KKR Real Estate Finance Trust Inc. Stock

Good morning, and welcome to the KKR Real Estate Finance Trust Inc. Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Jack Switala. Please go ahead.

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the Second Quarter of 2026. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious.

I'd 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 second quarter of 2026, we reported a GAAP loss of $122 million or negative $1.95 per share. Book value as of June 30, 2026, was $10.24 per share. we reported a distributable loss of $36 million or negative $0.58 per share. Distributable earnings before realized losses was $6 million or $0.10 per share. Lastly, we paid a $0.10 cash dividend with respect to the second quarter.

With that, I'd now like to turn the call over to Matt.

Thanks, Jack. Good morning, everyone, and thank you for joining us today. Let me begin by acknowledging our announcement that KRAS Board has initiated a review of strategic alternatives intended to enhance shareholder value. This process will be led by a strategic review committee composed solely of the Board's independent directors. I recognize there may be questions regarding the process. However, given its early stage and the need to preserve the integrity of the committee's review, we do not plan to comment further on this matter. But to grant any questions, to be clear, KKR has not submitted a proposal for any transaction to date.

As the committee does its work, KKR will evaluate its potential participation in any KRA transaction but there's no guarantee that KKR would make any proposal in the future. KKR's stated goal as manager is to support the committee as effectively as possible. And as the largest shareholder, KKR is aligned with the committee's mandate to enhance shareholder value. We do not plan to comment any further on KKR's perspective on this matter as well.

Let me turn to the results next. As we reach the midpoint of 2026, I'd like to focus on the progress we have made executing the action plan we outlined earlier this year. While there is still work ahead, we've made meaningful progress against our key priorities and believe the actions we've taken position KREF for book value stability and longer-term performance. Against that backdrop, we've reported distributable earnings before realized losses of $0.10 per share, covering our quarterly dividend. And then as a reminder, we continue to expect $0.40 per year of dividend to be covered by our annual distributable earnings before realized losses as we execute our business plan.

Our expectations are for earnings to trough later this year but remain in this area over the next several quarters before the benefit of our portfolio repositioning emerges. Book value declined 13.7% during the quarter, primarily reflecting actions taken to position our watch list assets and legacy office exposures monetization. This quarter represents a significant step toward achieving our goals. We have adjusted reserves and carrying values to our current expectations for monetization of these assets.

While we are still executing these resolutions and final outcomes could affect ultimate recovery levels, we believe the most significant book value impact is now behind us. And that KREF is positioned for greater stability going forward. Let me provide an update on our progress against the goals laid out for the year, legacy office. Legacy office exposure declined to 18% of the portfolio at June 30 compared to 21% at year-end 2025. We remain focused on reducing that exposure below 10% by year-end 2026. Watchlist watch list represents 16% of the portfolio as of June 30. Nearly half of the assets are currently being marketed, and we continue to target a complete reduction by year-end.

Life Science, we entering modified approximately 19% of our life science exposure. Today, that figure has increased to 39%, and we believe the vast majority of expected reserves have now been recognized remain on track to address substantially all of our life science exposure through modifications or other resolutions by year-end. Lack new originations. Loans originated between 2024 and 2026 now represent approximately 32% of the portfolio compared with 19% as of 2025 year-end.

We are continuing to target increasing newer vintage investments to more than half of the portfolio by year-end. We believe the portfolio we are building today will ultimately be more resilient and better positioned to support long-term earnings growth and book value stability. Importantly, each of these initiatives is interconnected. As we resolve watchless assets, we generate liquidity that can be redeployed under newer vintage investments. This portfolio rotation is well underway and should continue through the remainder of the year.

Turning to repayments. During the quarter, we received over $800 million of repayments. As a reminder, we continue to expect more than $2 billion of repayments throughout 2026. To put that in some perspective, this represents over 35% of the portfolio size at the beginning of the year and is larger than the approximately $1.5 billion of repayments in each of 2024 and 2025. This repayment activity has generated liquidity to support our broader strategy, including funding new originations, allowing us to reposition the portfolio into newer vintages and execute share repurchases.

Turning to capital allocation. During the quarter, we repurchased $38 million of common stock at a weighted average price of $6.63 per share generating approximately $0.32 per share of book value accretion. Subsequent to quarter end, we repurchased an additional $10 million of common stock at a weighted average price of $7.24 per share. Future capital allocation decisions on share repurchases will be part of the strategic review process.

Overall, we believe the actions we have taken over the past several quarters have meaningfully advanced our transition plan. While there is still work to do, we remain focused on advancing our action plan, resolving certain legacy assets, proven performance of the portfolio and creating long-term shareholder value.

With that, I will turn the call over to Patrick.

Thanks, Matt. Good morning, everyone. Overall, we made progress during the quarter as we continue to execute against our priorities. We're taking decisive action to address watch list assets advanced monetization plans across the portfolio, originated attractive new investments and maintained a strong liquidity position that provides significant flexibility as we continue to reposition the portfolio.

Let me begin with an update on the portfolio and watch list, where we continue taking proactive steps to align the portfolio with our expectation for asset resolutions. During the quarter, 2 watch list loans were resolved, including a repayment on our Gordon multifamily loan previously risk-rated for as well as the Boston Life Science loan, which transitioned into the REO portfolio with no material impact to book value given prior reserves.

Reflecting current market conditions, we downgraded our Chicago office and Carrollton Multifamily loans from risk rated 4 to risk weighted and a $42 million Dallas multifamily asset from which rated 3 to 4.

Turning to the REO portfolio. Our focus remains on executing business plans and positioning assets toward monetization. We made continued progress across several assets. In Portland, Oregon, we expect to complete the entitlement process this month. positioning us to advance the monetization strategy for the mixed-use redevelopment project. In Mountain View, California, as a reminder, we executed a full building lease with open AI this year and we expect the tenant to take occupancy of a portion of space this quarter, and we currently anticipate bringing the property to market within the next year.

In West Hollywood, we closed on the first condo sale this month and are in active discussions with prospective buyers on additional units. As we've discussed previously, we believe the REO portfolio contains embedded value that we can unlock through disciplined execution of these business plans and subsequent redeployment into performing loan assets. As we optimize our REO portfolio, we continue to benefit from resources across the broader KKR real assets platform, including our asset management and capital markets capabilities. .

Turning next to originations. We remained active during the quarter, originating 3 loans for approximately $350 million with a weighted average LTV of 58%. These included a multifamily portfolio loan in Spain, a multifamily loan in Los Angeles, in the California office portfolio loan. We continue to identify attractive opportunities where we can be highly selective and disciplined in deploying capital.

Finally, I'd like to highlight KREF's strong liquidity position. At quarter end, KRAF had over $700 million of liquidity, including $83 million of cash on hand and $350 million of undrawn capacity on our corporate revolver. Our total financing availability was $7 billion, including $2.6 billion of undrawn capacity and 79% of our financing remains non-mark-to-market. Importantly, we continue to expect elevated repayment activity throughout the remainder of the year. We received approximately $1.2 billion in repayments through the first 6 months and expect total repayments this year to exceed $2 billion.

Our debt-to-equity ratio was 2.6x and our total leverage was 4.3x as of quarter end. As our payments continue, we expect total leverage to naturally move back into our target leverage range of 3.5 to 4x. To summarize, we continue to execute against our action plans and have made meaningful progress during this quarter. Looking ahead, our priorities remain clear. Continue reducing watch list exposure, monetize REO assets where appropriate, redeploy capital into attractive new investments and drive earnings recovery over time.

With our strong liquidity position, robust liability structure and the support from the broader KKR platform, we believe we are well positioned to execute on these priorities.

With that, we're happy to take your questions.

[Operator Instructions] Your first question comes from Tom Kathee with BTIG.

Matt, maybe starting with you. You mentioned in your prepared remarks how the increases in reserves in the lower book value really reflect your current expectations for monetization of watch list assets. But if we look back to 4Q and 1Q when you introduced the portfolio repositioning plan, if you will. You also took kind of significant reserves there. I think it was a combined another 12% plus. So maybe if we think of this quarter, how was the loan loss review process and book value assessment different than it was in the prior 2 quarters? And kind of what level of confidence do you have that we've reached book value stability at this point in time?

Yes. Thank you, Tom, for joining us and I appreciate the question. I'd say a couple of things to highlight there. I think last quarter, first of all, just last quarter, we indicated there could be further potential softness as we implemented the action plan. And some of this is discovery, right, as we go through this process, where are the clearing values? What are we seeing in the market? And I think this quarter's decline in book value reflects that and just reflects some of our posture as it relates to trying to monetize as much as possible and some of the transition to 4 to 5 or we've also begun to try to create liquidity on some of that portfolio through node sales as well.

So at this point in time, we feel like we're positioned to execute on that with the watch list and have reserves or pricing kind of around our current expectations of monetizations. And as I highlighted on the prepared remarks, we haven't finalized all these yet, right? They're in different kind of stages of the process, but we certainly feel like the most significant impact to book value is behind us. And as we finalize these processes, there could be some small up and down, but we feel like we've we've come down the road and have these in a position where we understand the clearing values a little bit better right now.

And do you think, was it really this discovery process? Or was there also maybe an adjustment in the clearing values of these? Is there some level of erosion this past quarter?

Well, it's hard to say in terms of your -- I think it's the question of did the market move on us or do we just kind of know more about where the market is. I think it's hard to tell on some of these markets, especially when you're dealing with office assets, which are -- there's some level of liquidity in the market today for these, so I don't think that we have like a clear transparency in terms of like, okay, where was it last quarter? Where is it this quarter? I think what we have now is we're in a number of processes. We're getting real-time market feedback around levels to sell these, and we're adjusting, obviously, our reserves or our marks accordingly. .

Got it. Appreciate that, Matt. And then Patrick, maybe last 1 for us. You've previously ranked priorities for uses of capital. In the past, you discussed buybacks as 1 and then originations is to and then BP investing is 3. Obviously, very busy on the in this past quarter. As you look forward, especially with the level of repayments that have come in, how would you rank kind of your capital allocation priorities today if you look out for the rest of the year?

Tom, it's Matt. Maybe I can jump in for Patrick and take that 1 as well. I think, first of all, just as we think about the overall portfolio size, we'll take into account just some leverage ratios right now. So we got ahead in terms of investing a little bit. And we've been behind in the past, if you recall, some earlier quarters, we got a little bit behind. So we'll wait and adjust a little bit in terms of new originations here in the near term just because the portfolio leverage at about 4.3x. Think about our normal range is in that 3.5 to 4x area.

So there's a little bit of repayment activity that we've been getting a ton of repayments and we'll get more here. That will kind of bring us back down in line. And then as we do that, we can start thinking about options for investing. And I think when we start to understand the option for investing, a couple of things to highlight there. First of all, as we think about the share buyback, clearly, that was really accretive, and we've done a lot of that over the course of the last couple of quarters here. That's part of the really the strategic review committee at this point. So we'll interact with them and try to understand what's the go forward there. And then outside of that, it's just regular way investing and just keeping in mind our our overall leverage ratios.

