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KKR Real Estate Finance Trust (NYSE: KREF) ended its first quarter of fiscal 2024 with a book value of $1.38 billion, or $15.18 per share, down 34 cents quarter-over-quarter. The continued decline in book value has essentially plummeted investor sentiment towards the real estate lender, opening up a large gap at 51% of book value. KREF's CECL provision also increased to $3.54 per share from $3.06 per share in the previous quarter, and the mREIT last declared a quarterly cash dividend of $0.25 per share, a steep 41.9% decrease from its previous dividend, for a dividend yield of $1 per share, or 10.3% annualized. While the cut was brutal, it does mean that the indirect decline in book value since the Fed embarked on its ongoing battle against inflation has mitigated.
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Is KREF a buy? It's not clear. In the first quarter, the mREIT reported a GAAP net loss of $8.7 million, or $0.13 per share. But that was a significant improvement from a net loss of $30.8 million, or $0.45 per share, in the same period last year. KREF's operating expenses for the quarter included a credit loss provision of $33.27 million, down from $60.47 million a year ago, while total net interest income was $39.14 million, down 16% year over year. This comes as KREF significantly reduced its overall loan portfolio against headwinds in office real estate, which accounted for 22% of its $7.52 billion senior loan portfolio at the end of the first quarter.
Loan Portfolio, Credit Quality and Loan Origination
KREF's portfolio ended the first quarter with an unleveraged weighted average all-in yield of 8.9% and a weighted average loan-to-value ratio of 65%. The all-in yield decreased 10 basis points sequentially and the weighted average maximum term was 2.5 years. KREF collected 97% of interest due during the quarter, down from a 98% interest collection rate in the prior quarter. While the 100 basis point sequential decrease is immaterial, KREF's weighted average risk rating of 3.2 was unchanged sequentially.
Multifamily accounts for 43% of KREF's loan portfolio, and the mREIT received $336 million in loan paydowns in the first quarter. Industrial real estate and life sciences accounted for 15% and 10% of the loan portfolio, respectively, highlighting KREF's broad diversification even as offices face headwinds due to the work-from-home trend. With mREITs essentially in a phase of consolidation, paydowns are ahead of loan originations, and KREF is navigating one of the most disruptive periods for real estate lenders in a generation.
New loan capital in the first quarter was $106 million, with net repayments of $230 million. KREF generated distributable earnings of $26.7 million in the first quarter, or $0.39 per share. This represents 156% equivalent coverage of reduced dividends and a 64% payout ratio, ensuring the safety of a double-digit 10.3% dividend yield. The mREIT credit quality average was roughly unchanged in the first quarter from the fourth quarter, but loans with a risk rating of 5 increased by 300 basis points.
Watchlist migration, risk, and preferred stock
KREF received two risk rating downgrades during the quarter: its Boston office loan risk rating was lowered from 4 to 5 and its San Carlos life sciences loan from 3 to 4. The mREIT does not see the need to move any more office properties to its watch list. Total CECL reserves are $246 million, of which approximately $165 million is held in real estate owned (REO) properties.
KREF’s defining investment remains the mREIT’s 6.50% Series A Preferred (NYSE: KREF.PR.A), which pays a cost yield of 8.8% but trades at a steep 25% discount to its liquidation value of $25 per share. This undervaluation is especially coming against KREF’s liquidity. The mREIT had $107 million in cash on hand and $450 million in unused corporate revolving loans at the end of the first quarter. I’ve been buying more preferred shares in recent weeks, with $5.3 million in required quarterly payments covered 5x by distributable earnings. The core risk for both common and preferred remains high inflation, which confounds the timeline for Fed rate cuts, and we expect discounts to begin narrowing for both common and preferred shares once the Fed starts cutting rates.