KKR Real Estate Finance Trust Inc (KREF) 2020 Q4 法說會逐字稿

Good morning, and welcome to the KKR Real Estate Finance Trust Incorporated Fourth Quarter and Full Year 2020 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Anna Thomas, Head of Investor Relations. Please go ahead.

Thank you, operator. Welcome to the KKR Real Estate Finance Trust Earnings call for the fourth quarter of 2020. We hope that all of you and your families are continuing to stay safe and healthy.

Today, I am joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Mostafa Nagaty.

I would 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 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 provide a brief recap of our results. For the fourth quarter 2020, we had GAAP net income of $28.8 million or $0.52 per share, which included a $3.4 million benefit from a lower CECL provision. Distributable earnings this quarter were $26.5 million or $0.48 per share, driven by the continued strong performance of our portfolio.

This quarter, we began using distributable earnings as a supplementary non-GAAP earnings metric to replace core earnings. Consequently, our prior quarter's results have been relabeled to reflect the change in presentation, but no change in the calculation or reported figures. Book value per share as of December 31, 2020, increased to $18.76, which included the impact of $1.09 per share from CECL as compared to $18.73 as of September 30.

Finally, I would note that in mid-January, we paid a cash dividend of $0.43 per share with respect to the fourth quarter. Based on the closing stock price on February 12 the dividend reflects an annualized yield of 9.2%.

With that, I would now like to turn the call over to Matt.

Thank you, Anna. Good morning, and thank you for joining us today. We hope you're all healthy and safe. In a year where we experienced a global pandemic and the resulting health and economic damage, KREF delivered its strongest performance to date with record distributable earnings of $1.95 a share. We held our dividend constant despite a significant decrease in interest rates. And our earnings covered our dividend by 1.13x.

The volatility throughout the year put a spotlight on the industry, allowing us to showcase our defensive investing strategy and increase our investor base. Our financing, which is 83% fully non-mark-to-market demonstrated its resilience. This best-in-class liability structure, which was years in the making, demonstrates the tremendous effort across the KKR platform to differentiate KREF. And as transaction activity resumed in the market, we were among the first lenders to take advantage of the new environment and originated $565 million in the fourth quarter. As we look into the year ahead, KREF will continue to benefit from our conservative lending and liability strategy.

Turning to our portfolio. As of December 31, the balance was approximately $5 billion, with only $472 million or 9% of our total commitments of future funding obligations. Our almost exclusive senior loan portfolio focuses on institutional real estate and sponsorship and is secured predominantly by Class A lighter transitional, multifamily and office properties located in the most liquid real estate markets.

Our average loan size is $118 million. And our investment portfolio is 98% senior loans with no direct holdings of securities. Performance on the portfolio remains strong with interest collected on approximately 98% of the portfolio as of the fourth quarter. Through our robust quarterly asset review process, we evaluate every loan in the portfolio to assign an updated risk rating. Our portfolio has a weighted average risk rating of 3.1 on a 5-point scale consistent with the weighted average risk rating at September 30. 84% of the portfolio was risk rated 3 or better, and we feel very confident about the performance on those properties.

As we did in the second and third quarters, we continue to provide a detailed breakout of our watch list loans in our supplemental presentation. While our watch list remains the same, we are seeing improving trends in a number of properties, which we expect to lead to positive credit momentum in those assets. Approximately 2% of our portfolio is rated a 5 and is primarily comprised of our Portland retail loan. This property remains challenged, and we are in ongoing discussions with the sponsor. We continue to believe there are adequate CECL reserves.

As mentioned during our last earnings call, we returned to offense and originated a total of 7 loans for $565 million during the fourth quarter. Despite the yield compression in the broader market, there continues to be good relative value in the sector with opportunities to create returns similar to pre-COVID on loans with more structure. I would characterize our lending as more of the same. We continue to focus on high-quality real estate and light transitional business plans.

In the fourth quarter, 55% of our originations by commitment were secured by multifamily properties. We have also started to see new opportunities stemming from the COVID impact on real estate. The demand for industrial space has accelerated, and we are seeing increased opportunities to lend on industrial construction projects. For example, in December, we originated a $95.8 million loan for the construction of an industrial park located in Denver.

