KKR Real Estate Finance Trust - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 GAAP net income was $14.6 million ($0.21 diluted EPS); Distributable Earnings were a loss of ($14.7) million ($-0.21 per share) driven by a $35.9 million realized write-off on a subordinated loan.
• Portfolio deleveraging continued: repayments reached $457 million in Q4 and $1.5 billion for 2024; leverage fell to 3.6x total and 1.6x debt-to-equity; liquidity stood at $685 million with 79% non-mark-to-market financing.
• Credit quality stabilized: weighted average risk rating improved to 3.1; 100% interest collected in Q4; CECL allowance decreased to $120 million ($1.74/share), reflecting resolution actions (San Carlos modification and write-off).
• Management expects originations to outpace repayments near term and closed ~$224 million of loans in January 2025, positioning for offensive deployment at reset values; share repurchases of ~$10 million were executed in Q4.

What Went Well and What Went Wrong

What Went Well

• “Repayments of $1.5 billion last year surpassed expectations driving portfolio deleveraging and high levels of liquidity, positioning KREF for new investment activity.” — President/COO Patrick Mattson.
• “We have strong levels of liquidity with $685 million available… 79% of our financing is non-mark-to-market.” — CEO Matt Salem.
• “In fourth quarter, we modified the San Carlos Life Science loan… the $36 million subordinated note was written off… restructured senior loan upgraded to risk rating 3.” — President/COO Patrick Mattson.

What Went Wrong

• Distributable Earnings negative in Q4 due to a $35.9 million realized write-off; DE per share fell to ($0.21) versus $0.37 in Q3.
• Provision for credit losses remained a headwind ($4.6 million in Q4; $80.6 million for 2024) reflecting continued portfolio stress pockets.
• Watch list persisted (e.g., Minneapolis office remained risk-rated 5), with management acknowledging further credit migration is possible despite improvement.

Transcript

Operator (participant)

Good morning and welcome to the KKR Real Estate Finance Trust Inc Fourth Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded, and I would now like to turn the conference over to Jack Switala of Investor Relations. Please go ahead.

Jack Switala (Head of Investor Relations)

Great. Thanks, Operator, and welcome to the KKR Real Estate Finance Trust Earnings Call for the fourth quarter of 2024. As the Operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem, our President and COO, Patrick Mattson, and our CFO, Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements which do not guarantee future events or performance. Please refer to our most recently filed 10-K for cautionary factors related to these statements. Before I turn the call over to Matt, I will go through our results.

For the fourth quarter of 2024, we reported GAAP net income of $14.6 million or $0.21 per share. Book value as of December 31st, 2024, is $14.76 per share, which is relatively flat quarter-over-quarter. Distributable loss this quarter was negative $14.7 million or negative $0.21 per share. We have a $0.25 per share dividend, which yields 10% as of yesterday's closing price. With that, I'd now like to turn the call over to Matt.

Matt Salem (CEO)

Thank you, Jack. Good morning, everyone, and thank you for joining today. Before we begin, we first wanted to acknowledge the devastating wildfires in California. Our thoughts are with everyone that has been impacted, and our heartfelt thanks to all the first responders. Before going into our results, I thought I would discuss our 2024 achievements. First, I wanted to highlight KREF's ability to leverage KKR's significant resources and information. KKR manages approximately $80 billion of real estate assets globally. With approximately 140 professionals, we have been able to utilize all our resources across asset management, sourcing, underwriting, and capital markets. Just within real estate credit at KKR, we are active across the United States and Europe in both loans and securities, and we invest across the risk-reward spectrum through our bank, insurance, and transitional pools of capital.

Our dedicated K-Star asset management platform now has over 55 individuals with expertise in asset management, special servicing, underwriting, and REO. This team manages a portfolio of over $36 billion in loans and is named special servicer on an additional $45 billion of CMBS. Turning to KREF, this was a year of transition. Our posture during this challenging environment for real estate has been to transparently and proactively address issues, and we think this approach has led to better asset management outcomes. Over the course of the year, we have decreased our watchlist percentage from 13% as of fourth quarter of 2023 to 8% today. As for our REO assets, we've begun to see green shoots in the office and life science sectors. Tenants are re-entering the market, and we have responded to a number of RFPs.