The next question comes from Jade Ramani with KBW.

Starting with Life Science. Can you give an update on the Risk 5 Boston Life Science loan, not the 1 that went into REO, but the other risk 5-rated loan?

Yes, Jay, it's Matt. Thank you for joining this morning. The update there is we are in modification discussions. We have maybe the more important part of that. I didn't specifically call it out, but I think we mentioned it in the prepared remarks is that we do believe we're fully reserved on that loan at this point in time. So we'll continue with with the modification discussions but do not anticipate negative book value implications on that particular asset going forward.

Okay. And can you say whether you think that will remain a loan or could go REO? .

I think it's too early to say that at this point in time. My guess is that does not go REO, but we've got discussions ahead of us. But I wouldn't look at it, like, if you're thinking about like projecting and drags on earnings and things like that and cash flow, I wouldn't be modeling it like that.

And what are you seeing across the rest of the Life Science book? Maybe you could start with Cambridge, which I know is a Class A asset, it was already modified, San Carlos and Redwood City, both have had some leasing. And then the REO that you now actually own.

Yes. I mean I'll speak at a high level. I think that we're seeing -- you're starting to see green shoots in the market. You're starting to see some leasing come back. I think it's still early. The markets that are more weighted towards Life Science, think about Boston, whether that's Cambridge or Seaport or South Boston, I think those are further behind. They're still green shoots, but they're further behind some of the West Coast markets that you mentioned, which are beginning to see more office demand, and that's causing a tightening in the market.

And as you well know, a lot of these assets can be office or Life Science, so catching demand from from both of those, especially as you start to see the tech and AI leasing pick up on some of the West Coast markets, I think, has been helpful. And then as you start to move up the coast on the West Coast, like into Seattle, where we have REO, I'd say that is beginning to happen as well, where we're starting to see AI-related office leases, well, tech related, but specifically AI as well.

Office leases tighten up that market a little bit. And so we're evaluating opportunities there. We have Life Science tenants in our asset, but could we have office tenants in the asset there too as the office market tightens up. So I think a lot of it right now is Life Science starting to come back, but it's early. And if you are any market that has AI and tech exposure and you have -- that's causing tightening in the overall markets, specifically related to office and there's some overflow into Life Science. That's kind of how I'd characterize it now. But but it still feels early on the Life Science side.

Okay. Just overall on the REO book, which stands at $658 million, seems that the Mountain View has a reasonable chance of being monetized in the next year. Beyond that, what do you think the expected duration is of what's -- what would be remaining. Are we talking multiple years? Is it possible that there could be a strategy to accelerate selling this to more of an opportunistic buyer, developer, some other form of capital that could really see that through and then give are the chance to repatriate that capital and drive core earnings growth. .

Right. setting aside the strategic review committee and what -- how they may look at it and potential options as it relates to that. I don't think we've changed how we think about the portfolio in terms of duration. So we've got a number of assets that we really we think are more near-term resolutions. And so you can see that on kind of Page 8 of our supplemental as well, where we've got the West Hollywood condo asset were Patrick mentioned, we're getting some traction there. We're selling units now, so that's beginning to move.

We still think about our Raleigh, North Carolina multifamily asset as a near-term sale. We are in the market with our Philadelphia office that's REO and that should be come this year, hopefully, liquidation, then we've got the kind of more medium-term resolutions in terms of, as you highlighted, our Mountain View asset, we still think about that as second quarter next year. And then we've got our Portland Oregon redevelopment where we've made a lot of progress or near kind of final, final in terms of all the redevelopment rights that we've been working hard on with that asset. That's more medium term.

And then we've got the 2 assets that we've always talked about is just longer term. So the Seattle Life Science assets that I've referenced and now the Boston -- the South Boston Life Science asset, those are going to be longer term. Like I mentioned, it's a little bit further behind in terms of leasing demand, and we're starting to see some positive things there. But but those will take time to season and certainly don't want to force anything on those two. So it's -- I don't think much has changed. I think we still think about it as like this near term, medium term and in the 2 assets over a longer period of time.

Your next question comes from Gabe Pochi with Raymond James.

Matt, I just want to make sure that I heard you correctly. So the strategic review has been announced, is KRAS able to buy back stock during the strategic review process or is that on hold?

I don't think, yes, Gabe, thank you for the question. I don't think it precludes us from buying back shares, but I think it will be a conversation with that committee. You think about what's underneath they'll be reviewing everything. So it certainly should be a part of that when you think about kind of uses of capital.

Right. Okay. Just piggybacking on some prior comments to Tom's question and uses of capital, et cetera, and your prior commentary following 1Q is, obviously, you've been putting money to work and buying back stock. I just wanted to make sure that the review did not preclude additional repurchases. Second question is Patrick, you mentioned that about half the watch list, the loan watch list is being marketed. I know the office loan is held for sale. Any other color you guys can provide around what loans maybe shopped, being shopped right now?

Yes. I mean, Kate, I can maybe start out with that, and Patrick feel free to jump in. But Well, first of all, let me start out by saying, I think we try to be as transparent as possible on these calls and give you guys kind of the color that we can we are in more sensitive time period now, I'd say, with some of these processes in terms of liquidations or sales. So I think we want to be mindful of that right now as we -- kind of as we answer this type of question because we'll try to finalize some of these in the near term has -- just curious.

Yes. One thing, I think, because we have had some questions on this initially, we have some loans we put a loan in held for sale now. I just want to make sure everybody understands. When we look at our portfolio now and we think about the watch list and we tie that back into the action plan, we are looking at every single loan and asking ourselves how do we optimize the outcome here. And there's all these unique facts and circumstances around what's going on and whether that's the borrower or the asset itself, the market and we've got an array of options that we have to evaluate, things like, okay, can we modify the loan. Could we short sale it? Can -- if we can't do those things, so we note sale it.

And obviously, you've seen where we think that there's a business plan and a way to enhance long-term value, we'll go to title and we'll take it REO. So when you see these different outcomes, I would just assume that like we're looking at all these different things. We have the full toolkit available to us, and we're going to go down the path that we think creates kind of the best outcome as it relates to really moving through the action plan. So maybe that's -- I know that doesn't answer your question, but I wanted to frame that a little bit because there's some questions about how we're going about whether it's a modification or a short sale or a note sale, et cetera.

[Operator Instructions] Your next question comes from Chris Muller with Citizens Capital Markets.

So I guess on the EU multifamily origination, LTV is lower than we typically see, especially on multifamily. Is that just the EU market and coupons are more on par with the U.S., but LTVs are lower? And then kind of piggybacking off that, does getting the new facilities, the EU facilities in place, I mean you guys plan on doing more overseas London?

Yes. Well, thank you for joining, and I appreciate the questions. I wouldn't -- I don't view the the European market as a different leverage point for multifamily. I think the business plan is a little bit -- is probably a little bit different where there is a kind of a sale component to the to this multifamily units. So you're coming in at a little bit lower leverage point to start, then maybe we're typically seeing in the states on just the traditional multifamily. But I don't characterize that.

I think the 70-ish LTV is what we would typically see on a multi in Europe. We haven't really -- as part of your second question there. I don't think we've changed how we think about Europe as a piece of the overall portfolio. We still think about that in the, call it, 20%, 25% area. The facilities that we're putting in place just allow us to continue to to invest in that market, but it hasn't materially changed how we think about the portfolio position or really the relative value, I guess, at the end of the day, is what drives that.

We think that the relative value is pretty balanced right now between the U.S. and Europe. And then when you just think about the relative size of the markets, you can kind of translate that into like position sizing within the portfolio?

Got it. That's very helpful. And then given the elevated repayments, how are spreads on new loans versus what is paying off? Are you guys able to pick up any incremental yield? Or is that more of a headwind to the bottom line?

Well, spreads just spread to spread are lower for sure because the new spreads have adjusted for the current rate environment. When you think about ROE and the levered returns that we can get, I would say those are -- continue to be historically, at least on a new origination or a new investment basis, it's pretty consistent in that 12% area context. Now of course, some of the loans that we have today are out earning that because they were originated in a lower spread environment and, therefore, had higher spreads and now the rolled up the curve, if you will.

But in terms of just ROE, that hasn't changed much. It's really what we think about kind of that low double-digit 12% area in terms of the target. And we haven't seen in terms of what's happened locally here. I'd say spreads have been relatively stable, absent a little bit of volatility as it relates to the Warner run but have been pretty stable over the course of the year. So we haven't really seen any material tightening or widening for that matter over the course of '26.

Your next question is a follow-up from Jade Rahmani with KBW.

Just wanted to take a step back in terms of where we are in the commercial real estate cycle. You did have 1 downgrade to risk 4 from Riske, the Dallas multifamily. Multifamily is a lower cap rate asset class, rates have gone up and there's still a ton of supply in the Sunbelt. So fundamentals haven't really turned more positive, which is weighing on the space. So if you could talk about just broader credit trends and also focus on multifamily and what you're seeing.

Yes, sure, James. It's not again that. I think on the multifamily side, you're right to highlight that just this higher rate environment, higher for longer, I think, has put a little bit more pressure on values and it certainly wasn't the market's expectation, we would be where we are now a couple of years ago. I don't think that changes how we have to think about the credit risk or the loss content in the multifamily component within KREF. I think that we would characterize it the same way we have been on many of these earnings calls over the last handful of quarters, which is there'll be some noise, but we don't and there'll be some losses, but we don't think it's like material to book value.

We had a big portfolio of multi relates to go up 500 basis points will be some impact there, but not we don't think it's like that really that material. And I'd say these recent slightly more softer capital markets activity within multifamily. It's reflected in that reflect in that statement as well. I'd say looking forward, you highlighted that there's still supply being digested in these markets, which I think is accurate. But we're almost at the end of that.

And so I say we are somewhat optimistic that -- and the absorption by the way, has been higher than I think we all would have expected, likely because housing is pretty expensive right now. But I think we're relatively optimistic in terms of as you start to look forward here over the next few quarters going into next year that the market could see a tightening up of both kind of rent, occupancy and rents as well as the overall capital markets. It doesn't really change how we're operating within KREF right now, and you can kind of see that and some of the downgrades that we have and some of those were short sailing, right?

We're going to forcing people out. We're not going to wait and kick the can down the road. I think we want to try to get to a point where we don't have some of that noise. But I'd say would admit there's probably locally here a little bit of softness in the market and pressure on values. However, still pretty optimistic as we look out a few quarters.

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

Well, great. Thanks, operator, and thanks, everyone, for joining this morning. You can reach out to me or the team here if you have any questions. Take care.

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

Good morning, and welcome to the KKR Real Estate Finance Trust, Inc. First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jack Switala. Please go ahead.

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of 2026. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious.

