Christopher Muller

Christopher Muller inquired about the impact of recent and anticipated rate cuts on interest and liquidity for KREF's REO assets, specifically asking if the cuts have narrowed the buyer-seller gap. He also sought KREF's view on the office sector, what makes an office loan attractive today, and whether future originations would primarily align with repayments or lead to net portfolio growth.

Answer

CEO Matt Salem stated that rate cuts are helping market liquidity, but overall positive sentiment for real estate is also a factor. He noted a lack of sellers at opportunistic prices, leading to more refinance activity. Salem observed increased liquidity in the office sector, suggesting it has found stable ground. For attractive office loans, KREF focuses on newer, high-quality, stabilized assets with long-term leases in top markets, avoiding significant leasing or repositioning risk. He explained that originations would primarily aim to recycle capital from repayments while staying within targeted leverage ratios, with REO sales providing additional capacity for portfolio growth.

Christopher Muller from Citizens JMP Securities, LLC asked if recent and anticipated rate cuts have increased interest in KREF's REO assets and narrowed the bid-ask spread between buyers and sellers. He also inquired about KREF's current view on the office sector and what criteria make an office loan attractive for new originations. Finally, he asked whether originations should be expected to align with repayments or if net portfolio growth is anticipated.

Answer

CEO Matt Salem indicated that rate cuts contribute to market liquidity, but overall positive real estate sentiment and time, especially for the office sector, are also key drivers. He noted a lack of opportunistic sellers, leading to more refinance activity. For office loans, KREF maintains a high bar, focusing on newer, high-quality, stabilized assets with long-term leases in top markets to minimize risk. He explained that originations would primarily involve recycling capital from repayments while adhering to target leverage ratios, with REO liquidations also contributing to potential portfolio growth.

Chris Muller from Citizens JMP questioned if recent rescheduling discussions have spurred borrower interest, the drivers behind the increased CECL reserve, and how the BDC conversion might affect credit facilities and long-term portfolio composition.

Answer

CEO Daniel Neville noted that the market is in a 'holding pattern' regarding rescheduling, with no significant change in activity yet. CFO Brandon Hetzel attributed the higher CECL reserve to loan-specific fundamentals rather than macro factors. President and CIO Robyn Tannenbaum explained that while a BDC structure could offer better financing terms, new credit lines remain constrained by bank participation in the cannabis sector. She stated it is too early to predict the future portfolio mix.

Inquired about the potential opportunity for private lenders if Pennsylvania adopts a state-run cannabis model, the composition and growth expectations for the deal pipeline, and whether borrowers are being affected by tariffs on supplies.

Answer

Executives stated that a state-run cannabis model in Pennsylvania is unlikely and not factored into their opportunity assessment. They reiterated a cautious and selective approach to originations with no set targets due to market volatility. They also noted that the impact of tariffs on their borrowers is minimal as most critical supplies like fertilizer are sourced domestically.

Christopher Muller inquired about the potential opportunity for private lenders in Pennsylvania if a state-run cannabis model were adopted, the composition and growth expectations for the $287 million origination pipeline, and whether borrowers are feeling any impact from tariffs on items like fertilizer.

Answer

Chief Executive Officer Daniel Neville explained that a state-run model in Pennsylvania is not a likely outcome, as the proposal was recently rejected by a key Senate committee. President and CIO Robyn Tannenbaum clarified that their pipeline consists of cannabis deals and that originations will likely be muted given market volatility and their selective approach. Regarding tariffs, Daniel Neville stated the impact is de minimis, as the main exposure is on hardware and packaging, which is a small part of COGS, while critical inputs like fertilizer are typically sourced domestically.

Inquired about the new investor in the construction JV and the reasons for additional capital contributions to several Vantage properties.

Answer

The new JV investor resulted from a mutual discovery process during GHI's outreach and the investor's evaluation of the sector. The additional capital for Vantage properties was primarily needed to cover property taxes for a longer-than-expected holding period. This additional capital does not change GHI's economic interest or waterfall position, and Vantage partners have contributed on a case-by-case basis when asked.

Chris Muller from Citizens JMP Securities asked about the circumstances leading to a new institutional investor joining the construction JV and questioned the reasons for additional capital contributions to four Vantage properties.

Answer

CEO Kenneth Rogozinski described the new investor partnership as a 'two-way conversation' resulting from GHI's outreach and the investor's search for opportunities in the muni sector. He explained the additional capital for the Vantage properties was primarily to cover property taxes for longer-than-expected hold periods. He clarified this does not alter ownership percentages and is treated as an additional capital contribution, noting that Vantage partners have also contributed capital on a case-by-case basis when requested.