Investor sentiment is slowly rebounding, and liquidity is beginning to return for the highest quality assets. The CMBS market has seen a number of large office transactions with over $3.5 billion of office SASB issuance in 2024 and a healthy 2025 pipeline. We think our patience on these high-quality assets will optimize shareholder value. As a reminder, as we repatriate the equity in the REO portfolio, we believe we could generate an additional $0.12 per share on our distributable earnings per quarter. With the assistance of our KKR capital markets team, our liability structure remains a differentiator for the company. We have diversified financing, and 79% of our financing is non-mark-to-market. We have strong levels of liquidity, with $685 million available at the end of the fourth quarter.

Although we don't have any corporate maturities until 2027, the debt capital markets are healthy, and we continue to watch for opportunities to optimize our capital structure and further extend maturities. Since our last call, sentiment around commercial real estate has continued to improve, and transaction volumes are increasing quarter-over-quarter. The higher U.S. Treasury market may dampen some acquisition activity, but we have a robust pipeline, and there should be ample opportunity to lend on reset values. In January, we closed two loans for approximately $225 million. Looking ahead, we have consistently stated that while we are not fully out of the woods and anticipate further credit migration, we think we have dealt with the majority of the issues in the portfolio. Before I turn the call over to Patrick, I want to reiterate our optimism heading into 2025.

We continue to feel confident in our offensive positioning and look forward to the opportunity that we have in front of us. With that, Patrick can take it from here.

Patrick Mattson (President and COO)

Thanks, Matt. Good morning, everyone. Fourth quarter repayments exceeded $450 million, comprised of six loans secured by multifamily and industrial properties, as well as the par sale of a Dallas office loan. Full-year repayments totaled $1.5 billion, representing approximately 19% of our portfolio. We reported fourth quarter distributable earnings prior to realized losses of $0.31 and DE of -$0.21 per share, which includes the realized loss on the San Carlos life science loan. We now have four watchlist loans in the portfolio, representing 8% of the loan portfolio compared to 13% a year ago. While additional watchlist loans would not be surprising over the course of this year, we remain confident that we are well beyond the peak stress. With excess liquidity, a stabilizing portfolio, and leverage at the low end of our target, we are actively looking to invest repayments into new loans.

Repayments are expected to exceed $1 billion again this year, and given our current leverage levels, we anticipate originations to outpace repayments in the near term. We closed two loans for a total of $225 million last month, including a four-property multifamily portfolio of newer vintage and recently renovated assets, with a business plan to improve physical occupancy and burn off current concessions. Turning to our CECL allowance and watchlist, as we suggested in the previous earnings call, in fourth quarter, we modified the San Carlos life science loan and subordinated a portion of the loan to new sponsor equity. The $36 million subordinated note was written off, and the corresponding CECL reserve was released. Subsequently, the restructured and reduced senior loan was upgraded to a risk rating of three. Our total CECL reserve decreased to $120 million, and 92% of the portfolio is risk rated three or better.

On our watchlist, we continue to make progress on our West Hollywood multifamily loan, and we are continuing down a path to ownership and subsequent condo sellout. We will keep you updated on the progress in the coming quarters. As of the fourth quarter, our debt to equity ratio is 1.6x, and total leverage ratio is 3.6x. KREF's leverage at this point is on the lower end of our target zone, so we are actively originating loans. As part of our investment allocation, we've continually looked to evaluate share repurchase opportunities. Prior to the fourth quarter, we bought back almost $100 million of stock since inception of the company. In the fourth quarter, we added to that total, repurchasing $10 million of KREF stock, representing a weighted average stock price of $11.64.

We've made great progress on our watchlist over the last 12 months, and we remain excited about the current market opportunity. This should be a strong repayment and origination year for KREF. The lending market is attractive, and we plan to be active. We feel confident in our positioning from a portfolio quality, liability structure, and leverage perspective, and look forward to the opportunity ahead in 2025. Thank you again for joining us this morning. And now we're happy to take your questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster, and the first question will come from Tom Catherwood with BTIG. Please go ahead.