I'd 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 first quarter of 2026, we reported a GAAP net loss of $62 million or negative $0.96 per share. Book value as of March 31, 2026, is $11.87 per share. We reported a distributable loss of $4 million or negative $0.06 per share. Distributable earnings before realized losses was $13 million or $0.20 per share. Finally, we paid a $0.25 cash dividend in April with respect to the first quarter.

With that, I'd now like to turn the call over to Matt.

Thanks, Jack. Good morning, everyone, and thank you for joining us. As we outlined last quarter, 2026 represents a transition year for the company. With the goal of narrowing the gap between share price and book value per share, our focus is on 2 key priorities: first, executing an aggressive resolution strategy across our watch list assets and certain legacy office exposures; and second, positioning a portion of our REO portfolio for liquidity.

We have significant liquidity sitting at $653 million today and extensive capabilities across KKR to execute both our asset management and REO strategies. Today, I want to provide additional detail on our progress against those objectives and what you should expect over the course of the year. This quarter, book value declined by 9% as we position our watch list loans for resolution. Our action plan is designed to reposition the portfolio to optimize medium- and long-term performance. However, as we execute, we may choose to incur book value declines as we seek liquidity on legacy assets to create a higher quality portfolio.

As we complete this transition, we see a clear path to redeploy capital in newer vintage, higher quality investments, which we believe will support a return to book value per share stability and over time, drive earnings and book value accretion. Overall, our specific goals for 2026, as outlined on Page 8 of the supplemental, are to reduce our watch list and legacy office exposure, rotate the portfolio into newer vintage, higher-quality assets and reduce our REO footprint.

With that, I want to walk through our action plan for 2026 in further detail. First, reduce legacy office exposure from 21% to under 10%. We expect over half of this reduction to come from par repayments with the remaining driven by resolution of our watch list loans. We have already begun to action both prongs. Our largest office loan and $225 million loan in Bellevue was refinanced in the first quarter at par with the CMBS single asset, single borrower transaction. And the property securing our largest watch list office loan is currently being marketed for sale.

Second, we plan to resolve all of our current watch list loans by year-end by positioning these assets for sale or modification and accelerating their resolution. Third, address our life science exposure. Our goal is to have 100% of this exposure modified. We already have made progress here, having modified 19% and when including our Cambridge asset this quarter, we have modified 30% of our life science exposure. We also took a material increase in reserves for our Seaport loan in anticipation of a potential modification.

Finally, we are continuing to originate new investments as we reposition the portfolio. As a result of this activity, loans originated between 2024 and 2026 are expected to represent approximately 50% of the portfolio by year-end. This highlights the significant turnover into newer vintage assets, which we believe will have improved earnings potential.

Let me turn to liquidity and capital allocation, which is another priority for us as a management team for 2026. We announced a dividend reduction to $0.10 per share per quarter payable on July 15. This decision is not driven by liquidity constraints. In fact, as we look ahead through the year, we expect to have over $500 million of capital to invest, largely driven by over $2 billion of expected repayments in 2026. Rather, the dividend decision reflects a disciplined approach to capital allocation.

At this stage, we see more attractive opportunities, including repurchasing our stock and funding new originations. While we have ample liquidity to pay dividends at the current level, the new dividend level has the added benefit of being aligned with our expectations for distributable earnings per share before realized losses as we work through repositioning our portfolio.

While we expect $0.40 per year of dividends to be covered by earnings, excluding losses, quarterly results may vary in the near term with earnings expected to trough in the second half of 2026 into the first half of 2027. Once we get through this period, we expect distributable earnings per share to increase.

Regarding capital allocation, given our current trading levels relative to book value, we believe share repurchases represent an attractive opportunity to drive accretion to book value per share while also providing greater strategic flexibility. We were largely inactive with respect to share buybacks this past quarter due to trading restrictions while we were actively evaluating our dividend policy. With that process now complete and our dividend framework established, those constraints have been lifted.

On April 14, our Board authorized a new $75 million share repurchase program, providing us with meaningful flexibility to deploy capital. As a management team, together with our Board of Directors, we have not taken this dividend decision lightly. But given where the stock is trading, we believe the dividend cut and meaningful share buybacks are in the best interest of shareholder value creation.

With that, I will turn the call over to Patrick.

Thanks, Matt. Good morning, everyone. Let me start with a few changes to the watch list. This quarter, we downgraded our Philadelphia office assets with 2 smaller Texas multifamily loans from risk rated 3 to 4. As previously previewed on last quarter's earnings call, we also downgraded our Boston Life Science asset from risk rated 3 to 5. We upgraded our Cambridge Life Science from risk rated 5 to 3 following the loan restructuring that includes new sponsor equity commitment and a loan paydown.

As a result, we recorded CECL provisions of $74 million, bringing our total allowance to $260 million. These actions are part of our broader action plan to proactively reposition the portfolio.

Turning next to our REO portfolio. We are actively managing these assets with a clear focus on monetization and value realization. To help frame it, we grouped these assets into near, medium and longer-term monetization buckets. Starting with the near-term bucket, West Hollywood, condos, where units are currently listed and actively being marketed with proceeds returning equity as closings occur. Raleigh, North Carolina, multifamily, where we're completing targeted upgrades to common areas and expect to list the asset for sale by year-end.

Philadelphia office, where our business plan is largely complete, the asset is now approximately 85% leased, and we plan to sell the property this year. In the medium-term bucket, we have Mountain View, California office, where our platform, market positioning and patience have driven meaningful value creation. As we announced in March, we signed a long-term full property lease with OpenAI. We expect to bring this asset to market within the next 12 to 16 months as we complete the remaining work and the tenant takes occupancy.

Portland redevelopment, where we've executed on our plan and are near final entitlement on over 4 million square feet of mixed-use space and expect to begin our monetization strategy over the course of the year. And finally, in the longer-term bucket, Seattle, life science, where our focus is on leasing and stabilizing the asset, and we expect to hold it longer given current market conditions.

Boston Life Science, currently a risk-rated 5 loan, which we expect to transition to REO in the second quarter. This is expected to result in a realized loss of approximately $37 million, though we are adequately reserved as of the first quarter. Similar to Seattle, we plan to stabilize the asset and hold the property until market conditions improve. As we monetize these assets and redeploy the capital into new investments, we estimate the potential to generate more than $0.15 per share of incremental quarterly earnings over time, nearly half of that being driven by our Mountain View REO asset. This reinforces our focus to convert these assets into liquidity and redeploy that capital into higher earning opportunities.

Turning to financing and liquidity. At quarter end, we had $653 million of liquidity, including $135 million of cash on hand and $500 million of undrawn capacity on our corporate revolver. Additionally, we had over $500 million of unencumbered assets on the balance sheet. Total financing availability was $7.2 billion, including $2.6 billion of undrawn capacity. Originations totaled $184 million for the first quarter, while repayments were $415 million, with approximately 75% of the repayments driven by legacy office.

Looking ahead, in the first 3 weeks of the second quarter, we've already closed or circled over $400 million of new loans. We continue to benefit from our connectivity with KKR Capital Markets and 77% of our financing remains non-mark-to-market, providing stability across market environments. We believe we remain well capitalized and positioned to manage the portfolio.

Importantly, we have no final facility maturities until 2027 and no corporate debt due until 2030. Our debt-to-equity ratio was 2.2x, and our total leverage was 4x, consistent with our target range. As we move through this transition year, we believe we are well positioned. Our focus remains on executing our resolution strategy and redeploying capital into high-quality opportunities, including share repurchases. With a clear path to improving and rebuilding earnings power. We believe the actions we're taking today position the company for long-term value creation.

With that, we're happy to take your questions.

[Operator Instructions] First question is from Tom Catherwood, BTIG.

Maybe starting with the portfolio target of 50% newer vintage loans by year-end. By our math, that implies something in the neighborhood of $1 billion to $1.2 billion of origination activity over the coming quarters. Are we in the ballpark with that?

Tom, thanks for the question. It's Matt. I can take that, and thanks for joining the call. That's certainly in the ballpark of what we're looking at. Obviously, certainly it will depend a little bit on the share buyback amount, but that's a good projection for now.

Perfect. Perfect. And actually, you did fair point on the share buyback, and it's kind of the use of liquidity is something we're thinking of with leverage ticking up to kind of the top end of the range in Q1, will those originations and the $75 million allocation for buybacks, will those be tied to REO asset sales? Or are you comfortable using liquidity on your balance sheet and then just kind of back funding that as you sell assets?

Yes, I can start. It's Matt again. Let me start off a little bit. I think most of that liquidity, as we commented on the prepared remarks, is really coming from just natural loan repayments. So over the course of the year, we think we're going to have $2 billion of repayments. We got about $400 million or so in the first quarter. Second quarter -- and to be clear, it's always a little bit hard to predict these things quarter-to-quarter.

But we look at the second quarter right now and from what we can see, it could be close to half of that total repayment for the year could come through the second quarter. So I'd say most of this liquidity that we're looking at, which translates into like $500 million of investable capital, if you will. And then we can talk about the sources to your point, is really going to come from that -- from the just loan repayments and natural velocity within the loan portfolio.

Okay. So you don't need to line up the timing of REO sales in order to achieve that 50% new loan target?

No.

Got it. Perfect. And then last one for me on the watch list, roughly 6 assets on there when you account for the Boston life science loan in 2Q or that it's going to go REO. You obviously mentioned Minneapolis office is on the market. For the remaining 6, what are your expectations as far as the amount that are repaid versus those you expect to modify or bring on balance sheet?

Yes. Let me jump in again. Maybe just looking on Page 12 here, the goal is to try to monetize the vast majority of these. I think on the life science piece of it, we mentioned we will be taking title to one of those over the course of time here. But outside of that, I think a lot of this will be some combination of modifications, note sales as well. But I think the goal really is to clear all this up by the end of the year.

And things like the multifamily component here, I'm sure we'll get questions on this later, so I could just address it now. These are just coming up on maturity, and these are in the process of getting sold. So sponsors are out selling these assets. We downgraded these just because the sales price is going to be close to the debt, and we may take small losses or not on those loans. We want to make sure we identify those.

We don't think that's really indicative of the rest of multifamily. We've always been on these calls saying there can be noise in multifamily, but we don't think there's like material losses in that -- in the loan portfolio on the multifamily side. And this is probably a good example of what we're looking at of like there's going to be a little bit of noise here. We do take small losses as they sell these assets into the market and it trades right around the debt. But some of these will just be sales from sponsors, if you will.

Next question is from Chris Muller, Citizens Capital Markets.

So I just wanted to start with the dividend and just make sure I heard you guys right. So the new $0.10 dividend is well below the $0.20 ex loss that you guys put up in the quarter. I also heard the comments on both the new buybacks and also near-term pressure as you guys get more aggressive on resolutions. So I guess the question is, do you guys expect earnings ex losses to be around that $0.10 level? Or does that just give you some optionality? I think I just missed that what you guys said in the prepared remarks.