In terms of repayments, we received $535 [million] during the fourth quarter, including the repayment of one of our largest -- of our largest exposure to the New York City market. Our forward pipeline remains active with 2 loans closed since year-end and several loans under exclusivity totaling $497 million in aggregate, all of which are expected to close in the next couple of months. While the pipeline continues to grow, KREF is effectively fully deployed. Origination opportunities will likely exceed available capital. And in the near term, we will need to manage the timing of originations to repayments.

Before turning the call over to Patrick, I wanted to update everyone on the growth of KKR's real estate platform. Going back to our IPO, we've highlighted the benefits to KREF of being part of a larger asset management platform with a culture of collaboration. It contributes value across everything we do, of sourcing and underwriting to liability management. This has only accelerated as the business has scaled.

Today, KKR's real estate business manages over $25 billion. The strategy is ranging from credit to opportunistic equity, core plus equity and net lease. Recently, KKR acquired Global Atlantic, a leading provider of life and annuity products. This addition broadens the lending products we can offer our clients creating more opportunities to connect with borrowers and intermediaries, and KREF is well positioned to capitalize on this increased connectivity.

We remain excited about the competitive position of our franchise and the market opportunities ahead in 2021.

Now let me turn the call over to Patrick.

Thank you, Matt. Good morning, everyone. We hope that you continue to stay safe. As of quarter end, a market-leading 83% of our in-place asset financing was completely non-mark-to-market. And the 17% remaining balance was only subject to credit marks. While we will continue to prioritize non-mark-to-market financing, we expect to maintain a balanced and diversified approach to our secured financing and expect our credit facilities to continue to be an active and efficient form of financing within our capital structure. However, it was our intense focus on non-mark-to-market financing prior to the pandemic that allowed us to lower the risk of our liabilities, while at the same time, maintain target leverage levels, despite the volatility last year. As of quarter end, our debt-to-equity ratio and total leverage ratio were 1.9x and 3.6x, respectively. The leverage ratio reflects a slight decrease from the third quarter, given some recent repayments.

As a reminder, we have generally targeted a 3 to 4x leverage ratio on new senior loans depending on the source of financing. While we've been willing to finance loans at low 80s advance rates on our non-mark-to-market financing, we would expect our total leverage ratio to remain in this range in the coming quarters and expect our debt-to-equity ratio to be in the low 2x area.

As Matt noted, with a company near full deployment, repayments will be a key driver of our near-term origination pace. And while it's always difficult to predict repayments with certainty, our current expectation is for the existing portfolio to have some additional duration this year with repayments weighted more toward a latter half of 2021.

In the near term, KREF will continue to benefit from the in-place LIBOR floors and elevated effective net interest margins. As a reminder, while the portfolio is almost entirely floating rate, 85% of the loan portfolio has a LIBOR floor of at least 1%, while only 2% of our liabilities, excluding the Term Loan B, have a floor above 0. As we experience a rotation in our portfolio through loan repayments and new originations, we expect LIBOR floors on new loans to set close to spot rates. And we expect our effective NIMs to compress over time.

Finally, KREF's liquidity position remained strong at over $480 million. This total includes over $110 million of cash and full access to our $335 million corporate revolver. In addition to reported liquidity, at quarter end, we had approximately $275 million of unencumbered senior loans on the balance sheet that are able to provide additional liquidity, when pledged to our existing financing facilities.

With that, I'll turn the call over to Mostafa to touch on some of the 2020 highlights.

Thank you, Patrick, and good morning, everyone. Before I turn to the key financial highlights, let me call out the change in our non-GAAP earnings measure. Historically, we reported core earnings as our key non-GAAP earnings metric to assess the performance of our business. Starting with the fourth quarter and based on updated guidance from the SEC, we renamed the metric to distributable earnings. To better reflect the purpose of this metric, which serves as an indicator of our ability to cover and determine our dividend. To be clear, this change in the naming convention does not change the way we historically calculated and reported this metric, which are just GAAP net income to exclude certain noncash items.

Reflecting on 2020 in a very challenging and unprecedented year, we have achieved the record distributable earnings of $1.95 per share, comfortably covering our dividend of $1.72 per share for the year. We conservatively managed a strong liquidity position through the initial COVID volatility and ended the year with over $480 million of liquidity. We closed the $300 million Term Loan B, a $500 million warehouse facility, increased the borrowing capacity of our revolver to $335 million, which remains undrawn at year-end and maintained a best-in-class liability structure with over 80% of our secured financing on non-mark-to-market facilities.