Asked about the impact of tariffs on the BlackRock JV, the size of its pipeline, and whether the recent trend of lower gains on JV sales is expected to continue due to factors like insurance costs.

Answer

The executives stated that tariffs have not yet had a significant impact on the BlackRock JV pipeline. The pipeline has about $83 million committed with a goal to deploy $450 million in lending capacity over the next 12-18 months. Regarding lower gains, the significant insurance cost increase was specific to the Tomball asset and not a portfolio-wide issue. However, broader market headwinds like interest rates and stable cap rate expectations continue to pressure multifamily asset sales.

Christopher Muller asked for management's policy 'wish list' for the affordable housing industry, the potential impact of GSE privatization, and visibility into the new JV pipeline.

Answer

CEO Kenneth Rogozinski's wish list includes LIHTC program modernization and a dedicated private activity bond allocation for affordable multifamily housing. He stated that GSE privatization poses little risk to existing financings but could raise future borrowing costs if the GSEs' credit is perceived as weaker. Regarding the pipeline, he confirmed ongoing discussions with partners but no firm commitments beyond what has been disclosed.

Asked about the capital deployment outlook for the remainder of the year and into 2025, particularly regarding the MRB portfolio and pipeline visibility. Also questioned the potential to scale the new BlackRock construction JV beyond its initial commitment.

Answer

The executive explained that all new investments must be accretive to the current dividend yield, which is a key threshold. The new BlackRock JV is a priority for capital deployment. He clarified that this JV is not capped by partnership restrictions and can be scaled up if the right opportunities arise and more capital is committed by BlackRock or other institutional investors.

Christopher Muller inquired about the outlook for capital deployment through year-end and into 2025, including portfolio growth trends and pipeline visibility. He also asked if the relatively small initial commitment to the BlackRock JV could be scaled up and if there were any partnership restrictions.

Answer

CEO Kenneth Rogozinski explained that all new investments must be accretive to the current dividend yield, which serves as a primary hurdle. He noted a key goal is to deploy capital into the BlackRock JV to demonstrate success for potential future growth. He clarified that the JV size is not capped by partnership restrictions and can be scaled up if the right opportunities arise and additional capital becomes available from BlackRock or other institutional investors.

Chris Muller from Citizens JMP sought clarification on the accounting for the $33 million realized loss and the associated CECL reserve release, and asked if new loan originations will be smaller in size going forward.

Answer

CFO & Treasurer Jeffrey Gonzales clarified that the $33 million gross loss on the life sciences loan was offset by a $19 million specific reserve, resulting in a $14 million net impact to book value. CEO & Director Bryan Donohoe added that the average loan size is likely to decrease to improve diversification.

Christopher Muller of Citizens JMP questioned the company's plans for a potential CLO issuance in 2025 and asked if the recent surge in repayments would influence the timing of new lending.

Answer

CEO Bryan Donohoe characterized the CLO market as an opportunistic, 'nice-to-have' financing tool, not a necessity. An executive added that current pricing from warehouse lenders is very competitive and represents the most attractive financing option at present. Regarding new lending, Donohoe stated that the strong cash position from repayments works in tandem with resolving problem assets, and together these factors will prompt a return to portfolio growth.

Chris Muller from Citizens JMP asked about the company's near-term leverage targets, whether the REO properties are financed, and the potential timing for a new CLO. He also questioned what milestones, such as REO sales or EAD growth, are needed before the dividend is reinstated.

Answer

Andrew Fentress, Chairman of the Board, stated that leverage could comfortably increase to 3.5x to 4.0x, primarily through non-recourse CRE CLO financing. He confirmed the REO properties are levered at the asset level. Fentress projected a new CLO for Q4 2025 or Q1 2026 and explained that reinstating the dividend is contingent upon monetizing REO assets and ramping the loan portfolio to drive sufficient Earnings Available for Distribution (EAD).

Christopher Muller inquired about the specifics of the two loan sales, the reasons for the drag from REO operations on earnings, and the health of the investment pipeline amid recent market volatility.

Answer

Mark Fogel, President and CEO, disclosed that one loan was sold at par, while another nonperforming hotel loan was sold at a $700,000 loss, which was a strategic decision. He attributed the REO drag to typical Q1 seasonality for its hotel assets, which he expects to reverse in subsequent quarters. Fogel also noted the investment pipeline is stronger than ever, as market volatility has sidelined competitors, and reaffirmed the company's growth targets.

Christopher Muller of Citizens JMP Securities asked about the potential magnitude of gains from the remaining REO portfolio, the expected timeline for monetization, and the reason for the quarter-over-quarter increase in real estate expenses.