Yes, it's Matt. Let me jump in. We think earnings are going to trough towards back half of this year into next year. And a lot of that, we start to come out of it as we think about liquidating more of the REO portfolio, especially as you think about Mountain View, where we've obviously signed the lease there and that will be positioned for liquidity over the next, call it, 12 to 18 months.

So that's -- when you think about the light at the end of the tunnel, that's a little bit of a timing as if we can build back up earnings. When we mentioned the $0.10 here, part of this is just capital allocation, right? Like look at -- think about where the stock trades today, we've got pretty good uses of capital right now in terms of just share repurchases. So obviously, it ties into some just overall capital allocation discussions. But when we think about it just versus earnings, we expect to cover that on kind of an annualized intermediate basis, but there certainly could be a little bit of noise in certain quarters where we're not fully covering that as we continue to push through and reposition the portfolio.

Got it. And then I guess on the $42 million CMBS investment, was that a more attractive investment than deploying into bridge loans? Or was it more just a place to park some cash until it can be redeployed? And should we expect to see more of this going forward?

Yes. So we've been -- that number sounds fine. Let me double check the amount for the quarter. We've been evaluating different options for portfolio diversification, whether that's expanding into Europe and leveraging the platform that KKR has built in that market or just duration as well and just access to like different investing markets like CMBS.

So from a relative value perspective, we thought that was a particularly unique opportunity for us. And I think you're right in terms of the $42 million. I just want to double check that. But yes, I mean, we're evaluating everything on a relative value basis. The CMBS is providing a little bit duration. I think in this case, it was a little bit more single asset, single borrower, so solving more of the relative value component of it.

Next question is from Jade Rahmani, KBW.

Yes. Have you seen any green shoots in leasing in life science?

Jade, thank you for joining today. We are. I think it's a little bit market dependent. They're all in a little bit different stages of recovery. I think in South San Francisco, you're seeing 2 things happening. One, you're seeing a revitalization of office, particularly as it relates to AI tenants and growth, which is creating tension in the overall market. And as you well know, some of these assets, including some that we have, can be leased as office. So there's some pretty tight pockets of office there.

And then we're also starting to see life science companies turn back on as well. When we think about our other exposure, our larger exposures in Boston, and I'd say there, it's probably a little bit behind what we're seeing in South San Francisco, but we are seeing tenants in the market. Most of the assets that we have there are oriented to big pharma, and there are tenants in the market today like actively engaged trying to lease space, including one of the assets that we have. So we are seeing tenants starting to come back, but it still feels early and -- but at least you're having some sense of recovery starting.

And in terms of your REO expectations, from your standpoint today, is it your view that there will be just one additional life science REO?

That's the current expectation, yes.

And then can you discuss some of your approach to credit risk management because I have seen migration from risk-free loans to 5 as maturity approaches. And usually, what we see is a risk 3 to a risk 4 then to a risk 5. So the skipping ahead makes me a little worried about the risk 3 loans in the portfolio. I know it's multifamily and you don't expect material losses there. But just generally speaking, how are you thinking about that?

Yes. That's a great question. I would say the normal progression for us and obviously, the peers as well is you go 3, 4, 5. And I'd say the vast majority of cases, that's what's happened. And by the way, we do analysis every quarter evaluating, okay, what's happened with our 4 loans. And that's obviously a dynamic number. But up to this point, roughly half have gone to 5 and half have gone to 3, which is I think what a 4 is supposed to be, right? It's not just an indicator that it goes to 5.

Obviously, depending on the property type, it may be more heavily weighted to that over time. But in terms of -- I think we've had a couple go from 3 to 5. The only one we had this quarter was really the life science deal, which we flagged last quarter as going to get downgraded depending on what these modification discussions look like. It would be a 4 or 5. We weren't exactly sure at the time, and we had moved over to a 5. So I'd say it's unusual. The multifamily we put into the 4 buckets just because, one, it's not material, we don't think. And two, we're not exactly sure what's going to happen now as these sales processes play out.

But I think you're right in the sense that vast majority of time, you're going to have these natural linear progressions. But sometimes there's jump risk around a maturity date or around a modification discussion, and we obviously need to just reflect our best case scenario at the time or best guess at the time.

And then on the Minneapolis office, it's a risk 5 loan. So I believe there should be something around 23% loss assumption there, reserve that you currently have. And I think that your slides show that the price per square foot at your basis is $182, but that's before CECL. So if we stress that for a 25% severity assumption, I'm just curious if you think that is where the market is or if based on the sale process, there might be some further loss?

Jade, it's Patrick. I'll take that one. So yes, I think the number you're kind of backing into is a blend, is an average. Obviously, as we've seen in the office segment, some of those loss numbers have been higher than average, right? If you think about what's also in that bucket, we've got multifamily as an example. So it's just a proxy. Clearly, that's an asset that we've been working for some time here, and we think it's appropriately reserved for, but the number that you're quoting is just an average.

[Operator Instructions] Next question is from Gabe Poggi, Raymond James.

I've got a couple of questions. On capital allocation, capital management, as you guys think about the buyback versus making new loans to kind of keep a DE run rate going, how do you manage that relative to leverage, right? If your total capital right now to equity is around 4x and your leverage to common is 5x plus, how much of that buyback? How do you think about leverage relative to that buyback? That's question one.

It's Matt. Let me start out and try to answer that. I would say we're not changing our leverage targets. I think that's the first thing we're kind of solving for, right? We want to kind of stay in that 3.5 to 4x range. So I think we ended this quarter around 4 at the higher end of our range. If we didn't originate any loans, we could bring that leverage way down because we have so many repayments coming in. So we have a lot of flexibility on that, but that's probably the first thing we're solving for, which is like, okay, let's make sure we stay kind of leverage neutral, if you will.

And then we're looking at excess capital beyond that. And then we're trying to think about, okay, what's the appropriate amount of share buybacks first. I would say, just given where the stock price trades, how much should we be buying back. The Board authorized $75 million. you put that in context, that's a lot of firepower, right? We have a lot of. We have $500 million of liquidity. So what are we going to do with it? $75 million we authorized for buybacks. I mean that's roughly 25% of the public float, right? So it's a lot of buyback. So that's probably what we're looking at next.

And then we have excess capital, right? And that's like, okay, what else should we be doing and thinking about? And that's why we obviously want to think about the ongoing business supporting a dividend and not shrinking the company too much. And that's where the final piece of it, I think, comes in, which is the loan origination side. So hopefully, that gives you some context and kind of how we're from a decision tree perspective going through it.

Yes. No, that's helpful. Second question is, is there any contemplation from KKR, the manager during this transition period regarding a fee cut, fee waiver, just as you guys get from point A to point B, call it, mid-2027?

Yes. Thanks. Listen, I think we're evaluating everything, all options, I think, are on the table at the KKR level as manager, at the KKR level as the largest shareholder in this company. And then obviously, the KREF level and the Board. So I wouldn't -- we're looking at a number of different -- obviously, a number of different options.

Yes. And I've asked that just in the context of obviously getting from point A to point B, knowing KKR is a large shareholder and thinking about just kind of getting more to the bottom line during the transition. There was nothing pointed in that question, just so you guys know.

Last question is, is there any more detail you can provide around the Mountain View lease? Just any term details, things of that nature to give folks some granularity on how you're thinking about the potential value there as you think about monetization over the next 12 to 18 months?

Yes. We're subject to a pretty tight NDA. So we'd love to provide more, but obviously, we have a contractual agreement with our tenant. What I can say is that it's a long-term lease that we think will trade like a net lease, so we can effectively sell it to net lease type of buyers, right, on a long-term lease basis.

So that's really what we're looking at. We think that -- let's just take a step back, right? I mean where the stock is trading today, there's a lot of uncertainty in the world, clearly. And so it's hard to like project -- kind of project forward what happens, whether it's in -- with the war around in the oil prices and inflation, whether it's AI and impact on jobs or growth or GDP. So there's just a lot out there, I would say, right now.

But when we look at book value, and we're willing to -- I think you saw it this quarter, unfortunately, and we're willing to pay some bid offer to find liquidity, to clean up the portfolio. It is putting pressure on book value. And like we said, we're going to -- we've got a little bit of ways to go here. We're going to choose to do that going forward to get to a spot where we can feel good about it and have a portfolio that's earning well and give the all clear.

But like when we're -- it's not like we're sitting here and like looking at this portfolio and our book value and saying, oh, this is going to -- we can get down to like a single-digit type of book value per share. So like -- we're not exactly sure what the market is pricing, and that doesn't include like back to this discussion around 350 Ellis, where we think we've got a big gain in that asset, right?

We marked that down significantly. Now we have a tenant. We've got a good lease. It's a long-term lease. We feel like we can sell that and liquidate that asset over time, and that will be accretive to book value. So we can actually start building this back up a little bit. And then, of course, with share buybacks, we can do the same. So that's a little bit of how we're thinking about it. And I know we've been pressed on this a number of times on Mountain View is timing.

Listen, we'll sell this as soon as we feel like we can optimize value. But we're giving the 12 to 18 months because that's kind of the stabilized moment. And if we have options before that, of course, we'll look at those very, very carefully. But we want to be, I think, conservative and judicious as we think about the timing and what's realistic.

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

Well, great. Thanks, operator, and thanks, everyone, for joining today. Please reach out to me or the team here if you have any more questions. Take care.

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

Good morning, and welcome to the KKR Real Estate Finance Trust Inc. Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Jack Switala, please go ahead.

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the Fourth Quarter of 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious.

I'd 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-K for cautionary factors related to these statements.

Before I turn the call over to Matt, I'll quickly go through our results. For the fourth quarter of 2025, we reported a GAAP net loss of negative $32 million or negative $0.49 per share. Book value as of December 31 is $13.04. We reported distributable earnings of $14 million or $0.22 per share, and we paid a $0.25 cash dividend with respect to the fourth quarter.

With that, I'd now like to turn the call over to Matt.

Thanks, Jack. Good morning, everyone, and thank you for joining us today. Before reviewing our company results in more detail, I would like to highlight several key achievements for KREF in 2025.

First, we made significant progress strengthening our liquidity position throughout 2025. In March, we closed a 7-year, $550 million Term Loan B, which we later upsized and repriced in September, increasing the outstanding balance to $650 million and reducing the coupon to SOFR+ 250 basis points. During the year, we also upsized our corporate revolver to $700 million, up from $610 million.

Second, we closed on our first loan in Europe for KREF. We have been strategically building our real estate credit platform in the region over the last several years. This transaction along with subsequent European investments in the fourth quarter represents an important milestone in that effort and positions us to capitalize on relative value across the U.S. and Europe.

These transactions also serve as a foundation for continued geographic diversification. During 2025, we continue to experience healthy repayment activity, which totaled $1.5 billion, consistent with 2024 levels. We offset this with $1.1 billion of new originations and today, we are operating at the high end of our leverage ratio and targeted portfolio size. More than 75% of our new originations during the year were concentrated in multifamily and industrial loans, sectors where we continue to see resilient fundamentals and attractive risk-adjusted returns. Multifamily remains our largest property type exposure. And given our significant exposure to Class A product, we continue to observe strong underlying performance across the portfolio. We remain focused on maintaining and selectively growing the portfolio within on-theme asset classes and top tier MSAs.