We accretively repurchased 2 million shares of our stock, totaling $25 million at an average price of $12.27 per share. We also returned to the old sense following a market shutdown with originations over $565 million across 7 loans in the fourth quarter. We look forward to continuing to deliver attractive risk-adjusted returns and strong results to our shareholders.

Thank you again for joining us this morning. And with that, we're happy to take your questions.

(Operator Instructions) The first question comes from Jade Rahmani with KBW.

In terms of your comments surrounding capital management and the company is being in a position of full deployment with the stock trading at about 99% of GAAP book value and below book value ex the CECL reserve, what options might you consider? I assume that the unencumbered assets you want to keep as a liquidity insurance. And I'm wondering if perhaps you could pursue a CLO as some of your peers are reported to be looking at. I'm wondering if you might consider issuing some form of unsecured debt, whether it be a convert, perhaps a preferred? What are you currently considering?

Jade, it's Matt. Thank you for joining us. Appreciate the question. I'd say right now, we're primarily focused on managing and originations through repayments. Obviously, I think as we look at the stock price, and you mentioned where we are versus book value with and without CECL, we'll continue to track that and think about raising capital if we can do so accretively. Certainly, the pipeline is very big right now. It feels like there's been some pent-up demand over the course of the last 6 to 9 months. And so we're seeing good opportunities there. I think from the debt side, we're going to take advantage of some of the things you mentioned. The markets are very strong right now on the liability side of the equation. Certainly, the CLO market has been very active and is pricing at a very attractive levels. But I think from a total debt perspective, we're in a good place. So we don't expect to add debt, but obviously, we can change forms of debt or refinance existing facilities to take advantage of some of the current environment. So right now, I think we're, again, most focused on repayments and potential equity to the extent you can do so accretively.

Looking at the watch list assets, I would agree with your commentary that overall there seems to be the potential for improvement in the quarters ahead. The New York condo market has seen a meaningful uptick in sales over the last 2 months. Everyone knows that Florida is seeing very strong occupancy rates in hotels. So I assume the Fort Lauderdale Hotel would do well. Even the Brooklyn Hotel, I believe is a recently constructed asset, so it could be in a good position. Industrial is doing well. So Queen's Industrial, I assume, would also do well. San Diego multifamily, I also believe is a recently developed properties and it's probably in the state of lease up, so that may be just a timing factor, and there's lots of liquidity. So that leads to Portland retail loan, which is total principal of $110 million, $100 a square foot. The basis seems low. And I know in the past, you've indicated you're comfortable with the location. But it does seem to be potentially a redevelopment. So I'm wondering if you feel that there's a risk of impairment on that or how you think we should evaluate that risk?

Yes. Well, I think -- it's Matt again. I think first of all, as you walk -- kind of tick through the watch list loans, I think we have a similar view to much of what you said. We've seen continued improvement in the hotel sector and the -- certainly the condo sector, there's been a number of sales at that property post-COVID, including one in the fourth quarter. So we continue to see progress there. And as I alluded to on the call, I think some of these, you could see positive credit migration over time. We've had some modifications recently in one of our hotel loans and culminated -- pay down on the loan came with that principal pay down of the loan. So things are definitely proceeding in a positive manner on the watch list.

So let's turn to Lloyd Center. I think, first of all, it's only 2% of the overall portfolio, so let's just put it in perspective. Currently, we are granting short-term extensions, while we continue discussions with the borrower. It's a complicated asset. It's a complicated business plan. As you mentioned, it's in a good location. There's real demand drivers around it for both multifamily office and mixed use. The question is, how do you get there and in what format, it's going to take time. So I think we're at the stage now in discussions where it's probably most appropriate to keep those direct with the sponsor at this point in time. But we'll try to give more details when we have a little bit more clarity on the path forward. But again, I think when you look at that, it all comes back to kind of what we reserve for to some extent, and we still feel comfortable with existing CECL reserve on that particular loan.

The next question is from Stephen Laws with Raymond James.

Can you talk -- you have been more active on the origination front, can you spend some time talking, what's changed, what hasn't changed as you underwrite these new loans versus 12 months ago?

