Matt Salem: That’s right. So, that’s our maximum exposure of $37.5 million. The mortgage debt senior to us, which comprises — the two together comprise the $188 million is held by a third party.
Steve Delaney: And obviously, you’re subordinate of course there, so you need to focus on that when you look at the property value for sure. So, not to get ahead of things, obviously, you’re aggressively trying to get through these problems and to workouts. I thought it was pretty bold, but a strong move by the Board to make the meaningful cut in the dividend ahead of these resolutions. And obviously, $0.39 in this quarter for reported DE will be offset by the big number next quarter. But it does appear, by the time we get into early 2025 that your run rate DE, I would expect — perhaps all of us have to update our models, would be in excess of your $0.25 current dividend. Sort of, I guess, psychologically at the Board level, what does the Board and what does management want to see in the portfolio before it would be reasonable to reconsider the dividend for a possible increase?
Matt Salem: Thanks, Steve. It’s Matt, again. I can jump in again. I guess a couple of things. First of all, unfortunately, we just reduced the dividend. I don’t think we’re…
Steve Delaney: Of course.
Matt Salem: …considering increasing it in the near term here.
Steve Delaney: No.
Matt Salem: And I think most of the uplift is generally going to come from the recycling of REO assets into performing loans or earning assets effectively, right? And so, when we start to think about the — and that’s why we keep referencing back to the $0.12 a share, where, okay, we’re going to take title. We’re going to be patient. We’re going to lease these. I think that’s the best thing for our shareholders, the best thing for our balance sheet over time, and not paying out a higher short-term dividend. But if we optimize those outcomes and we repatriate that capital, then we’ll be able to, we think, increase earnings by at least kind of $0.12 a share. So that’s really what we’re focused on is that optimization and implementation of that REO strategy.
We’ll see what the world looks like in six months, nine months, maybe other things that are — have a material impact on that. Obviously, where’s the interest environment will be a big driver, given we’re floating rate portfolio. But that’s really I’d say what we’re mostly focused on is what is the path and the timeline to REO assets.
Steve Delaney: Got it. Well, congrats on the resolutions, and I appreciate the color. Thank you.
Matt Salem: Thank you, Steve.
Operator: And the next question is from Jade Rahmani with KBW. Please go ahead.
Jade Rahmani: Thank you very much. Just stepping away from the transitional CRE space and looking more broadly, can you give any sense as to what’s happening to CRE loans at maturity? What are you seeing from most lenders in terms of loans that come up for maturity, the percentage that get refinanced, get modified, get extended? How would you characterize it from your broader vantage point?
Matt Salem: Hi, Jade. This is Matt. Thank you for the question. I would say, first of all, I don’t have exact numbers at my fingertips in terms of like what — how much is repaying versus getting extended. Certainly, we’re in an environment now where there’s a lot more extensions than normal payoffs. And I think lenders are more than willing to work with borrowers on an extension scenario. They need a little bit more time to get into the interest rate environment that’s more accepting, I guess, of property value. So — and I think just — everyone looks at the maturity wall, maybe that’s a little bit of a question embedded in your question. I never look at that maturity walls like something that’s a real sign of imminent danger or issues.
I think that if it makes sense and the borrowers are willing to put in a little bit of money, I think almost all lenders are willing to kind of give another six months, 12 months to go down the road. In very few instances, our lenders like really need that capital back and force people out of the portfolio. So that would be a little bit of how we think about it.
Jade Rahmani: Thank you. And on the flip side, from a borrower standpoint, and I know KREF has some large real estate equity holdings, how are borrowers contemplating the outlook now? It seems that there has been a material shift in the interest rate outlook higher for longer versus earlier in the year. Any color you could provide there?
Matt Salem: Sure. What we’re seeing and embedded in my comments just like the return to transaction volumes. And of course, when that inflation print hit and we got that rate move and that — I think there was a little bit of uncertainty in the market around, “Okay, how will this impact real estate equity participants? How they think about acquisitions? How will they think about their ownership of assets?” And what we saw — and it’s early days, but I think what we’re seeing today is a materially different outlook than perhaps we saw in the fall where we had, obviously, a backup in rates as well, which is a view that I’m not going to necessarily change how I think about terminal interest rates, terminal cap rates. I may have a little bit higher cost of capital in the interim here.
However, my views around growth are more solidified today than they were six months ago. So, people are like leaning into growth a little bit more than they had been and really kind of leaving exit caps around the same from what we can tell. And therefore, this print has been relatively, I think, immaterial to the mindset of institutional real estate investors. Again, early, but that’s certainly what we’re seeing right now, and there’s a lot of big transactions in the market that are pricing, and that’s what we’re witnessing.
Jade Rahmani: Thanks. And if I could ask a follow-up. Just could you give a range of what your views of the exit cap rates are, touching on property type, you could leave aside office?
Matt Salem: Yes. So, I think multifamily right now, I would say, entry caps are in the — for Class A, SOFR around 5%. Very high 4%s to low 5%s, I’d say is kind of where those entry cap rates are. I think industrial is very hard to put — and these are all market dependent. I think industrial is very hard to put a pin on just because what’s the embedded gain to lease? How long are the lease terms? What market are you in? What’s your box size? I mean there’s so much variation there. But I do think that a lot of those assets are trading, call it, high 5%s, low 6%s type of like context. And then people running exit caps either at or slightly inside those levels to adjust for, obviously, rallies in the treasury over the next couple of years.