Answer

Chairman Andrew Fentress stated that while not providing specific guidance, the company anticipates future gains from REO sales and expects the monetization process to be largely completed in 2025. CFO Eldron Blackwell clarified that the Q4 increase in real estate expenses was due to one-time cleanup items and should not be considered a recurring run rate.

Christopher Muller of Citizens JMP Securities inquired about the valuation of REO assets, the potential for gains upon sale, whether realized gains would impact EAD, and the reason for a change in the number of risk-rated 4 loans.

Answer

President and CEO Mark Fogel explained that REO assets are held at cost and gains are recognized only upon monetization, but he anticipates incremental gains. He confirmed that realized gains from these sales will flow through EAD. Fogel also clarified that the number of risk-rated 4 loans decreased because one loan was converted to REO during the quarter after the borrower was unable to keep it current.

Chris Muller of Citizens JMP Securities, LLC asked about the Real Estate Owned (REO) portfolio, questioning if further gains could be expected on future sales given the successful dispositions in Q2. He also inquired why the remaining multifamily REO assets are currently unfinanced.

Answer

Robert Foley, CFO, responded by highlighting the company's historical success in selling all REO properties at a book gain. He stated that operating performance has been improved on remaining assets and that several will be brought to market in the near future. Mr. Foley explained that the multifamily REO assets are not financed primarily due to the frictional costs of securing financing on assets expected to be held for a relatively short term, though he affirmed they are 'eminently financeable'.

Chris Muller of JMP Securities asked about the company's leverage outlook for the second half of 2025 and whether it would remain low until office loans mature. He also sought details on the drivers of net interest margin (NIM) compression and the potential impact of future Federal Reserve rate cuts.

Answer

CFO & Treasurer Matthew Brown stated that the debt-to-equity ratio is expected to remain consistent at its current 1.6x level, as the company is under-levered on its office loans, and leverage will likely stay there until that capital is recycled. Vice President Jared Lewis explained that NIM compression is most pronounced in the competitive multifamily sector, driven by CRE CLO financing. He noted that while Seven Hills benefits from favorable repo pricing, it wins business through flexibility rather than just price. Lewis also suggested that Fed rate cuts would primarily boost transaction volume by improving investor sentiment.

Chris Muller of JMP Securities inquired about the company's leverage outlook for the second half of the year, particularly given the low leverage on its office loans. He also asked about the primary drivers of net interest margin (NIM) compression and the potential impact of Federal Reserve rate cuts.

Answer

CFO & Treasurer Matthew Brown stated that leverage is expected to remain consistent at the current 1.6x debt-to-equity ratio until the under-levered office loans are recycled. Vice President Jared Lewis explained that NIM compression is most pronounced in the competitive multifamily sector, driven by CRE CLO financing. He added that potential Fed rate cuts would not only lower borrowing costs but, more importantly, would likely improve investor sentiment and spur transaction activity.

Christopher Muller inquired about the drivers behind the strong credit performance, particularly in the office portfolio, the impact of recent market volatility on the lending pipeline, and for an update on the Yardley office property.

Answer

Thomas Lorenzini, President and CIO, attributed strong credit to diligent underwriting and a focus on well-capitalized sponsors willing to support their assets. Jared Lewis, Vice President, noted the pipeline remains robust despite market volatility due to ongoing refinancing needs. Regarding the Yardley property, Mr. Lorenzini stated it is performing well, contributing to earnings, and will likely remain on the books through 2025.

Christopher Muller from Citizens JMP inquired about Seven Hills' leverage targets for 2025, noting its current ratio is well below industry norms. He also asked about the feasibility of the company utilizing a Collateralized Loan Obligation (CLO) given the improving conditions in securitization markets.

Answer

CFO and Treasurer Fernando Diaz stated that leverage, currently at 1.6x, could comfortably reach approximately 2.0x with planned originations, with a maximum target of around 2.5x. Vice President Jared Lewis addressed the CLO question, acknowledging the market's strength but explaining that Seven Hills' current portfolio size makes accessing the CRE-CLO market challenging, as those structures are typically much larger and concentrated in multifamily assets.

Christopher Muller asked about the outlook for portfolio size over the next few quarters, whether the portfolio was near its trough size, and the maximum size the current capital base could support. He also inquired about current loan yields and spreads compared to the existing portfolio and requested an update on the Yardley office sale.

Answer

Jared Lewis, Vice President, stated they have a pipeline of $225-$250 million and can fund about $200 million in the next quarter, with a maximum potential portfolio size just under $1 billion. He noted that while spreads have tightened, increased transaction volume allows them to be selective for higher-yield deals. Thomas Lorenzini, President and Chief Investment Officer, added that they are holding the Yardley property for now, as strong leasing activity could significantly improve its value, making an immediate sale less urgent.