Looking ahead, 2026 will be a year of transition for the company. Through execution of our business plans, we have positioned much of our REO portfolio for liquidity this year. Additionally, we are going to implement an aggressive resolution strategy for a significant portion of our watch list assets and select office assets. The overall goal is to compress the discount of our stock price to book value and more quickly unlock approximately $0.13 per share embedded in our REO assets.

However, this strategy will also put additional pressure on earnings until we're able to fully execute the plan. As it relates to this approach, we will need to be balanced on a few assets. To that end, I want to touch briefly on our Mountain View asset. The market continues to improve meaningfully, and we remain engaged with tenants. If we were able to sign a lease in the near term, we believe the optimal strategy will be a monetization post 2026, given a number of factors, including anticipated CapEx and tenant improvement work.

Finally, I want to comment on our dividend. The dividend is something the Board is actively evaluating as part of a broader capital allocation discussion, particularly as we work through a transitional year for the portfolio. Our priority is to make disciplined decisions that balance near-term earnings visibility and long-term shareholder value.

With that, I'll turn it over to Patrick.

Thanks, Matt. Good morning, everyone. Looking at risk ratings. During the quarter, we downgraded the Cambridge Life Science and San Diego multifamily loans to risk rating 5. As a result of these developments, we recorded total incremental CECL provisions of $44 million during the quarter.

Subsequent to quarter end, we entered into new modification discussions on our Boston Life Science loan, which is currently risk rated 3. And while the loan continues to make contractual monthly interest payments, we anticipate a ratings downgrade and CECL increase in the first quarter. New originations in the fourth quarter totaled $424 million, which surpassed repayments of $380 million. In 2026, we expect full year repayments of over $1.5 billion, exceeding repayment activity in each of the last 2 years. We'll continue to originate new loans while maintaining our target leverage range alongside other capital allocation strategies.

Turning to financing and liquidity. We ended the year with near record levels of liquidity totaling over $880 million, including $85 million of cash on hand, another $74 million loan repayments held by the servicer as well as $700 million of undrawn capacity on the corporate revolver.

Total financing capacity was $8.2 billion, including $3.5 billion of undrawn capacity. Leveraging our internal KKR Capital Markets team, we added to our non-mark-to-market capacity during the quarter and 74% of our financing remains non-mark-to-market. We remain well positioned with no final facility maturities until 2027 and the corporate debt due until 2030. The weighted average risk rating on the portfolio is 3.2. Our debt-to-equity ratio is 2.2x, and total leverage ratio is 3.9x, consistent with our target range.

Finally, during the quarter, we repurchased over $9 million of common stock at a weighted average share price of $8.24 for the full year 2025, we repurchased $43 million of common stock at a weighted average share price of $9.35, which resulted in approximately $0.32 of accretion to book value per share over the course of the year.

As of the end of the fourth quarter, we have approximately $47 million remaining under our current share buyback authorization plan. Our strong liquidity position provides meaningful flexibility in managing the portfolio, allowing us to thoughtfully allocate capital across a range of opportunities, including share repurchases and new originations.

Overall, we remain well capitalized and focused on repositioning the loan portfolio for improved earnings. With that, we're happy to take your questions.

[Operator Instructions] The first question comes from Tom Catherwood with BTIG.

Matt, you talked in your prepared remarks about accelerating resolutions on watch list and REO assets. If KREF executes on this plan, and the stock doesn't materially pull to par if there's just a structural discount for monoline commercial mortgage REITs. Are you willing to take an approach similar to what ARI announced last week and look to revamp your business totally?

Tom, I appreciate you joining us, and thank you for the question. I guess a couple of things there before I have addressed the ARI transaction. I think, first of all, we made a lot of progress on the REO, which is kind of why we're at this point today. We feel like we're in a good position on much of that portfolio to be able to liquidate that over the course of this year.

And then obviously, start to think about our Mountain View asset, getting a lease done there and being able to execute that business plan more fully post 2026. So I think we've made the right decisions in terms of just being patient, taking good real estate back, and now we're at the point where we either advance the business plan, liquidity has returned and we can get, obviously, some monetization activity there.

The question you're asking, I think, is a good question, and it's kind of why I think we're putting a second phase of this plan in effect, which is let's just not deal with only the REO where we've had progress. Let's also deal with some of the watch list and maybe some other of our select office assets so that when we are through this portfolio strategy, we could show up with a relatively new origination portfolio.

A lot of the REO has been cleaned out, and we don't have some of the exposures that the market is I think, focused on right now. So that's really the goal here. And my expectation is if we show up with a clean portfolio, a newer portfolio that the market will price it, I think the market is efficient and will recognize the steps that we've taken and the new portfolio that we've been able to create at that moment. But we'll have to evaluate that.

Obviously, when we get to that moment in time, and there's a good amount of distance between now and then. So that's how I would say that. I have optimism that won't occur, that we will get recognized for the portfolio, we're going to create here. As it relates specifically to the ARI transaction, listen, I think it's an interesting transaction for sure. It definitely shows how the private markets value some of these portfolios compared to what the public markets do. But I don't want to draw any direct correlation to KREF. I think we've got our business plan. We've got our strategy, and we're really focused on implementing that.

Appreciate those thoughts, Matt. And maybe sticking with this kind of overhaul of the portfolio. When we get to the end of '26, what does success look like? I mean you mentioned Mountain View likely carrying on into '27. Is it all the REOs as of right now is resolved? Is it the watch list is fully resolved? Is it office has been reduced by 50%, some number out there.

Like what does success look like internally? What are those targets by the end of '26.

Yes. And I appreciate the question. I would say a couple of things. One, I think in our next call, I think we'll be able to really walk everyone through and articulate what the end goal is here.

Certainly, when we're looking at it today, if you think about our watch list, which we highlight, I think, on Page 12 of our supplemental, I think the goal is to get through and monetize or liquidate the vast majority of that watch list.

The reason I don't say all is because I think some of those life science assets, one, we're in the process of modifying and so we should get to a basis where we're comfortable moving forward on those or two, we just have to evaluate the liquidity in that particular sector. But certainly, when we think about the office on our watch list, we have one multideal on there, the multideal on there, like the goal is to move through those and then I think to your point, on office, I think we're going to have to start making a distinction on office because we are making new office loans that we think are really high quality, but there's certainly some of our legacy deals that we wouldn't put in that same that same bucket. And so I think the goal would be to, at the end of this year, be able to articulate, hey, we think from an office portfolio perspective, we've kind of liquidated everything that we see a problem on.

We'll be able to identify any future issues that we may see. So create a lot of clarity there. On the REO, I don't expect much to change there as it relates to what we've talked about on the last couple of earnings calls. When you think about the buckets that we've put our REO in, which is I think listed on Page 25 of our supplemental if you want to follow along.

We have a number of assets -- excuse me, Page 15. We have a number of assets that we put in the short-term bucket. The goal for those would be to liquidate over the course of this over the course of this year, either partially or fully. Obviously, some of these are selling units or selling lots. So I'm not sure we'll get through 100%, but we'll at least be making good headway there. Those assets are the West Hollywood, luxury condo, Portland, Oregon redevelopment, the Raleigh, North Carolina multifamily and the Philadelphia office.

So those are all the short term, and we'll be able to give progress updates over the course of the year on those. Medium term, I'd put more in the Mountain View asset, which we've talked about, right, get a lease done on that. Again, that market is extremely healthy right now, and we are engaged with tenants in the market there. And then I put in this last category, the longer term, more of the life science, right?

So we've got the Seattle asset, and we'll likely go to a title on our Boston loan that's on the watch list right now in the life science sector. So a little bit of background there, but same buckets, like vast majority coming out this year, and then if we can execute on Mountain View in the intermediate term, and we've largely cleaned it up with the exception of a couple of these life science deals, which we'll see, right? We were pretty patient on some of our office, and that's worked out very well, I'd say, just the market has come back. It's healthy. What we have in the portfolio from an REO perspective in life science is extremely high quality.

So to the extent that market comes back, I understand it's under pressure today. But forever is a long time, and if those markets come back, certainly, we could benefit from that as well.

The next question comes from Rick Shane with JPMorgan.

When we sort of run back at the envelope, we're looking at over $800 million of loans that are of assets that are either REO or on nonaccrual. We then -- there's the development in terms of migration, adding the new loan to the watch list this quarter. Is that going to be in nonaccrual as well? And are we could be in a situation where let's call it, 20% of the portfolio is under earning in 2026 or as a negative carry.

Rick, it's Patrick. I'll take that question. I think in terms of like specific numbers, I don't have sort of that bucket. I will say this, on things like the asset that we indicated will likely downgrade. That asset is paying its contractual interest. We expect in the near term that you will continue to pay contractual interest and so from an earnings standpoint, we're not seeing any degradation from that.

What's driving it in the near term are some of the REO assets we talked about, and we'll give more color in terms of the timing of the resolution in the subsequent quarter, when we can get some of that back and when we can actually convert that into earnings assets. So clearly, we're being dragged down by some of those assets, but we do think there's a near-term opportunity to pull that forward.

On some of these other assets that are on the watch list, and we can sort of -- you can kind of go through each of these, but in general, we're seeing contractual payments being made here. So it's certainly impacting us, we certainly think there's a lot of upside, as we've indicated before. We think there's around $0.13 from getting these REO assets back and converted into performing loan assets. But that's kind of what I would say on that.

Okay. And again, I assume, look you guys talked about dividend policy, and I heard what I would describe as sort of rational financial analysis as opposed to focused on market sentiment and just maintain a dividend for the sake of that, I'm assuming that, that is an indication that as we go through the year, you guys are going to be looking at all of this. And we should be thinking about our dividend very much in the empirical way as opposed to sort of some sort of gauge sentiment.

Rick, it's Matt. I think that's a fair articulation of how we're thinking about it now, which as we kind of look through the course of the year, like I said, and we try to rebalance this portfolio, trying to understand the near-term impact of earnings there.

Matt, I think fair was a good adjective, but clear or straightforward probably wasn't a good adjective to describe my commentary, but thank you for answering the question.

The next question comes from Jade Rahmani with KBW.

To touch on Tom's question and maybe the underlying issue is that the bid for assets or loans that KREF is originating seems to be stronger in the private credit market than the required yield that mortgage REIT investors require.

So there could be an arbitrage there. As a result, perhaps management should pivot its focus to value creation as the top priority, which could include loan sales, share repurchase, unlocking potential gains in the portfolio if there are some such as Mountain View REO. And perhaps that would buy time to reposition the company rather than go with the strategy you've been undertaking which might still result in KREF trading at this very sharp discount to book value.

Otherwise, accelerated dispositions could materialize the book value that the market ultimately is projecting, which clearly requires significant losses on the Life Science, in particular, but perhaps elsewhere in the portfolio. So just wanted to get your thoughts on that potential pivot and if you see that as something management might undertake.

