Good morning and welcome to the KKR Real Estate Finance Trust Inc. Third Quarter 2020 Financial Results Conference Call. All participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Michael Shapiro. Please, go ahead.

Thank you. Welcome to the KKR Real Estate Finance Trust earnings call for the third 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 phone 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.

Thank you, Michael. Good morning and thank you for joining us today. We hope you are all healthy and safe. We had a strong quarter on many fronts. We continue to see the benefit of our company's conservative positioning on both our lending strategy and liability management which has allowed us to differentiate ourselves during this volatile market. Since the onset of COVID, we have maintained a best in class portfolio, a prize of $5 billion of lighter transitional floating rate senior loans with a significant overweight to multifamily and office properties and only 8% exposed to hospitality and retail, increased our market-leading fully non-market-to-market financing to 78% in order to further de-risk our liability set. Increased our liquidity position through the inaugural issuance of a $300 million term loan B which enables us to take advantage of the current lender-friendly market all while delivering record quarterly earnings, which has benefited from net interest margin expansion resulting from our strategically negotiated in the money LIBOR floors. As of September 30, our portfolio balance was approximately $5 billion with only $462 million or 9% of total commitments for 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 in the most liquid real estate markets. Our average loan size is $135 million. And approximately 80% of our loans are secured by properties located in the top 10 markets in the United States. Our investment portfolio is 99% senior loans with no direct holdings of securities.

Thank you, Matt. Good morning, everyone. I hope that you continue to stay safe and healthy. As of quarter-end, our market leading 78% of our in place asset financing was completely non-mark to market. And the 22% remaining balance was only subject to credit marks. We continue to invest a considerable amount of time and resources across KKR, differentiate and diversify our financing sources. And in September, we were excited to close our inaugural term loan B issuance. The proceeds from the $300 million seven-year loan allow us to take advantage of the current lending opportunity as well as continue to reduce some of our mark to credit facilities. Additionally, the pricing flexibility of the term loan B affords us the ability to adjust the cost of capital in the future to match the conservatively positioned profile of our assets and other liabilities. Our intense focus on non-market-to-market financing has allowed us to lower the risk of our liabilities, while at the same time maintain target leverage levels despite the volatility this year. As of quarter end, our debt to equity ratio and total leverage ratio were 1.9x and 3.8x respectively, down from the second quarter. As a reminder, we have generally targeted a 3x to 4x leverage ratio on new senior loans, depending on the source of financing. While we've been willing to finance loans at a low EDs advance rate on our non-market-to-market financings, we would expect our total leverage ratio to gravitate more toward the mid-three's in the coming quarters. Our repo financing, which currently represents only 22% of our outstanding secured financing, is diversified across three banks, and currently has a weighted average advance rate of approximately 65%. The repo facilities financed 10 loans predominantly secured by Class A multifamily and office assets. Notably, we have not received any margin calls on these market to credit facilities. KREF's liquidity position remains very strong, with over $700 million of availability, including cash of approximately $300 million as of 3Q, and access to an additional $335 billion from our corporate revolver. While we have currently earmarked some of our liquidity for our increasing pipeline of loan opportunities, given the level of uncertainty in the markets, we do expect to hold incremental cash on the balance sheet versus prior years to maintain flexibility for the foreseeable future, which could create some incremental drag on earnings.

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

Thanks very much. Can you give some color as to the types of deals you're seeing and what the sponsors are looking to achieve, if there's been any changes in the way they're underwriting deals? I noticed one of the deals had below 50% LTV, give some color on the transaction market.

Hey, Jade, it's Matt, thanks for joining and good to hear you. As a little bit of color, we're seeing the market slowly reboot here. Obviously, we're starting to take advantage of that. All in coupons are in the 4% to 4.5% range for the higher-quality assets. There's a real bifurcation, I would say in the market today between the haves and the have-nots so clearly you can understand hotels and other sectors that have been the most impacted. The financing there is much more difficult and coupons much wider there. Where we're focused is where we've been focused historically so I don't think we really changed our credit DNA at all. So really trying to focus on the multifamily sector of the market and then well-leased office. What's a little bit different now is two things. One, it's more of a lenders market as you would expect, so you get better structure, better credit. In some cases, lower leverage. Obviously, the online coupons similar to what we were lending at pre-COVID but the composition has changed quite dramatically given where LIBOR is. The spread is very high and the overall meme, as we mentioned on the calls has increased from low 100 to very high 100s. The other thing I would say is that the fact pattern or the business plan that you're lending on is a little bit more advanced and so for instance, if we were making a multifamily loan pre-COVID on a construction takeout lease-up, that property may have been somewhere between 10% and 30% occupied.

