Matt Salem: Yes. I think what gives us the confidence, and we’ve highlighted this on other calls, is when you look at the three rated loans in the portfolio, they have very long lease terms in place, so over eight years of lease term in place. They’ve got a very high debt yield, and we think at a relatively reasonable leverage, equating to a relatively reasonable leverage point. So, that’s obviously the entire portfolio that’s in that three. A number of those we’ve clearly already modified, written off, restructured with our sponsors. We’ve been proactive about that. But it really just comes down to the durability of those cash flows that we’re seeing and how much debt yield and leverage we think is in that. And I think we’ve got a good idea of where the office market is.
Obviously, we’ve worked through a number of loans within the KREF portfolio. We just got refied out on a D.C. office loan, so we know where there’s liquidity, and we’re using all that to obviously make those statements around and what we see in the rest of the three-rated office loans.
Don Fandetti: Okay. Thanks.
Operator: And the next question will be from Stephen Laws from Raymond James. Please go ahead.
Stephen Laws: Hi, thanks. Good morning. Matt, to follow-up on Sarah’s question around Seattle, can you talk a little bit about how that discussion may play out, the timing, is it something we’ll hear about next quarter, whether it’s modified or REO’d, or is that something that lasts longer than that, kind of how that process will play out?
Matt Salem: Yes, Stephen. Thank you for the question. It is always hard to handicap the timing around these discussions. I think this one will go faster, so we should be able to get – I hope for sure we’d have an update. We certainly will have an update, but potentially more of an idea of what the resolution looks like by our next call. You know, these discussions are — we’re pretty deep in them right now, so we should be able to give a more fulsome update at that point in time.
Stephen Laws: Okay. And then, I think multi was covered. So, a quick one on the Mountain View, California; Patrick, I think you said it’s probably a 2Q event. You know, is the specific reserve that will run through DE that we should think about, the difference in the loan principal balance versus the slide that shows the projected REO, or are there things where it’s not necessarily exactly that difference that will run through as a realized loss?
Patrick Mattson: No, Stephen, that’s a good question, and that’s correct. Yes, page 13 of the supplemental where we highlight the REO schedule, we’ve got the carrying value. So, that gives you a good roadmap for what we expect to happen there in the second quarter.
Stephen Laws: Great. Matt, bigger picture, what — I guess sort of shifting gears, but what are you looking for to go back on offense, right? I know you look at a lot of investment pipeline across the KKR platform. It seems like you feel like you’ve got a good handle of proactively addressing your concerns and commentary a second ago leads me to think you have comfort in your current three-rated loans. Do you expect to do some new originations, especially given the repayments in January? Are new originations a Q2 event? Is it something that’s going to be later this year, or is it not until 2025? Kind of how do you think about turning back to offense given where you are with your existing portfolio and your current liquidity?
Matt Salem: Yes. Thank you, Stephen. I would say a couple things. Let’s step away from KREF for a second and think about the broader KKR real estate credit business. We’ll expect to win somewhere in the magnitude of $8 billion to $10 billion this year away from KREF. So, we’ve got an active lending business across a variety of different kind of risk-reward strategies, bank, insurance, and debt fund capital. We’re seeing a very large return in transaction volumes, both acquisitions and refinance. As I mentioned, obviously, the macro has cleared up a fair amount and the market is getting its sea legs again. And values have come down a lot. So, you see equity investors in real estate trying to put money to work, and it’s still a very good lending market just given the elevated rates and the lower basis you can lend on today.
So, overall, we do like the market environment to invest today. I think from a KREF perspective, it really comes back to what we’ve talked about in the past, which is just seeing a healthy level of repayments in the portfolio. I don’t think we want to increase our leverage profile right now. There’s still uncertainty. And so, as we start to get more repayments, I think that’s really where we’ll look to redeploy. You’re right. We saw a fair amount of repayments this quarter and repayments in sectors that obviously have a little bit less liquidity like office. So, if we see that continue in the portfolio, I think that’s really where we’ll think about turning it back on. Hard to predict and project when that happens, but I think it’s more of a back half of the year for us, if I had to guess today, but we’ll continue to monitor that.
Stephen Laws: Great. And then, one last quick one, if I may, to Don’s question, you talked about dividend and kind of what would push the EBITDA level you mentioned kind of I believe aggressive studies and just given the impact of a floating rate portfolio, any considerations of buying your own weight floors at some level to take that tail risk off the table?
Matt Salem: I mean, it’s something we’ve looked at over time at different moments in time. Right now, it doesn’t feel like the best use of capital, but it’s something we can continue to watch.
Stephen Laws: Great, appreciate the comments this morning. Thank you.
Operator: [Operator Instructions] The next question is from Jade Rahmani from KBW. Please go ahead.
Jade Rahmani: Thank you very much and thanks for all the color in the presentation. Just a basic question, when we think of interest income, what percentage of the interest that KREF receives is funded out of existing reserves versus property cash flows and is there perhaps a third source that I haven’t thought of and thinking about that?
Matt Salem: Hi, Jade, it’s Matt. Thanks for the question today. It’s not a number I have in front of me right now. We can take a deeper look and look at that. I mean, if you think about most of the largest asset type and the second largest asset type in multifamily and office, most of those are leased assets or in some high level of occupancy. So, I would think that the majority of the portfolio is going to be of the income coming up into the portfolio I suppose is coming from actual property cash flows. There is obviously some business plans that are in construction or in lease up and that’s really where the reserves are going to factor in, in those the big amount of reserves are going to factor in, but don’t have the exact number in front of me.
Jade Rahmani: The follow-up would just be what you think the true drivers of default will be in this market? You mentioned in multifamily, you don’t expect much pressure. It sounds like there’ll be modifications, discussions around interest rate caps, but you don’t expect much default there. So, what at its core do you think is the driver of default? I know in a lot of cases for the mortgage REITs, much of the interest is in fact funded out of interest reserves, which is similar to construction loans?
Matt Salem: Right. So, I think, I guess a couple of things. Let’s just state the obvious. Big secular change and value change in office. So, I think that’s despite cash flow in some cases like there’s clearly a very big deterioration there. So, that will be on its own and we’re all seeing that, we know that. The other places I think you could see it is in just these bigger lease up plans. I think the Seattle Life Sciences is a good example of that where you are in the right sector, we are in a good property, leasing has slowed down, the business plan is very expensive to implement from our existing sponsors’ perspective and that obviously is creating an issue in discussions with that loan. So, you will see that in other places, I think as well.
On the multifamily side, I speak from our own portfolio, which again tends to be very high quality real estate. There’s a lot of liquidity there I think across the board. But certainly, you could see some noise in the multifamily sector, especially if you have sponsors implementing like deep value add business plans, heavy renovations that take a long time and then you are trying to kind of re-lease it, because those are again they are just deeper, longer time periods that you are really exposed to the cost of capital in the market today. So, I’d highlight a few of those things.
Jade Rahmani: Okay. Thanks. And then, just going through the portfolio details, when I look life science specifically and I compare committed principal to current principal, many of the loans there’s a substantial difference, which means there’s a lot of future funding, which means these are not leased assets, these are development deals and there is very weak leasing in life science. I know you said long-term you’re bullish, how do you think about the outlook for those assets? Are we going to see further non-performance beyond the Seattle asset?