Tom Catherwood (Analyst)

Thanks, and good morning, everybody. Maybe starting with repayments. Obviously, huge jump in 4Q. You had alluded to that, obviously, with 3Q earnings, just that you expected that pace to be accelerated. How has that pace trended with the steepening of the yield curve? Kind of has that slowed as we've begun 2025? And how much of that do you kind of expect of the $1 billion+ of repayments? Do you think that that's likely an early 2025 event, or should it come in kind of evenly throughout the year?

Patrick Mattson (President and COO)

Tom, good morning. It's Patrick. I'll take that question. So you're right. We did have a pretty meaningful acceleration in the fourth quarter. As you know, our loans are pretty chunky, so we get a few more repayments in any one quarter, and that can sort of drive the numbers. Obviously, that was at a time when we saw rates back up, and there wasn't a meaningful impact in repayments. I don't see that as a main driver for the repayments. A lot of these loans have reached their business plans, and it's about optimizing the refinance for our counterparties. So I don't see a material impact there. In terms of the forecast this year, again, difficult sort of quarter by quarter. We certainly think it's over $1 billion this year.

If I had to sort of lean one way or another, I'd probably say that's middle to sort of back-end it, but it's really difficult to forecast. What we saw in the fourth quarter was an acceleration of some repayments that we had forecasted to repay in 2026 and obviously came early.

Tom Catherwood (Analyst)

Got it. Appreciate that. And Patrick, just want to make sure I heard you right. Did you say you expect originations to exceed repayments in the near term in your prepared remarks?

Patrick Mattson (President and COO)

That's right. And that really stems from the fact that we're at the low end of our leverage target here. So as we start to redeploy the capital, we think there's an opportunity for us to get ahead of some of these repayments, but also get back into the mid-range of our leverage ratio. So out of the gates, we had a pretty strong January to start with. There were no repayments that came in that month. So already in the first quarter, we're seeing the trend that I was discussing.

Tom Catherwood (Analyst)

Great. And then along those lines, can you talk about the kind of, I mean, obviously, we appreciated the color on the hospitality loan in Tennessee and the multifamily loans in various locations. But as far as your pipeline looking forward, can you talk a bit about the asset classes that you're targeting and maybe how the scope of that pipeline might compare to pre-pandemic or kind of early 2020 times?

Matt Salem (CEO)

Hey, Tom, it's Matt. Yeah, I can jump in on that one. I think the first takeaway is largely the same in terms of what we're targeting. We're going to continue to target institutional sponsorship and really high-quality real estate and major food groups. So we'll continue to focus on multifamily, industrial, student housing. Obviously, we did a hotel deal this quarter. That's always been a little bit smaller part of what we've done, but an important piece of the portfolio. In terms of just what's different, I would say a couple of things. Number one, for us, Europe, we'd hope to, we've built a business in Europe over the last few years, and we've been actively lending there. So we'd like to add that to the portfolio from a diversification perspective. Again, similar property types and sponsors, but we will get that geographic diversity in the portfolio.

And then, secondly, I would say from a business plan perspective, things tend to be a little bit more stabilized. And I think the multifamily deal that we did this January is a good illustration of that, where kind of before the rate increase, we were doing a lot of kind of newly built construction takeout lending and providing that bridge to lease the asset up. And we still like that, and we'll still do that. But this most recent deal is more a function of the business plan. It's mostly leased assets.

It may burn off some concessions over time, but our loan is really just providing the sponsor with just a little bit more time to get into a little bit better rate environment and grow revenues a little bit, but not the same kind of dramatic increase in occupancy that we were lending on a few years back. So the underlying business plans have changed. And then from a property type perspective, the only thing I would add is just the data center sector continues to, we continue to see a lot of demand for financing there. And so I think that would be a new area that we could potentially introduce into the portfolio.

Tom Catherwood (Analyst)

Got it. Appreciate that, Matt. And last one for me, kind of sticking with you. For office, we would usually speak about the sector in hushed tones. Obviously, you mentioned in your prepared remarks some positive shifts recently in the sector, albeit off of a very low base. But kind of how are you thinking of your office loans right now, both the ones in your loan book and the REO assets on your balance sheet?

Matt Salem (CEO)

Yeah. I think there's three segments there probably I would highlight. On the REO, the green shoots that we're beginning to see in the sector are encouraging. It's early still, and I think we have to be patient, but there's leasing activity. And I think what we own, both in the office and the life science sector, it's really high-quality real estate. And the reason that we went to title on it, and it's not without cost, let's be clear, but the reason that we did that was because we thought we had really good assets that would lease over time. And now we're beginning to see some of those tenants come back into the market. Again, early, but it's got to start somewhere. And so it's nice to kind of see that begin.