Turning to the office sector, are you seeing any broader changes in the way either sponsors, lenders, or the market overall is looking at office space? I think that pre-COVID, the average office lease was somewhere in the 8.5 to 10-year range and there is some chatter about typical lease durations being curtailed. JLL CEO said that in the second quarter, that average lease deal had 16% shorter term. How are you thinking about that or what are you seeing with respect to the office market?

Well, I think everyone puts office in this category, it has a big question mark around it. In my mind, is a real cyclical issue with office. We never want to lease up office in an economic downturn. Then there's the secular question that we're all debating around usage going forward, changes in behavior. I would say given those are both at play, both the secular and the cyclical, I think we're very cautious right now on the sector overall. We don't have enough data points to answer your question directly. Are leases getting shorter? I would say as we're underwriting new office loans, we want higher occupancy, longer leases, more stability, and we're still taking a lenders' view and protecting our downside. I don't think the market's evolved enough to really tell you this is exactly what we're seeing in terms of shorter lease terms. It certainly wouldn't surprise me but again, I'm not sure that's a secular issue or cyclical issue.

Okay. Turning to the Portland asset, you said that you feel adequately reserved with respect to your basis. And the Cecil reserve? What you are looking at the outcome and workout is this going to be essentially a foreclosure whereby KREF takes control of this asset and figures out a repositioning strategy? Would you bring in, third party capital for this? And just directly, what impact will this have on the company's liquidity? I believe this asset is not financed on any repo line, so it probably will have a minimal impact on liquidity but if you can just touch on that?

Sure. I think it's too early to tell on how exactly the workout proceeds. We have a sponsor in place, still, that's kept our loan current. And so we'll be working with them on what the business plan is going forward. And I think it's too early to speculate, how this may play out. Patrick, I’ll turn it over to you for the liquidity perspective, but, overall, it's not a big position, obviously for us, and we have much liquidity as we've had in the company. But, Patrick, you want to give any specifics?

Sure. Jade, just a follow-up on that. So we've got a small amount of leverage against this, something on the order of less than 20% of the face amount of the loan, so not a big mover in terms of our liquidity usage, if we decide to pay off that financing.

Thanks very much.

Next question comes from Don Fandetti of Wells Fargo. Please good ahead.

Good morning. I'm so look, I mean, it's good to see you guys holding grown in a difficult market. I was wondering Matt if you could just provide a an update on some of the other watch list assets, in particular, the New York condos, and then the Fort Lauderdale hotel.

First, on the on the New York condo hotel, this is an asset that, you know, over the last couple of quarters, we've actually seen an increase in sales. So both in the second, and the third quarter, we saw three units sell and each of those quarters. And there's an additional unit that sold and closed here in the fourth quarter, which will get reflected when we report next quarter. I think we've been pleased with the progress of the pay down those sales for contexts have been in the $2200 a foot range. And for context, our loan is around 1720 per square foot. And so from a basic standpoint, we feel good, we like this, we like the velocity on those sales. And the amount of leverage that we have similar to our Lloyd asset is really a fraction of our outstanding loan balance. So, in total, we've had about 41 million of pay downs in these last two quarters. On the asset in Florida, we continue to work closely with the sponsor, as you recall, this is an asset where we entered into a partial forbearance on the payment in exchange for some cash that came in from the sponsor, that partial forbearance period extends for several more months. And we've seen some improvement in terms of the occupancy of that asset. But it remains challenged in terms of the pre COVID level. So, one that we continue to sort of monitor but one where we've got a path to continue to work with the sponsor, and help them really sort of manage through the situation.

Got it and how would you describe the overall commercial real estate lending markets from a stress perspective? I know there's a lot of concern. Could you just talk about it from a high level?

Sure. This is Matt, I can jump in there. Because a couple of things. One, it's I think it's lagging the more liquid markets. And so it's certainly we haven't seen anywhere near the level of yield compression that you see in the corporate credit market or the securitized markets is clearly a lag in the private markets or specifically in CRE lending. There's a bifurcation like I mentioned before between the haves and the have not right that But and that's really by property type, for the most part that to some extent business plan and the transitional limit but predominantly property type. And so there's definitely a whole swath of retail assets and hotel assets that just don't have access to financing today, or it's extremely expensive. And then, as it relates to the business plans, as you can imagine, the more transitional you get, the heavier the lift is, it's going to be tougher to finance right now. And again, that's we're an unprecedented market, and then people are cautious right now and so you can understand the conservatives on the winning some of those assets. And then I would just say in terms of the participants in the market, what we're seeing, at least in our spaces, is definitely less competition, which is making it attractive and perhaps why we're lagging here. But there's capital out there, I wouldn't call the market distressed. And we're living at 4.5% coupons I think that's attractive. But I don't think it's distressed. And you do see a number of participants in the market as you would expect, the securitize lenders are back, you will see BS product, both on large loans as well as on conduit, insurance companies are very active. I would say one of the sectors where we haven't seen as much activity are the big money center banks. And so that's one area that we're watching closely.

