KKR Real Estate Finance Trust Inc. 2026 Q3 Earnings Call

Please go ahead. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for the third quarter of 2026.

As the operator mentioned, this is Jack Switala. This morning, I am joined on the call by our CEO, Matt Salem, our President and COO, Patrick Mattson, and our CFO, Kendra Decious. 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. This call will also contain certain forward-looking statements which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements. Before I turn the call over to Matt, I will go through our results.

For the third quarter of 2026, we reported GAAP net loss of $6 million, or negative $0.11 per share. Book value as of September 30th was $10.14 per share. We reported a distributable loss of $152 million, or negative $2.64 per share. Distributable earnings before realized losses and strategic review expenses were $5 million, or $0.09 per share. Lastly, we paid a $0.10 cash dividend with respect to the third quarter. With that, I now like to turn the call over to Matt.

Thanks, Jack. Good morning, everyone, and thank you for joining us today. Let me begin with a brief update on the strategic review process. As we announced in July, KKR's board established a strategic review committee composed solely of independent directors to evaluate potential strategic alternatives. Since that announcement, the committee has retained a financial advisor and legal counsel and continues to evaluate the company's strategic alternatives. Given the review is ongoing, we will not be providing any further commentary on the process during today's call. Turning to the broader commercial real estate market, the recent increase in interest rates has created renewed pressure on property values, presenting both opportunities and challenges for real estate lenders. Existing borrowers will be impacted by higher debt service costs and lower refinancing proceeds, particularly for assets financed at peak valuations in 2021 and early 2022.

We expect this environment to extend resolution timelines, and in some cases, result in additional credit losses. At the same time, these dynamics should drive increased demand for refinancing and recapitalization capital as borrowers work through upcoming maturities. Importantly, underlying property fundamentals remain generally constructive across most sectors, supported by tenant demand and a meaningful slowdown in new construction activity. As we continue to reposition KKR's portfolio, we believe this environment provides an attractive opportunity to redeploy capital into new loans with compelling credit characteristics and risk-adjusted returns. Portfolio repayment activity has been particularly strong, with $2.4 billion of repayments year to date, surpassing our $2 billion expectation for the year. This quarter, repayments totaled $1.2 billion. This quarter's repayments nearly matched our annual repayments for each of 2024 and 2025.

Importantly, much of this activity has been concentrated in our older vintage loans, accelerating the natural rotation of the portfolio and reducing our exposure to loans originated during the 2021 and 2022 market environment. Those vintages accounted for over 80% of the repayments this year. We continue to make substantial progress executing the portfolio action plan we outlined at the beginning of the year. Our priorities have been to accelerate the resolution of watchlist and legacy office exposure, address our life science portfolio, and reposition the portfolio toward newer vintage loans with more attractive credit characteristics. During the quarter, we resolved three additional watchlist loans. While the pace of resolutions has been encouraging, the timing and ultimate valuations of remaining assets is challenging.

We continue to actively pursue monetization strategies for these assets, although some transactions previously anticipated to close before year-end are now likely to extend into the first half of 2027. We remain focused on advancing these resolutions while maintaining a disciplined approach to maximizing recovery. Given the more challenging liquidity and valuation environment, we could see an increase in reserves in the near term as resolution processes advance and market conditions continue to evolve. With that, I'll turn the call over to Patrick.

Thanks, Matt. Good morning, everyone. I'll begin with origination activity. During the quarter, we originated $157 million of loans, including a Class A senior housing portfolio secured by four properties across the U.S. and a Class A Texas office property. From a broader market perspective, conditions for new investments remained constructive. Credit spreads have been relatively stable. Financing for loans remains readily available, and liquidity across markets remains healthy. We expect our pace of originations to remain measured. Given our focus on maintaining balance sheet flexibility, we have been deliberate in deploying capital rather than seeking to replace repayments with new loans on a dollar-for-dollar basis. Turning next to balance sheet and liquidity. The combination of significant repayment activity and our disciplined approach to capital management has meaningfully strengthened KREF's financial position throughout the year.

At quarter end, liquidity increased to approximately $853 million, including $166 million of cash, $53 million of loan principal repayments held by a servicer following a repayment on the last day of the quarter, and $600 million of undrawn capacity on our corporate revolver. This represents one of the highest liquidity positions for KREF's history, well above the historical average of approximately $600 million. Importantly, this liquidity provides us with significant flexibility as we continue to execute our portfolio strategy. We also continue to further optimize our financing structure. During the quarter, we exercised optional redemptions on our two remaining CRE CLOs, completing the retirement of both transactions. Given the substantial repayment activity and reduction in the underlying collateral pools, these transactions have become less efficient financing structures relative to other non-mark-to-market financing alternatives available to KREF.

Strong repayment activity during the quarter also drove a meaningful reduction in leverage, with our debt-to-equity ratio declining from 2.6 times to 2.2 times, and total leverage declining from 4.3 times to 3.1 times below our historical target range, and we expect leverage to remain below the historical range for the fourth quarter. In summary, the third quarter represented another important step in executing the priorities established at the beginning of the year. We materially reduced the watchlist, advanced the resolution of legacy exposures, exceeded our full year repayment expectations ahead of schedule, and further strengthened our liquidity position. With that, we are happy to take your questions.

Tom, thanks for the question. I think if you think about what is on kind of the watchlist now and the kind of processes we are in, a lot of that is just a function of a little bit of opaqueness, and some of these markets are relatively illiquid. We obviously are marking these and have CECL reserves appropriate for what we are seeing in the market today. But as we have seen over time, number one, markets can change, and number two, just given how the liquidity in some of these markets, we do not know exactly where these processes can end up. As we kind of continue to work through those, we will obviously adjust it in real time for what we are seeing. But just understanding kind of where the overall market is today, we wanted to obviously highlight that as we continue to work through the resolutions here.