Operator: And the next question is from Sarah Barcomb from BTIG. Please go ahead.
Sarah Barcomb: Hi, thanks everyone. So as you’ve talked about earlier, both KREF and its peers are sort of playing defense right now with respect to maintaining liquidity and – while you executed on some prior quarter fundings, it looks like there weren’t any new originations in the quarter. Can you talk about any deals that you might have taken a look at that didn’t cross the finish line and why those maybe didn’t look as attractive even with spreads where they are now? Or was it mostly just a function of preserving liquidity given the watch list migration? Thanks.
Matt Salem: Sarah, it’s Matt. I can take that. Thanks for the question. I think for KREF in particular, it’s more the latter point of your question. It’s really about just preserving liquidity until we get into a more normal market environment. So we weren’t looking at a lot of new fundings for the quarter. Of course, as we mentioned on the call, away from KREF we have a larger real estate credit business here at KKR. We lend on behalf of banks. We lend on behalf of insurance companies. We have private debt funds that we lend on behalf of and all three of those are actively in the market lending today. We do like the market. We think it’s attractive. And I think despite some of the headlines you may see, it is a fair and competitive market.
And the insurance companies are very active, foreign banks are very active, regional banks are active. So I’d say almost everyone – all the lending types are still actively lending in the market, albeit at a lower basis because values have come down and the market is just a little bit more conservatively postured, so LTVs have come down. So we find it to be a pretty attractive overall lending market right now. And obviously, as things stabilize, we hope KREF will be one of the first to come out and lend within the mortgage REIT segment again.
Sarah Barcomb: Great. Thank you. And just one more quick one. So you talked about how the remaining office book, that 3-rated segment, 90% Class A, 90% leased. Are there any indicators of upcoming lease expirations that investors should know about? Or any other signs where you think there could be incremental risk to NOI at the property level for that bucket?
Matt Salem: I mean these are – just given the – I think we call it the median wealth on those, which – so for the most part, these are very well leased for a pretty long time. But some of them are multi-tenant and do have – I’m sure there’s some near-term lease expiration, but nothing not one that comes to mind in terms of like one we’re particularly focused on from a from a re-leasing perspective.
Sarah Barcomb: Okay. Thanks. That’s it for me.
Operator: And the next question is from Jade Rahmani from KBW. Please go ahead.
Jade Rahmani: Thank you very much. Starting with the CECL reserve, it seems you’ve taken substantial reserves on clearly the risk 5-rated loans. The risk 4-rated loans, some math I was doing just assuming 50% to 75% of this quarter’s $60 million provision would imply something like a 10% to 15% loss. I was surprised by that, given those are LTVs below 60%. But then addressing your comment about the 1% remaining CECL reserve. I mean, that’s far below the bank’s reserve levels on their CRE portfolio. Just two examples, USB at 2.5% and Wells Fargo at 1.76%. So could you comment on the overall reserve adequacy and how you’re thinking about it?
Patrick Mattson: Jay, it’s Patrick. I’ll take that. So yes, in terms of, I guess, the latter part of your question, I think it’s really a reflection of kind of where we would sort of view ourselves in this progression. Clearly, with the asset earlier this year, where we had a realized loss, we’ve got, as you noted, heavier losses against these 5-rated loans. When we start to clean up that book, we would expect that we would get to a more normalized loss number. Think about what that portfolio looks like also when you start to remove some of those office assets, we’re already 60% multifamily and industrial, remove the office component or a heavy part of it, and that’s a pretty significant percentage of our overall book. I think in terms of the change this quarter, clearly, a bulk of that, as we said, was in these 5-rated assets.
But across both the 3-rated assets and 4-rated assets, we saw an increase – and I think it’s just a reflection of a market that’s further deteriorated since the fourth quarter. And so those losses or loss reserves carried through. So at the moment, we feel like we are adequately reserved across the portfolio. Obviously, we’ll continue to evaluate next quarter, and we’ll adjust as appropriate. But at the moment, we feel like we’re at the right level.
Jade Rahmani: Looking at the office portfolio, you mentioned some statistics on the eight loans rated risk 3. Those seem pretty fully occupied with the – or fully leased with the market where it is today. The debt yields do seem somewhat close to office cap rates given the uncertainty around secular changes there. So what’s the outlook for performance on those deals? Are you expecting further deterioration? I just wanted to mention, there’s another DC office loan in that portfolio rated risk 3. The Plano, Texas deal was also originated right before COVID. And lastly, if you could touch on Bellevue, Washington, that looks like a large construction loan. I believe Amazon is the anchor tenant there. What would be the prospects there as Seattle does have quite a lot of supply?
Matt Salem: Sure, Jade. It’s Matt. I can take that one. So this just work backwards. I think you threw out a couple of those deals. But when you think about like that construction loan, you mentioned that in Bellevue, Washington, you identified the tenant there as Amazon, obviously, a very strong credit and that they have a lease – a signed lease for 16 years for that asset. So we feel, I think, good about the prospects of that particular deal just given the long lease term and the strength of the tenant they’re going to actively build out that space, and we expect them to occupy it. So that would be the Amazon deal Plano. That’s an asset that’s done extremely well. We like the Dallas market a lot. We’ve got actually a couple of other assets in the portfolio that are in Dallas that are little bit more close to rent and uptown in Preston Center.
But all 3, I would say, have experienced very strong leasing momentum and leasing rates. And so that’s why that – and that deal has some long-term leases as well. So I think that’s why we remain – that remains at three and remain confident in that asset. And the D.C. office market is definitely a tough market. It’s two of our loans – our full rated loans are located in D.C. Again, I mentioned the GSA comment earlier. But that particular asset that you’re highlighting remains a three because we have a very long weighted average remaining lease term to the U.S. government. So we feel good about the credit. And we’ve got a lot of length there, decent debt yield as well. So that’s – each deal is going to be a little bit different, but a lot of how we’re factoring this in is, obviously, what’s the cash flow and how durable is that for how long.
And those – I think in all three of those, we’ve got pretty long – very long lease terms.
Jade Rahmani: And just with the debt yield close to office cap rates, what are your thoughts on that?
Matt Salem: Well, I mean, certainly, we’ve seen leverage, our implied leverage increase on these loans, right, as we’ve seen the widening of, as you mentioned, of these cap rates, not just for office but across everything, given the interest rate environment, obviously more acute in office, for sure. But when we’re looking at values of our – when we’re revaluing the assets and we do a lot of work on a quarterly basis to understand where we think the value is on each individual deal. Certainly, when we’re looking at these 3-rated loans, we don’t think that we’re above the value of the asset by any stretch.
Jade Rahmani: Thank you.