Chris Muller of Citizens JMP asked about expectations for net loan portfolio growth in the second half of the year and if there is a target portfolio size. He also inquired about how levered returns on new loans compare to historical levels and sought to quantify the cost-of-funds benefit from the new investment grade rating.

Answer

CEO Brian Harris projected potentially writing another billion dollars in loans by year-end, driven by a pickup in acquisition financing. President Pamela McCormack added that with muted payoffs expected, they anticipate net portfolio growth. Harris noted that current unlevered returns are around 9%, which is healthy. Regarding the IG rating, he confirmed a significant benefit, estimating the coupon on the new bond would have been over 100 basis points higher without it. McCormack highlighted that spreads have already tightened since issuance and pointed to their unsecured revolver rate as a benchmark for future tightening.

Christopher Muller from JMP Securities asked for insight into near-term loan repayments and whether the company expects net portfolio growth in 2025. He also questioned the potential impact of federal cannabis rescheduling on the business, including long-term effects on loan yields and leverage.

Answer

Executive Peter Sack confirmed that the company aims for net portfolio growth in 2025 and will compete to refinance most of its upcoming maturities. Sack noted that rescheduling would be highly accretive by improving borrower cash flows but believes it will take more than just rescheduling for significant new lenders to enter the market and cause yield compression, suggesting the first benefits will go to the largest operators.

Christopher Muller questioned if borrowers can operate effectively in the current status quo without federal reform and asked about the Board's rationale for consistently paying a special dividend rather than increasing the regular base dividend.

Answer

Managing Partner Peter Sack affirmed that borrowers can operate in the status quo and that the company's underwriting model assumes no federal reform occurs, viewing potential changes as a positive catalyst. Regarding the dividend, Sack stated the company prefers to maintain a regular dividend that investors view as having a significant cushion and a strong margin of safety, which is evaluated quarterly.

Christopher Muller of Citizens Capital Markets asked about the impact of recent market volatility on new CLO issuance and whether BXMT might issue another CLO this year. He also inquired about the pace of resolving remaining impaired loans and if the bulk could be cleared in 2025.

Answer

CEO Katharine Keenan noted that the CLO market is stabilizing with capital available at wider spreads, and BXMT would consider another issuance if conditions are favorable. On impaired loans, she confirmed that resolving them is a top priority. While timing can be 'chunky', she stated they have a clear path on several assets and expect the positive resolution trajectory to continue through the year.

Inquired about the specifics of the recent loan sale, the activity in the loan sale market, and the expected timing and impact of selling REO and held-for-sale assets.

Answer

The company sold 32 loans with a $55.8 million UPB for approximately $36 million, a 65% net realization. While the market for that sale was active, the process was difficult, and they are not pursuing another bulk sale. They are now handling remaining held-for-sale loans individually and expect to resolve the increased REO balance relatively quickly, which could provide capital for future activities.

Inquired about the outlook for loan modifications, the potential for an increase in REO properties, and requested a breakdown of the CECL reserve between general and specific provisions.

Answer

Loan modifications are subject to stricter underwriting, with non-compliant loans being moved toward foreclosure or sale as part of a balance sheet 'cleansing'. A significant increase in long-term REO is not expected, though strategic, temporary REO acquisitions may occur to facilitate sales. The CECL reserve consists of approximately $14 million in indirect reserves against nonperforming assets and the rest as a general reserve for the performing pool.

Christopher Muller from Citizens JMP asked how aggressive CMTG plans to be in resolving watch list loans and if more loan sales should be expected. He also requested clarification on the fair value write-down of the REO hotel portfolio.

Answer

CEO Richard Mack stated the company will be more aggressive in creating liquidity in 2025, even if it requires trade-offs against maximizing value. EVP Priyanka Garg added that in the improving transaction environment, they will use discounted payoffs and short sales more actively. CFO John McGillis explained the hotel portfolio's value mark was primarily driven by uncertainty created by the New York City Safe Hotels Act legislation passed in Q4 2024.

Christopher Muller from Citizens JMP asked about the potential portfolio size supported by the current capital structure and whether the declared $0.42 fourth-quarter dividend indicates a future run rate for distributable earnings.

Answer

Executive Chairman Leonard Tannenbaum outlined the company's medium-term capital structure goal: one-third equity, one-third sub-debt, and one-third senior debt, targeting 1.5x leverage. He stated that while the company cannot provide forward-looking guidance, earnings are expected to rise as the portfolio is deployed, which supports the dividend declaration.