Then the second part of the portfolio I would comment on is just the three-rated office loans. I think there it's a much more positive sign because the financing markets are back. Our three-rated office loans tend to have a long term. They're well-leased. They have long remaining lease terms, and our leverage point is reasonable. As the financing markets come back, you can start to see some liquidity in those positions. I'd say that's pretty encouraging on that component. On the watchlist side, it'll still be we've got a risk-rated office loan in Minneapolis, and it's still probably a little bit of a wait and see, and let's keep working through it. We've modified that and have big reserves already. But again, we're not finished, we're not out of that asset yet either.

A little bit of a mix depending on which group you're looking at.

Tom Catherwood (Analyst)

Got it. Appreciate all your thoughts. Thanks, everyone.

Matt Salem (CEO)

Thank you.

Operator (participant)

Next question will come from Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti (Analyst)

Yeah, Matt. So it seems like there are some cross currents in your business. You've got office getting a little bit better, but higher for longer might not be so great for apartments, multifamily. As you think about book value, should investors sort of view this as a more stable environment, maybe a little bit of migration from three to four, but nothing too significant to where you're doing very large reserve builds and eating into that book? Or is that a reasonable kind of base case over the next 12 months?

Matt Salem (CEO)

I mean, it's hard to look out. I'd say hard to look out into the future. I think we try to make these comments that we're largely through what we think is going to come through the portfolio, but we're not done yet. I don't know exactly what that means just because it's hard to look out a couple of quarters and project what might happen. Obviously, it's a pretty volatile macro environment, rate complex in the economy as well. It's hard. I think we're entering this phase where we're going to see much more book value stability, but again, hard to project over a few quarters or a handful of quarters like what else might come down the road.

Don Fandetti (Analyst)

Got it. And what's your sense on multifamily in your portfolio? You've had a couple of rate cuts, but now it looks like maybe fewer. What are you hearing from borrowers? Are they sort of willing to hang in there? Is there still some hope? And if you do take real estate back, do you still feel like you can still monetize the value because there's liquidity in multifamily?

Matt Salem (CEO)

Yeah. With the multifamily, I'll kind of start where you ended, which is there's a tremendous amount of liquidity across the capital structure. Senior loans, mezzanine, preferred equity, there is a lot of demand for it. And if you just do the math of the change in kind of the forward curve, it would imply that values are down a little bit more. But there's a few things that are offsetting that, I would say. Number one, spreads have compressed, so the cost of capital has come in a little bit to offset some of that interest rate increase. Number two, we're further down the road, the supply pipeline road, which means we're closer to that moment in time where, good or bad, these markets are going to be undersupplied again. We're not there yet, but we're closer to it.

That impacts just your projections as it relates to rents over time. Then finally, it feels like this latest rate increase has been accompanied by a higher degree of growth in the market. Perhaps investors are going to put a little bit more weight behind their rent growth assumptions going forward. There's kind of some puts and takes, I would say. As it relates to our portfolio, I honestly don't think we have a lot of rate sensitivity in our multifamily portfolio. We've got a couple of watchlist loans. I don't think those are really rate sensitive. Then our overall portfolio, I don't think it really is impacted. I think there's still equity cushion there for the most part. I don't think this rate move is really going to impact us that much.

There were a lot of borrowers that elongated capital structures, paid down loans to try to get to a lower interest rate environment, and clearly, they're going to have to wait a little bit longer. My guess is within our portfolio and the quality of the sponsorship we lend to, my guess is that they'll continue to play that forward and they'll delever us a little bit and buy some more and buy some more time. Not every sponsor's got the liquidity to do that, so as you start to get into smaller sponsors, that's where I think you could see a little bit more of delinquencies, but I don't think values have changed that much over the last couple of quarters in multifamily.

Don Fandetti (Analyst)

Thanks.

