maybe even sort of the pie chart of that $2 billion, hey, we think we're going to -- 50% are going to pay off are going to extend and 10% are going to be problematic. Can you give us some sense of how to think about that 2026 maturity wall?

A: Matt Salem said he can't be precise, but a lot of maturities are getting pulled forward, pipeline is active with sponsors buying time, and less credit issues expected at maturity dates as problems have reared their heads earlier.

Q: First, let me applaud the buyback, I think it's a great allocation of capital, even though it is -- obviously, you'd like to pay offense more than defense, but as -- as a representative of the shareholders, I say thank you. I assume that we'll probably continue if the stock stays down here under 70% of book. Matt, just looking at, and Patrick, looking at the portfolio, you're now billion, about 20% off the recent high I guess, 1.5 years ago, a little over $7 billion. When you look at the capital base today, you look at the opportunity, as we're updating models and we're thinking out to the end of 2026 or so, is it realistic to think that the loan portfolio could -- could grow back to something close to that $7 billion figure? Or given the buyback and given the other allocations, is that unrealistic? I guess, I'm just asking if you guys have a target level for where your loan portfolio could stabilize in the current environment?

A: Patrick Mattson said they don't think in terms of target dollar level, mix will change with CMBS investments and buybacks, but equity trapped in REO assets can be redeployed into new loans, and pipeline is active.

Q: Do you view that as somewhat opportunistic, given some market disruption? Or do you see that as a core piece of the pie, the investment pie going forward for KREF.

A: Matt Salem said they'd like B pieces to be a more consistent piece, have a strong position in CMBS B piece market since 2017, and it's a diversifier with higher return and helps with duration.

Q: Wanted to start with a 2-part question on your life science loans. First, obviously, the Boston loan was downgraded for the second straight quarter here. I was curious what a potential plan for resolution could look like there. I know, Matt, you mentioned the extension. I was just curious if it could be something like what we saw St. Carlos modification a few quarters ago? And then second, of your other 5 life science loans, I know they're all 3 rated -- how do you feel about where those stand and their ability to stay off the watchlist in the coming quarters?

A: Matt Salem said they're working through options for Boston loan, and rest of life science assets are new, purpose-built, in good locations with strong sponsors, and markets are showing green shoots.

Q: One of the notable developments this year has been the move by some of your peers into the owned net lease space. than you've mentioned diversifying into more European loans, obviously, the CMBS B pieces. Just curious to hear your team's thoughts on more commercial mortgage REITs owning net lease real estate. And if that's something that you would ever consider in the KREF vehicle?

A: Matt Salem said it's positive for the market, they're evaluating net lease for KREF but nothing imminent.

Q: What's sort of the time line to repatriating that capital back into loans?

A: Matt Salem provided timelines for different REO assets: West Hollywood condo sales in third quarter, Portland lots sale for development, Mountain View office patient with market recovery, Seattle TBD, Philadelphia office leases, and Raleigh multifamily short-term hold.