Thank you, Jade. Yes, it's Matt. Let me unpack that a little bit. I guess when I heard you go through the list of things that we could accomplish or strategies we could follow. I think we are doing most of those.

Certainly, when we think about and I mentioned like watch list, select office assets, repositioning the portfolio, I think we would -- part of that will be loan sales, 100%. I think when we think about gains on the REO, unlocking those gains, completely agree. We should try to accelerate those as much as possible, which we're doing, and I think which our plan will incorporate. A lot of it comes back to -- when is the optimal time to sell, and we don't want to give money away, the market has certain expectations, when it buys an asset, when I think about something like Mountain View, well, even if we sign a lease, there are certain things that we'll have to do to get that tenant in and occupying et cetera, for the lease to go effective.

So there are certain moments where we're going to create more value and liquidity that we have to be mindful of. And so we'll do that. The last piece, share repurchase, we've been repurchasing shares. So I think that certainly has been part of our strategy as well

So I do think that we're evaluating everything possible. I think the last -- the last point that you might ask as a follow-up question, well, what about performing loans? Why not go and sell those? And certainly, we could add that and continue to evaluate a performing loan sale. But right now, I'd say we're focused on really getting the portfolio in a place where the public markets can trade us in the right way because all these portfolios, whether it's ours or some of our peers, we all have some legacy assets. And that's not to say that they're all going to become watch list or they all become losses, but perhaps they're just higher loan to value, right, than where we started, of course, values are down a lot in the real estate space.

So maybe that's what the market is telling us. And as we reposition the portfolio and as the percent of newer loans on adjusted basis comes into that portfolio, then these stocks can compress. So I'm not convinced that this is again forever, like these stocks are always going to trade like this. We've just gone through probably one of the most challenging real estate environments, certainly in my career. And as we get through this, I expect the market will be rational and reprice these portfolios.

The eye of the storm seems to be life science. When you listen to Alexandria's earnings call, it's clear and they are best in class at this. They expect a very long timeline to turn around this sector, 5 years plus. And AI is also going to re havoc on this sector.

So you talk about putting in place modifications to get basis to a point of comfort, the weighted average basis today is $830 a foot. Do you have in mind the range or some benchmark that you could provide, which we should think would be a reasonable basis to take this outsized risk beyond the investor horizon that people are contemplating?

Yes. I think a couple of things on the life science sector. We understand and certainly follow it closely. We understand it could be a very long, a long road here. At the same time, I remember when we foreclosed on Mountain View, everybody in the market, including the most sophisticated brokers told us it was going to be 5 years before we could get anything done there.

I'll take the under on that by a few years, and I'll take the over on the value creation that we make there. So things change. And as it relates to technology and AI and particularly as it applies to life science, I'm not convinced that's a negative for the life science sector. I think it could be actually quite a positive in terms of the development and need for development of new drugs and need for new lab space.

So kind of we'll see how that plays to the system. I think we're eyes wide open, though, we need to get to a lower basis, and you've seen us doing that. I think we apply the same thing to our life science as we do to all the other modifications that we're doing, which is unless the sponsor is willing to make a significant capital commitment to delever us to a point where we feel comfortable, then usually, we'll either go to REO and sell it. But in the case of our -- some of the challenges that we're dealing with now and some of these downgrades recently, we do expect our sponsors to commit significant capital to pay us down. And in return, we'll likely have to do some type of hope note around that. But I don't want to talk specifics as we're in the middle of some of these negotiations right now. But in general, we've been bringing our basis down in a pretty significant way, again, not just through hope notes, but also through principal paydowns and borrowers coming out of pocket and recommitting to the assets.

The next question comes from Gabe Poggi with Raymond James.

I want to kind of piggyback on what's been asked already, but kind of go a different angle and how do you guys comment through the KKR lens as it pertains to just broad demand for one commercial real estate credit and then commercial real estate in general.

Matt, to your point you just made, right, timing is in the eye of the beholder and can change in 5 years to a shorter term. But just what's the bigger KKR machine seeing as it pertains to global demand for domestic real estate, both on the credit side and the equity side. I think it will help us kind of get an angle as to the true value here or value creation probability if we take a little bit longer-term tact.

Thanks, Gabe. I appreciate the question. So right, let's put our KKR hat on for a minute here. I would say that we are seeing increased allocation to both real estate credit as well as real estate equity. I think the sentiment has clearly shifted from a relative value perspective. A lot of institutional allocators of capital, I think we're looking at their overall portfolio and thinking about where those values have gone over the course of the last 5 years and seeing that real estate has been relatively stagnant.

And so you're starting to see a shift back into that sector. Now I would say it's still predominantly in the opportunistic and value-add parts of the market within equity. So you haven't fully seen, so that core money come back in or that core plus money, although I could see early signs of it, but I'd say most of it is in that opportunistic value-add sector.

So people are allocating velocity is starting to come back a little bit in the market. I think we've all seen that some sales starting to go through. When we think about our pipeline still predominantly refinance on the lending side, but it's -- there's more acquisitions that we're seeing, which means lots of capital is increasing funds returning capital, and that money typically gets recycled back in the fund.

So that reset, I believe, is beginning to happen. On the real estate credit side, same comment true. We are seeing increased allocations to real estate credit. I think we've been in a little bit more favored piece of the market than equity for a while now as just allocations to private credit overall have been increasing over the course of the last handful of years.

Now I think there is a very tangible relative value discussion happening around not just real estate credit, but asset-backed as well and particularly infrastructure also from a sense that how do people may be fully allocated to corporate credit, maybe corporate credit has other potential challenges in those portfolios.

So how do I diversify away from that, but still be in a credit exposure, still get -- take advantage of the yield and the safety that credit offers in today's market. So we've seen certainly a pivot into real estate credit. The private funds are raising not just us, but other -- our peers as well, I think are raising a significant amount of capital in this space and my expectation is that will continue going forward here.

[Operator Instructions] The next question comes from Chris Muller with Citizens.

So we have a couple more rate cuts behind us now in futures are suggesting another 2 cuts this year. I guess the question is, have those cuts increased interest in your guys' REO assets at all? And I guess what I'm really trying to get at is, have those cuts narrowed the gap between buyers and sellers?

Thanks, Chris. It's Matt. I do think that these rate cuts are helping liquidity in the market. I don't know if it specifically translates to the liquidity we're seeing, but it's certainly part of it. But I think overall, the sentiment for real estate right now is pretty positive. There hasn't really been a lack of buyers in the market.

I think there's a lack of sellers personally. Sellers at a price, right, sellers at an opportunistic price, which is why we're seeing a lot of our activity more in the refinance part of the market than the acquisition part. Because you have owners of real estate that own a really good property. That property likely is performing fine from an occupancy and cash flow perspective outside of like small pockets where you have some oversupply, you may have a sponsor that owns it at a higher basis than they'd like given just value decline since rate hikes in 2021. And so we're seeing our sponsors really play that forward refinance by time where supply really drops off and they can raise rents and grow their equity value back.

So that's the overall market. So as we think about selling our assets, particularly on our REO, I do expect there to be liquidity and unrelated to maybe the rate cuts, we're seeing more liquidity in the office sector, right? Some of those assets that we've taken back or on the watch list like didn't historically have a lot of liquidity, just given the uncertainty market there has found some stable ground, and you're starting to see real liquidity in that sector. Again, I'm not sure it's directly related to rate cuts. I think it's more about just time and seeing where leasing is shaking out and finding some stability in the overall occupancy and leasing market.

Got it. That's very helpful. And that's a good segue into my next question on office. And you touched on this a little bit, Matt. But we haven't really seen many new office loans in recent years. So can you guys just talk about your view on that sector? And what makes an office loan attractive these days?

Sure. I'd say our borrower is still high. Jade asked the AI question. Like certainly, we think there's potential volatility ahead as it relates to technology in real estate. So we need to continue to be mindful of that. The opportunity, I think, is on -- if you can lend on newer, high-quality assets, and especially for someone like KREF on stabilized cash flows like leased or mostly leased assets with long-term leases in place, that's really where we're seeing an attractive opportunity today.

So you're not really taking a lot of leasing risk or reposition risk, you're going to have this stable cash flow in place, you're in a good market. You can see a lot of leasing demand and velocity within that market, and you're in one of the top buildings within that market. I think that's really where we're focused. And there's a substantial amount of data, I think, that can prove not only is there liquidity for in the capital markets for owning real estate like that, but there's also a lot of leasing demand as well.

So it's kind of an interesting opportunity for us where we don't have to take a lot of repositioning risk. We can just lend on really high-quality real estate that's already leased.

Got it. Very helpful. And if I could just squeeze one more quick one in. Should we expect originations to mostly be in line with repayments as you execute this more aggressive resolution strategy? Or could we see some net portfolio growth in the coming quarters?

Yes. I would think about it as -- really need to look at it through 2 lens. One is repayments and recycling that capital, I think is the right to answer your question, yes, we'll how to recycle that capital into new loans.

The second piece is just making sure we're staying within our targeted leverage ratio, right? Those are the 2 things that we're balancing.

Got it. So REO sales may be the missing piece of that puzzle there?

Yes. And as we liquidate REO, we'll be able to increase portfolio size. It would be the other piece of that as well, you're right.

And we have a follow-up from Jade Rahmani with KBW.

On Mountain View, could you quantify how much dollars you expect to put in? And do you see a potential gain there?

Jade, it's Matt. I don't think, we don't have a lease yet. I don't think we'd want to comment on potential CapEx, TI, et cetera, until we have a lease. At that point in time, when we have the final numbers, we can certainly go through that. The answer to your second part is everything we're seeing today, I'll comment again, we don't have a lease done. But everything we're seeing today would suggest that I think we've got significant value in that asset above where we're carrying it today.

Okay. That's good to know. And then office, there's a couple of 2021 and early 2022 vintage risk-free loans. I'm not sure if that's what you're referring to in your office comments, including Washington, D.C., Plano and Dallas. So just if you could comment on that.

Yes. And I think we can take everybody through this again in more detail next quarter. I guess a couple of things. One, not all of our -- we're not worried about kind of like all of our office 3 rated loans, to be clear. Like you called out some of the Dallas assets, like I'd expect those assets are perfectly fine, and we have DC assets that are totally fine.

So I expect to get -- we're going to get a fair amount of repayments in our office portfolio this year from that seasoned piece from the 2021 or earlier. So I wouldn't look at it as though we're looking at each particular asset. I think most of them are going to get repaid. To the extent we're not going to get repaid, we may just choose to note sale those or recut a deal with the borrower, et cetera, to make sure that we can get on a call and have that portfolio -- that piece of the portfolio reduced.

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

Well, great. Thanks, operator, and thanks, everyone, for joining us this morning. You can reach out to me or the team here with any questions. Take care.

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

Good day, and welcome to the KKR Real Estate Finance Trust Inc. Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded.