Operator (participant)

And our next question will come from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws (Analyst)

Hi, good morning. Matt, I wanted to circle back on, you made a couple of comments to the Minneapolis office. I know you guys provided some color on the West Hollywood multi-deal. But as you think about that Minneapolis office asset, five-rated, it looks like the maturity date is sometime in the first half of this year. Do you expect any color you can provide on kind of the resolution path there? Do you think that's something that moves into the real estate portfolio? Do you expect something more along the lines of the San Carlos resolution? Kind of how do you anticipate that moving in the first half of this year?

Matt Salem (CEO)

Yeah. We don't have a determined path yet. So we could go a couple of different ways. I think we have a little bit more time on an asset like that as well because it continues to be pretty well-leased. It's similar occupancy from over the last few years. We've lost some tenants. We've got some tenants. So it's relatively well-leased and cash flowing well. And it competes well in the market. Minneapolis is a really difficult market, but that asset competes fine, competes well in the market for tenants. So I'm not exactly sure what the path is, but there's probably more options there just given the cash flow. And we could potentially just try to push that forward again and see if we can buy some more time.

Stephen Laws (Analyst)

Great. Appreciate that color. As you think about originations and use of capital, how do you view additional stock repurchases in the current market, especially given kind of the sell-off year to date? I guess I assume that's a quiet period. But how do you think about repurchase activity versus new originations going forward?

Matt Salem (CEO)

Patrick did a nice job of highlighting on the remarks that we've been very consistent buyers of our stock when we thought it was undervalued. I think we'll obviously continue to evaluate that opportunity here. There needs to be a balance in my mind as well. Our business is to invest capital and make loans. I think it's important for us to, for a lot of reasons, vintage exposure, portfolio diversification, duration, to make sure that we're turned back on and making new loans. I don't like to think about it as one or the other. I think, as you saw us do over the course of the last few months, a balanced approach is kind of what we've taken in the past.

Stephen Laws (Analyst)

Great. And Patrick, one for you on CECL. As you think about the new originations coming on that originated current environment, current cap rates, new underwriting standards versus a few years ago, how do you think about the right level of reserves on the new originations this year? I mean, is it 75 basis points, 100 basis points? How do we think about the normalized return level as we move back to a portfolio that is increasingly originated in this current environment?

Patrick Mattson (President and COO)

That's a good question, Steve. Certainly, as we're originating new loans, just on the margin, I'd expect CECL to go up a bit because it's model-driven for these three-rated loans. And the model for a short-duration loan, like many of the loans on the book today, have a lower CECL than a newly originated five-year loan. So I would expect that marginally we'd sort of go up. Certainly, that's something that we're going to be evaluating as we're making new loans. And I think part of your question is, what's a minimum CECL that should be expected? And I think that's something that we continue to do work around. But I do think at the margin over the course of this year, absent any other movement, we would expect that there's slightly greater CECL.

Stephen Laws (Analyst)

But to clarify, that says an absolute number, right? And not necessarily just, and that's largely driven by the portfolio growth because of the new originations? Or are you referring to some basis points of the portfolio?

Patrick Mattson (President and COO)

A little bit of both. One, because I think from a portfolio growth, there's a growth opportunity here just where we've got capital and where we're at a leverage level, and then at the margin, putting aside resolutions, clearly, if we resolve some of the fours and the fives, we would expect CECL as a percentage to come down, but as I think about our three-rated assets and think about the percentage of CECL against those, I would expect that to go up not only in nominal dollars, but in percentage terms.

Stephen Laws (Analyst)

Okay. Great. That's helpful color. I appreciate that, Patrick. Appreciate your time today. Thanks.

Matt Salem (CEO)

Thank you.

Patrick Mattson (President and COO)

Thank you.

Operator (participant)

Next question will come from Steve DeLaney with Citizens JMP. Please go ahead.

Steve DeLaney (Analyst)

Thanks. Good morning, everyone. Look, first, we just want to applaud the buyback activity. It's very shareholder-friendly. And it's something, frankly, that it's not always seen among the externally managed companies. Your average price was $11.64. We're down to 14% to about $10.05 now, or around $10 range. And so we should assume that you continue to view that regardless of the volume and the leverage. I mean, I assume you still look at buybacks as being a very attractive opportunity. Is that correct?

Matt Salem (CEO)

Hey, Steve, thanks for the questions, Matt. Yeah, I think, like I said earlier, we're evaluating both buybacks and new loans, and I think like we've done in the past, we really go down a balanced approach.