Next question comes from Stephen Laws of Raymond James. Please go ahead.

Hi, good morning. I guess first when I asked about the LTVS on the new originations I noticed two were refinances. So you would have done a new valuation analysis in October. Can you talk about how much the value the client all those two appraised value declined on those two assets from the loan they were refinancing, which I assume that that valuation was done pre COVID? And please let me know if that's not the case.

Yes, thanks for the question. I don't think I have the exact answer in terms of like the appraisals lined up from their pre COVID to what we're doing today. I will tell you on the multifamily assets, that we would generally lease up multifamily assets, we're generally underwriting down, call it 10% to 15% area in value, just because it's taking longer to lease up and there's clearly a concession package involved in today's market. So it's really the cash flows that are changing the valuation as you would expect, in this kind of interest rate market. We are seeing and we expect to see more cap rate compression, once the assets have stabilized, but it's taking longer to get there in our underwriting.

And okay, and then shifting over to the change in core and then coupled with that an outlook on the dividend? Kind of belief CECL a non-cash item, the CECL reserves. So we'd love to kind of have a little more background on your thoughts to now include that seed non-cash CECL change in the core metric, especially with some of the inputs that go into that being macro and not company specific. Additionally, you know, I think historically we've used core earnings as a proxy for the dividend but I don't believe that CECL is something that impacts re-taxable income, which determines the dividend distribution. So can you talk about going forward after this change what we should look at as a proxy? Should we simply take their core earnings and back out CECL, the way it's been done? And, to that point, any spillover income from last year, any income you can spill forward, that we need to think about with regards to satisfying the 90% distribution requirement for this year?

Good morning, Steven. Thanks for the question, this is Mostafa; so I'll take that one. So, just to clarify that the change in the core earnings presentation prospectively is a result of SEC that we received directing us to no longer exclude the provision of credit losses, or a portion of the provision for credit losses from our core earnings presentation going forward. And we noted that in our MD&A and also as noted by Mike on his prepared remarks. So all incremental changes starting with Q4, and all subsequent reporting periods and obviously, for consistency, we will recap our core earnings presentation for the first three quarters to correspond with a new presentation. That said, we don't believe that the change that is seen change in the presentation of core earnings for reporting purposes, and obviously the CECL provision will continue to be reported as a single line item on our income statements. So, anybody can do the math there. With respect to the coverage from a dividend standpoint, I think the old presentation of core earnings would be a good proxy. And we believe that we will meet the distribution requirements from a dividend standpoint for this year.

Appreciate the time today and the comments. Thank you.

The next question comes from Charlie yet of JP Morgan. Please go ahead.

Good morning, guys. Thanks for taking the questions. A bit of a follow up on the CECL there, look, I think there's no better demonstration of kind of a more incrementally positive economic outlook than putting money back to work. In that context, should we see some tweaking of that CECL reserve going forward? And just how are you guys thinking about the overall reserve rate on the portfolio?

Yes, this is Mostafa, again. So, well -- I think it's a good question. With respect to the reserves, I think obviously, that the result fluctuate quarter over quarter, depending on a variety of factors, including, obviously, originations volume, our repayments, velocity, and also changes to the macro on top of that. But generally speaking, everything else equal, we would expect, the biggest driver for the change and the CECL reserves would be resolution of any of the worthless loans, or the forum five-rated loans, and also the macro outlook over the next few quarters. So those will be the two key drivers.

Okay, got it. Thank you. And then just unrelated follow up, I know, there was some deferred interest discussions on I think, the Portland loan, but I'm just wondering if there were any other additional loan modifications that will kind of executed during the quarter?

Charlie, good morning it’s Patrick. So in terms of the quarter, we obviously had the two hotel loans, where we had modifications in place. There was one other modification related to interest payments, which is on the New York condo loan, which I talked about earlier. And there we entered into a partial forbearance on a portion of the of the interest payments. There was a little bit of pay down associated with that. But that's it in terms of interest related modifications in the quarter.

Great, thanks so much for taking the question, guys. Thank you.

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

Thank you, everybody for joining us today. We hope you stay safe, stay healthy. And if there's any follow up questions, please feel free to reach out to any of us. Thank you again.

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