I would now like to hand the conference over to Mr. Jack Switala. Please go ahead.

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the third quarter of 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious.

I'd 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 2025, we reported GAAP net income of $8 million or $0.12 per share. Book value as of September 30, 2025 is $13.78 per share. We reported a distributable loss of $2 million due primarily to taking ownership of our Raleigh multifamily property. And prior to net realized losses, DE was $12 million or $0.18 per share. We paid a $0.25 cash dividend with respect to the third quarter.

With that, I'd now like to turn the call over to Matt.

Thank you, Jack, and thank you, everyone, for joining us today. I'll begin with a brief update on the commercial real estate lending market. The number of real estate opportunities remains robust as we enter the $1.5 trillion wall of maturities over the next 18 months. The debt markets are liquid, with banks returning to the market while increasing their back leverage lending. Despite a tightening of whole loan spreads since the beginning of the year, with lower liability costs, we are still able to generate strong returns, and we believe that real estate credit offers attractive relative value.

As lenders, we think about safety first. And the ability to lend on reset values well below replacement cost, combined with decreasing new supply, creates a unique credit environment with strong downside protection. Overall, sentiment for real estate is turning positive as investors recognize the lagging values and strengthening fundamentals. We've been actively lending into this opportunity.

In the fourth quarter, we expect over $400 million in originations and have already closed $110 million across the United States and Europe. In October, we closed our first real estate credit loan in Europe for KREF, secured by 92.5% occupied portfolio of 12 light industrial assets across Paris and Lyon, France. This transaction highlights the breadth of our platform and our ability to draw on KKR's global resources. Although this is KREF's first European loan, over the last couple of years, we have been strategically building our European real estate credit platform, establishing a dedicated team and originating over $2.5 billion to date. Through our European real estate equity business, we have strong connectivity across markets, giving us unique insight and access to opportunities that align with our disciplined approach.

Within our broader real estate credit platform, we have been actively investing across the risk/reward spectrum. Our platform lends on behalf of bank insurance and transitional capital, targeting institutional sponsors and high-quality real estate. Our CMBS team is one of the larger investors in investment grade and B-Pieces. Across our global team, we will invest approximately $10 billion in 2025. To support our investing activity, we built a dedicated asset management platform called K-Star, which now has over 70 professionals across loan asset management, underwriting, special servicing and REO. K-Star manages a portfolio of over $37 billion in loans and is named special servicer on $45 billion of CMBS.

Moving next to our third quarter results. We reported distributable earnings of negative $0.03 per share, or distributable earnings excluding losses of $0.18 per share, compared to our $0.25 per share dividend. We set our dividend at a level in which we believe we can cover distributable earnings prior to realized losses over the long term.

We continue to see upside in our REO portfolio, where we are making progress. And as we stabilize and sell those assets, we can repatriate that capital and reinvest into higher earning assets. Therefore, there's embedded earnings power of $0.13 per share per quarter that we will be able to unlock over time.

Looking at [ risk rating ]. We downgraded Cambridge Life Science loan from [ risk-weighted 3 to 4 ], with increased CECL provisions due to the downgrade. Book value per share remained mostly unchanged at $13.78, a decrease of 0.4% quarter-over-quarter. We are proactively managing our current portfolio of $5.9 billion. We received repayments of $480 million this quarter. Year-to-date, we have received $1.1 billion in repayments and have originated $719 million with, $400 million of originations circled in the fourth quarter. Underlying activity level remains strong, and we continue to see robust market activity. In 2026, we expect greater than $1.5 billion of repayments and expect to continue to match repayments with originations.

With that, I'll turn it over to Patrick.

Thanks, Matt. Good morning, everyone. Thanks to strong investor demand and close coordination with the KKR Capital Markets team, we successfully upsized our Term Loan B by $100 million to $650 million, which now has approximately 6.5 years remaining until its 2032 maturity. The loan repriced 75 basis points tighter, reducing the coupon to SOFR plus 250 basis points and locked in more efficient funding.

During the quarter, we also upsized our corporate revolver to $700 million, up from $610 million at the beginning of the year. With continued momentum for repayments and the Term Loan B upsize, we ended the quarter with near record liquidity levels of $933 million, including over $200 million of cash, plus our $700 million undrawn corporate revolver. Our overall financing availability sits at $7.7 billion, including $3.1 billion of undrawn capacity. Importantly, 77% of our financing is non-mark-to-market, and KREF has no final facility maturities until 2027 and no corporate debt due until 2030.

In the quarter, we continued our share repurchases totaling $4 million, representing a weighted average price of $9.41. Year-to-date, we have repurchased $34 million for a weighted average price of $9.70. And since inception, we have repurchased over $140 million of common stock. We remain committed to deploying capital through buybacks as well as new investments. Overall, our liquidity position gives us meaningful flexibility to manage the portfolio, stay on offense and take advantage of new opportunities. We're encouraged by the market backdrop and momentum we're seeing.

Turning to our watch list. Our current portfolio has a weighted average risk rating of 3.1 on a 5-point scale. Our total CECL reserve at quarter end is $160 million, representing around 3% of the loan portfolio. Over 85% of the loan portfolio is risk-weighted 3 or better. And as of the third quarter, our debt-to-equity ratio is 1.8x, and total leverage ratio is 3.6x, consistent with our target range.

Now turning to our REO portfolio. We took title to the Raleigh multifamily loan, which is already appropriately reserved for, and therefore, no additional impact on book value. Our business plan is to invest additional capital into the property to enhance the amenity base, improve operations and reposition the asset for sale.

On our Mountain View, California office, the market continues to heal, with leasing demand picking up. And as mentioned last call, we're actively responding to tenant request for proposals. Given our asset offers the tenants the ability to have a full campus setting and control their amenities and security perimeter, we believe positioning for a single user is the optimal strategy.

On our West Hollywood asset, we launched condo sales -- we launched a condo sale process last week and are focused on executing our sales strategy. Finally, on our Portland, Oregon redevelopment, our entitlement process is progressing, with final entitlements expected in the first half of 2026, giving us the ability to unlock value and return capital through parcel sales.

In summary, we see significant opportunity ahead. Our origination pipeline continues to build. We remain focused on optimizing our REO portfolio, working through the watch list and redeploying capital efficiently as we position the business for its next phase of growth.

Thank you for joining us today. Now we're happy to take your questions.

[Operator Instructions] And your first question today will come from Tom Catherwood with BTIG.

Maybe Matt or Patrick, help us triangulate something here. So there's kind of two ways to view the lower leverage and higher liquidity that you had going into the end of the third quarter. One is like a defensive positioning to kind of bolster the company against headwinds. Or the second one is really a timing issue where if a couple of originations had closed a week or so earlier, it might look very different from the level of the distance between repayments and originations and it might be a very different story. Which is the case here? Is this just timing? Or is it -- could we see further deleveraging and further liquidity building as we get through the rest of this year?

Tom, it's Jack. Give us just a minute here. We're just having some technical difficulties. We'll be right back to you. So just give us about 2 minutes here. We're redialing in, and folks should join shortly. Thank you.

[Technical Difficulty]

Ladies and gentlemen, please stand by as we reconnect. Thank you for your patience.

Pardon me, this is the conference operator. I've reconnected the speaker lines. Please proceed.

Okay. Thank you. Tom, can you hear me now? It's Matt.

Yes, I can.

Okay. Sorry about that, everyone. We are down in our Dallas office and had a new system here and just had some technical difficulties, but I think we're working now, so we'll jump back in. And appreciate everyone joining.

Tom, thank you for the question. It's really the latter. I'd say it's just a timing issue, and it's really related to two things. I'd say the first one, just when you think about repayments, one of our repayments this quarter just happened to be a larger repayment. It was actually the largest loan in our portfolio repaid. It was a multifamily property just outside of Washington, D.C. that got taken out by the agencies on a refinance. And so that is a relatively large single repayment.

And then secondly, when you think about our originations this quarter -- I think we mentioned this in the prepared remarks -- a bunch of our originations just happened to be in Europe. And those take a little bit longer to close. Just the closing time lines are somewhat elongated in Europe versus the U.S. And so that's why you see the bigger pipeline, I think, in the fourth quarter and a little bit of a slower originations in closings, I'd say, in the third quarter.

So just timing, we haven't really changed our strategy at all, and certainly expect to continue to invest and originate in line with our repayments. And right now, we're at the lower end of our leverage ratio. So we've got the ability to kind of take that up and grow the portfolio back to where we were before.

That's perfect. And maybe just following up on that and thinking of the cadence of earnings, and you talk about the lag between receiving repayments and putting that capital back to work. And also, you mentioned, I think it was greater than $1.5 billion of repayments that you're expecting in 2026. Could that lag take us lower from an earnings front for a longer period of time just while you put that capital back to work? Or are there some other levers you can pull to boost distributable earnings as you're repatriating and redeploying capital?

No, I wouldn't look at it like we're always behind. I think some quarter like this quarter, obviously, we got a little behind. And again, just kind of due to the timing of those closings, but I think other quarters will be ahead, you can see us getting ahead of it a little bit.

So you can't time the repayments, right, and you can't necessarily time the closing dates of your originations. So there's just a little bit of ebb and flow that happens naturally in the business. But I wouldn't necessarily like model anything like we're always waiting for repayment to come in before we originate so we're 45 days behind. I think there's just a little bit of give and take in the overall investing profile.

Understood. And then last one for me. We've had a number of lab space owners this past quarter that have noted an early-stage rebound in demand from smaller life science tenants looking for space kind of following an upturn in VC funding over the past 12 months. In terms of the 4 assets in your life science loan portfolio that remain [ 3 ] rated, how are they proceeding on their business plans? And are you starting to see that at least early-stage recovery in tenant demand?

I think we're starting to see green shoots from the sponsors, right, and some of the commentary about leasing. And I'd say we've got, honestly, a little bit of a mix. Most of our assets that we've lent on are more -- the tenants are going to be larger pharma companies and not necessarily some of the smaller VC-funded ventures. But we are starting to see a little bit pickup in that sector.

And again, we're long term, like we're pretty positive on that sector. I certainly understand it could be cyclical, both from a capital perspective and certainly some of the things you see going on at the NIH and things like that. But I'd say over the medium to long term, I'd say we're still pretty positive on the overall sector.

And your next question today will come from Jade Rahmani with KBW.

I wanted to follow up on Tom's question. Can you give an update as to the state of dialogue with the sponsors across the life science deals? And then on Cambridge, if you could touch on what drove the downgrade?

Yes, I'd say really, the -- let's go -- starting with the last question. What drove the downgrade was we've entered negotiations and modification negotiations with that sponsor. And so it was really as it related to those discussions.

And then I think on the other -- the [ 3 ] rated loans, Jade, there's no other really discussions happening. It's just a normal course. We're getting leasing updates and any property level financial updates. But really, no other kind of detailed conversations happening at this point in time.