Steve DeLaney (Analyst)

Sure. And to that point, Matt, about the portfolio, just curious, looking at the portfolio at $5.9 billion, obviously, activity has been a little slow over the last year or two. It's been more a credit issue. The high was like $7.6 billion at the end in early 2023. You've got $1.4 billion of equity at year-end 2024. Do you have in mind sort of a round number or a range for where you think the portfolio could grow over the next year?

Patrick Mattson (President and COO)

Steve, it's Patrick. I'm happy to take that.

Steve DeLaney (Analyst)

Thank you.

Patrick Mattson (President and COO)

You're welcome. So yeah, as we think about the portfolio and think about our target leverage range, this is absent resolution of some of the REO assets because that changes a little bit of that number. But just on the current portfolio, we think that number is in the kind of $6.6 billion-$6.7 billion range.

Steve DeLaney (Analyst)

Very helpful. Well, thanks for the comments. A lot's been covered. And I think I'm good.

Matt Salem (CEO)

Thank you, Steve.

Operator (participant)

Next question will come from Rick Shane with JPMorgan. Please go ahead.

Rick Shane (Analyst)

Good morning, everybody. Hey, look, a lot's been covered here. But I guess I really have two questions. First is we've seen movement in rates. I am curious, the comment was made implicitly that puts a little bit of downward pressure on valuations. When you look at what is transacting in the market, is market sentiment and the ability for the market to clear a function of price, or is it a function of buyers and sellers developing greater confidence about where we are sort of at the end of the cycle? Are people less concerned about, "Hey, we spent $100 million on this, and yet it's going to be miserable to trade out at $50 million"? Or is it, "Hey, we're now trading out at $50 million, and we're a lot less worried about it being worth $40 million next week"?

Matt Salem (CEO)

Hey, Rick, it's Matt. Thanks for the question. Let me answer it this way, and hopefully what you're looking for comes through. I think it's a function of, over the last few years, or a couple of years, it's been a function of who are the sellers. Because a lot of these assets are fundamentally strong. And setting office aside, they're well-leased, they're cash flowing, and they have a valuation issue around cost of capital. And so there just haven't been that many willing sellers in the market. And the larger sellers have been. It's been really around liquidity and not around. It's really been they have to sell to repatriate capital. That's been where most of the sales have been. Now, as we start to enter this next phase, I think there's more certainty locally where values are. So the bid offer has definitely compressed.

And then it's just a question of, okay, do the existing owners, do they just want to keep buying a little bit more time and playing it forward and trying to get into a little bit lower cost of capital environment, let growth continue to build in their portfolio, let some of these supply pipelines within the multifamily sector burn off and get into a larger rent increase dynamic? So that's really what I think is happening. And then the overlay, again, is this capital structures are becoming short. Because you think about all the acquisitions that happened in 2021 and 2022, a lot of those were financed with five-year loans. So people are just running a little bit short on time, and there's a little bit more acute decision, I think, that they have to make. So that's how I see it.

quarter-over-quarter for the last four or five quarters, we've seen volumes build, transaction volumes continue to increase. And I think it's a function of just what I described, reality setting in, capital structures getting maturing, and people needing liquidity. So I personally think it'll be a little bit more of a continuation of that. I don't think there's going to be a huge change in transaction volumes this year. We're just in this very slow deleveraging process for the industry.

Rick Shane (Analyst)

Got it. Hey, Matt, first of all, thank you. I know it's a little bit of an amorphous question, and thank you for swinging at the pitch. I appreciate that. I said one more question, but I'm actually going to follow up and then ask the second question. Is what you just described the explanation for the Minneapolis office loan? You've described it as well-leased and alluded to the possibility of extending that a little bit longer. Is it just giving everybody time to let cash flows align a little bit better if the rate environment improves?

Matt Salem (CEO)

Well, I would put office as a little bit of a separate category where there's been liquidity for all these other sectors throughout the last couple of years. Just nobody really wanted to sell at the price that there was liquidity. People just would rather hold out. I think with office, there was, in my mind, very little to zero liquidity. Now you're starting to see some of that liquidity come back into the market. So it's a little bit different dynamic there where not only could the rate market help improve the valuation of those assets, but just more buyers in the market and some level of interest in owning office could really help that. I just don't think office was a liquid asset class over the last couple of years. And now you're starting with the best. I don't want to overstate it.

The highest quality stuff first, but of course, that's where it's going to start, and I think that's the gun.

Rick Shane (Analyst)

Got it. Thank you. And then the other question I had is this: we tend to take a pretty high-level top-down view of the space. And one of the observations I would make is that you guys make three-year loans that never last three years. When times are good, they last 18 months or 24 months. And when times are bad, these three-year loans that have five-year terms or five-year extensions go six or seven years. And we saw the pendulum swing wildly in the last three years or four years on that. You talked about a repayment in the fourth quarter that was something you didn't expect until 2026. I realize it's just one loan, and everything is super idiosyncratic. Is there any indication that some of the newer loans, that things are swinging a little bit back in the other direction?

Matt Salem (CEO)

In terms of the portfolio?

Rick Shane (Analyst)

Going from two years to seven years, is there anything that we're starting to see stuff, anything out there execute a lot faster than we've been seeing over the last three or four years?

Matt Salem (CEO)

Yes. I think there's more liquidity of the debt markets today than there has been, which is allowing some of our sponsors to refinance earlier. And I think the new loans that we're making now, I hear your point. I mean, I think the new loans we're making now are pretty strong. I mean, we've got reset basis, got good terms. And I agree with you. I think those are likely going to be on the shorter end as I think people are getting good buys today. And if it's a refinance, then they probably don't want all five years. They probably only want a couple of years before they repatriate capital. And then part of it's just a function of where we are today. Our sponsors have largely had a few years to implement their business plan.

So they've executed on it, and now they have the cash flows that they can either sell or go refinance. And we've been thinking more about duration, to your point, around just always on the treadmill and on shorter duration loans and the portfolio exposure that can create. So it's something that's on our mind as well.

Rick Shane (Analyst)

Got it. Okay. Really appreciate it. And sorry for all the questions, but I realize we're sort of at the end of this, and hopefully that's okay. Thank you, guys.

Matt Salem (CEO)

Sure. Thank you.

Operator (participant)

Again, if you have a question, please press star, then one. Our next question will come from Jason Sabshon with KBW. Please go ahead.

Jason Sabshon (Analyst)

Hi, good morning. Can you please give an update on KREF's life science deals and the outlook for leasing and ultimately value in those assets? That's probably the number one area of pushback that we hear. So addressing that would be helpful. And is that where you could see the potential credit migration in the portfolio that you alluded to previously? Thanks.

Patrick Mattson (President and COO)

Yeah, I'll try to cover some of that without going into too much detail. First of all, we've made some progress on the life science piece of it. We foreclosed on an asset. We've modified. Obviously, last quarter, we had that big modification, which hopefully dealt with that. And then a lot of our remaining exposure is on really construction. There were construction loans, so these are really high-quality, very well-located, trophy-like in some cases assets. Where when I commented on the green shoots, a lot of it is related to those types of exposures. And we think the tenants are coming back into these markets, and they're really looking for the best assets in the market. And our exposure is not 100%, but largely in that type of space and that type of quality.

Our sponsors, I think, are excited about what they're seeing in terms of just the tenants coming back into the market. I want to stop there without going loan by loan.

Jason Sabshon (Analyst)

Great. Thank you. And on the multifamily watchlist assets, it would be helpful to hear about what the issues there are. Is it basis, rent, supply, or something else? Thanks.

Matt Salem (CEO)

Yeah. I think it's a little bit depends on the asset. A couple of them are more supply-driven markets where you've just seen that impact, a little bit occupancies, but certainly rental levels. So that's some of it. I'd say our West Hollywood multifamily is a different deal. That was just a very peak of the market acquisition or financing. So more of a value, really more of a value issue there at the end of the day from a multifamily perspective, which is why we're continuing to move down the path of a condo sale out there because it was really built for condo. So a little bit of a mix depending on which asset we're looking at.

Jason Sabshon (Analyst)

Thanks.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Jack Switala for any closing remarks.

Jack Switala (Head of Investor Relations)

Great. Thanks, operator. Thanks, everyone, for joining today. Please feel free to reach out to me or the team here if you have any questions. Take care.

Operator (participant)

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.