And then broadly speaking, have you done an NPV analysis comparing the cost and benefit of [ waiting ] on these deals as well as any other subperforming deals versus selling down the exposure, taking that capital and reinvesting in the current uptick in deal flow that we're seeing, which that would drive stronger distributable earnings and eventually dividend growth more near term than perhaps the market expects? How do you view the trade-offs versus [ waiting ] since I think that the life science recovery is quite nascent at this point, so for at least that sector, it's probably going to be a while before these buildings get to stabilized occupancy?

Yes. It's a great question. And it's something that I'd say we look at every quarter. It's something that we certainly discuss with the Board in terms of portfolio positioning and specifically, Jade, as it relates obviously to the REO, which is directly impacting our earnings. And as we liquidate that, obviously, we can redeploy that capital and increase our earnings, which we talked about on the last few calls. And so it's something we're consistently looking at.

When you look at where we've decided to hold things -- and I'm talking more about the REO because that's really the biggest impact right now -- it's really around quality. And we feel like we've got quality real estate, and our job as fiduciaries is to maximize the outcome there. And if we've got a great asset, we think it's going to lease over time, and we'll be able to optimize the value.

But we definitely look at NPVs and we look at what's that IRR and is it better to sell today versus -- and redeploy capital now versus holding out. But so far, I'd say we're pretty -- I think we've been right to kind of be patient. And certainly, when you think about things like our office in Silicon Valley, that market has come back significantly, and we're seeing re-leasing demand in that market. So to be patient, wait, quality asset, let's get a tenant, and then we can evaluate liquidity options. And I think that strategy has -- will work out over time. But we have to continuously evaluate this because I know that we can't -- we don't have forever, that -- we need to execute, and we need to repatriate some of this capital.

And your next question today will come from Rick Shane with JPMorgan.

Looking back last quarter, there was commentary about $1 billion of repayments in the second half, it seems like you're on track with that. And I think the implication, at least the way we interpreted, was that, that capital would be redeployed and suggested sort of, again, not -- we didn't fully assume this, but targeting towards that $1 billion in reinvestment. Should the way we think about this be there's a 1 quarter lag, you get the repayment in quarter 1, you're able to redeploy it in quarter 2, you get repayments in quarter 2 that are redeployed in quarter 3? Should we see this as sort of the $1 billion of repayments in the second half of this year manifesting into Q4 and Q1 originations close to $1 billion?

Rick, it's Patrick. Yes, thanks for that question. I think as Matt was sort of referencing a little bit earlier, I think the goal is to sort of match up the repayments, minimize some of the timing that happens between repayment and origination. That always -- when we snap the line at quarter end, that always won't sort of match up. But we think over time, there's going to be some quarters where we get a little bit ahead of that. And if you think about our liquidity position today, we certainly have ample capital to be able to do that.

And so there are going to be some quarters where we're ahead of it. Maybe there are some quarters that we're behind it. But on balance, we should think about as we're getting those repayments, they're going to be matched. And our goal effectively is to minimize some of that drag because ultimately, we want to optimize what we can return to shareholders in terms of earnings.

Got it. Yes. I mean, I think the thing that confuses me about it is I understand the difference between a deal closing on September 30 and October 1. From your perspective, it's a day. From an accounting perspective, it's very different. You've talked about $400 million of originations this quarter. I think what surprises me is given the lag in 3Q originations, again, not a big deal. But that, that Q4 pipeline doesn't look bigger given that sort of timing issue. I think that's what's confusing people a little bit here today.

Understood. Yes, I think -- look, as we think about the fourth quarter, obviously, a lot of that will be front ended in the quarter in terms of the originations. The year is not out. The pipelines are still very active. I think we've been focused on being disciplined around deployment, focused on diversity. So when you look at these asset sizes, they'll reflect that.

Obviously, Matt mentioned some of the activity that we have in Europe. But as I said, our goal is to continue to deploy capital. I suspect that if things continue to proceed as they are, going into year-end and into first quarter, we continue to see build for that origination pipeline. And we know what -- we have a good idea of what we expect to come forth in the next 2 quarters. And I think we're preparing to match that up and to close some of that gap.

Got it. Okay. And then the other question is this. And Jade's touched on this and -- but if we look at the current ROE, it's about half of what you need to support the dividend as it exists today. Obviously, moving, resolving challenged properties and challenged loans is the key to that. Realistically, how long do you think it takes for you to be able to double that ROE to put yourself in a position where -- and again, we -- there are all these different earnings metrics, but at the end of the day, this really is an NII issue. How long do you think it really takes to get there?

Yes, I can jump in there. Rick, it's a good question and certainly something we think about a lot. In my mind, we kind of bucket the REO in the kind of 3 time lines. One is like near term, 12 to 18 months. Medium term, maybe that's 24 or so months, 24 to 36 months, and then longer term. And I'd say about half of that, we think we can get back in the near term, and that's concentrated on things like our Portland, Oregon asset, which we should be fully entitled [ to in ] the market with next year on an individual parcel basis. The West Hollywood condo, which Patrick mentioned, we're in the market now live selling or offering units there. The Raleigh, North Carolina multifamily deal, which is largely stabilized, and we're doing a little bit of value add there, but can kind of execute on that in a short amount of time. And then the Philadelphia office, which -- there's kind of 1 or 2 leases outstanding that we're working on and then effectively sell that as well.

So if you put those together, that's really the short term. And again, it's about half of that number so we can get that back more quickly. I'd say in that medium-term bucket is the Mountain View asset. As I mentioned to Jade, like, we're making good progress. The market is really coming back there, and we're kind of actively engaged there with tenants. So I'd put that more in the medium term, although we could have something happen there shorter than that, but then there would be a business spend to execute if we were able to sign a lease there in terms of just tenant improvements and CapEx, et cetera.

And then lastly, I kind of put the Seattle, Washington Life Science and just given where Life Science is, we'll see that market come back quickly. But just given where we're seeing there, we did execute a pretty important lease on that asset. So we're pretty happy about that. But it could take longer to fully stabilize that asset.

Matt, Patrick, I really always appreciate your willingness to try to dimensionalize the answers to these tough questions, and I appreciate it a great deal.

And your next question today will come from [ Chris Muller ] with Citizens.

So it's nice to see you guys branching out into Europe. Can you contrast some of the EU loans versus U.S. loans? I guess what I'm looking for is are terms similar, returns similar? Any color here would be very helpful.

Sure. Yes. Thank you for the question. Let's start with kind of how they're similar, and then we can think about how they're different. I'd say from a quality of real estate perspective, from a sponsorship perspective, it's the same program we're running in the United States. This is institutional quality real estate and sponsorship. And in fact, a lot of the clients we lend to in Europe are the exact same clients we're lending to in the U.S. And so it's nice to have that global connectivity there.

I'd say the opportunity set there is a little bit different than what we're seeing in the U.S. The loan sizes tend to be a little bit bigger. There tend to be more portfolios where we're -- and then also, I would say, multi-jurisdictional is an opportunity as well. It's a heavily banked market. So contrast, think about Europe as like 80% of that market is banks, whereas in the U.S., it's around 40%. And the back leverage there, structurally, I think, is a little bit more advanced in our favor than what we're seeing in the U.S.

From a whole loan perspective, spread-wise, now you're talking about different base rates, obviously, between the U.K. and EU. But I'd say overall, spreads on whole loan and then the ability to back leverage and generate ROE are largely in line with the U.S. From a relative value perspective, I think it's pretty balanced right now. Although we've been lending there for a few years now, it has not always been like that. I'd say 2 years ago, we probably saw a lot more opportunities and relative value in Europe versus the U.S. And -- but now as the U.S. activity has picked up materially, it's probably a little bit more balanced. So -- but ultimately, I think the ROEs are really about the same between the U.S. and Europe right now. And that's on a U.S -- on a hedge U.S. dollar basis.

Got it. That's all very helpful. And I guess on the Long Island multifamily loan you guys originated this quarter, is this ground-up construction? And then are you guys looking at heavier transitional projects now? Or was this more of a one-off type loan?

It is ground up. Yes, it's a ground-up construction to a repeat sponsor who we've lent to a couple of times now on construction projects. So it's -- we know them well. And we think they do a great job and build a really high-end product. So it's great to be able to sign that one up with a repeat sponsor there.

I don't think we've really changed the DNA of what we want to do. We've always had a small percentage of construction in the portfolio, and we'll continue to do that. We think there's some relative value in that sector. The bulk of the opportunity of what we're seeing right now is what I still refer to as like almost stabilized versus transitional lending. I still think that there's like stretch -- the market is really -- the opportunity around the market is really around stretch seniors, where it's like a 70% LTV, mostly leased assets. And so that's where we've been participating. We think that's where there's the most relative value.

We'll look at projects that have a larger business plan. But just from a relative value perspective, again, like it seems like the kind of almost stabilized lending is -- just offers a better investment right now.

Got it. It's all very helpful.

Your next question today is a follow-up from Jade Rahmani of KBW.

I wanted to ask about the platform overall. I know you mentioned during Dallas with K-Star. And you all have a servicing operation, quite substantial. You buy B-Pieces. So a nice complement to that could be the CMBS conduit business, which is capital light. And I think the securitization outlook seems quite healthy, given that the regional banks still continue to pull back. Any interest in that?

And then another follow-up would just be on the special situation side, if you see any opportunities to combine with another either public or privately held mortgage REIT. I think scale is a huge differentiator across the real estate landscape. We see huge premiums between market cap ranges in all real estate sectors. And I think it's clear that having gone through this cycle, there's also a big differentiator in the commercial mortgage REIT space. So you could combine stock-for-stock or NAV for NAV transaction, gain scale, and that probably would help with consistency of dividend. So could you just respond to those two items?

Sure, Jade. Thank you again for the question. First on the CMBS side, it's something we've looked at. We have the expertise, I think, in-house to do that, whether it's from the credit or the origination side or -- some of us have backgrounds in that business and capital markets.

I think right now, no real plans to begin a CMBS originations business. I think the one thing that is a real consideration for us is it doesn't really overlap with our client base for the most part. And I think about -- we're lending in major markets to institutional sponsors, and that tends to be a more diverse set of borrowers and end markets. So we'd have to probably change a little bit of the way we're oriented. And I'm not sure that's in our kind of credit DNA to do that. But we'll continue to evaluate it as I think as the market evolves.

On the M&A question, I would say we continue to look at opportunities as they arise. I think there'll be consolidation in the industry over time. We'd like to grow not for the sake of scale for scale's sake, but to have a more liquid stock, as you mentioned, I think would be able to attract more shareholders and create a better cost of capital. And as we've discussed, we want to try to do things that also give us the ability to diversify our portfolio. And moving into Europe is one of those things, but also potentially adding duration to the portfolio. So we're going to continue to evaluate opportunities that are on the table, but there's nothing we're looking at currently.

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

Well, great. Thanks, operator. Thanks, everyone, for joining today. Please reach out to me or the team here if you have any questions. Take care.

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