Sure. I said on the call -- it's Matt again. And thank you for the call, Stephen. I think where we're focused is a similar place, predominantly multifamily, lighter transitional properties, including office. The biggest change in the underwriting is really in the timing for how long it's going to take the borrowers to implement their business plans. We're clearly still in a difficult economic environment for many retail -- for many real estate properties. And so there's going to be a timing element to how quickly you can ramp cash flows back up.

And then there's obviously the concessions, as we think about multifamily and rental rates and what the impact of COVID could be and what the future holds as you burn off concessions and potentially see a rise in rental rates in some of these larger markets. So I'd say that's the biggest difference in the underwriting is really around some of the concessions or the rental rates and again, the timing. But there's lots of opportunity, as I mentioned. There's pent-up demand. The pipeline has never been bigger. And then I would segue, too, there are new opportunities that come from COVID. So we are seeing increased interest and demand on the industrial sector, as you would imagine, in the life science sector. So some of the haves -- some of the winners in the real estate properties certainly are in need of financing and to create new space that can really take advantage of that demand for some of the things coming out of COVID.

Great. Mostafa, could you touch on G&A. It looks like we're kind of back at the level we saw pre-COVID? And kind of how do we think about that moving forward?

Yes. So I think we had excluding the stock comp, Q4, we had lower G&A load compared to Q3, and that's mainly driven by a higher nonrecurring items that took place in Q2 and Q3 in connection with the COVID disruption. So going forward, looking into 2021, we expect our G&A load to be fairly consistent with what you have seen in 2020, was there a bit of a spike, expected spike, in the first quarter, consistent with some of the Q1 work with the proxy and related costs.

The next question is from Steve Delaney with JMP Securities.

Matt, sure, I wanted to ask about your co-origination strategy. You did that on a number, I guess, 6 of loans or so in the fourth quarter. You've certainly got the demonstrated ability to make $150 million loan on your own. Talk about why you would split them 50-50, and how that fits into -- adding to the diversification and reduced exposure to any one project, to any one borrower? Just how you view co-origination versus putting a loan on your books, 100% funded by KREF?

Yes, Steven. Thanks for the question. Good to hear from you. We'll first start out with allocation. And for the things that KREF does from -- primarily does, so think about senior lending on transitional properties. KREF has a priority kind of first shot at all the opportunities that fit that segment of the market. And so then it just becomes a question of -- for KREF. And how much capital do we have? And how do we optimize some of the other things, like you said, diversity of the portfolio, financing availability, returns, as we look at each individual opportunity.

I think you're right to say that if a $150 million loan comes in, and we have available capital, that most likely will go to 100% to KREF. I think that there's some timing differences in what we did in the fourth quarter around some repayments when we issued a Term Loan B, et cetera, where some of those early closers, it was unclear the amount of capital that was available at that particular moment in time. And so those were effectively allocated across other pools of capital. So KREF will continue to take that priority.

And then I think about it as a real positive because from a risk management perspective and from a financing optimization and ultimately ROE, KREF can effectively use other pools of capital to originate larger loans. So if we could do a $400 million, $500 million loan, it's very helpful to have other pools of capital available so that we can show up as a one-stop solution to our clients. So I think of that as a kind of a net positive, but hopefully, that gives you a little bit more color on how we think about it.

Yes. No, that's helpful, especially the part about, if you have the capacity and need to put $150 million to work that you're not in any situation, where you're required to split it with anyone else. So that's what I really wanted to hear, that it's going to be really at your discretion, how you choose to split it up.

And then one quick thing for Patrick. So obviously, financing, probably that's the story of 2020, those that had good financing versus, those that did not. And 83% is exceptional for a fully non-mark-to-market. Let me just ask this, it is hypothetical, but in the extreme. So okay, no market, no credit, no like capital markets marks, no actual credit marks on those, but the hypothetical of a loan going nonaccrual, maybe just take Portland. And I don't even know if Portland may not even be financed on a line. But at some point, you may have to foreclose on a property. At what point in that whole process when you've got a loan finance with a bank, would the bank come to you and say, okay, we don't finance REO. And I'm just curious how far that no call actually goes in a workout?

Thanks, Steve. That's a good question. So when I think about -- it obviously depends on the financing facility that you're talking about. And even on the non-mark-to-market facilities, there are differences in how a loan that's in default might -- maybe treated. I would say what's typical on the credit facilities, the repo facilities is that defaulted loans are not meant to be financed on those facilities. And so you're generally required after some period of time to purchase the asset off of the facility. Obviously, if it's on something like a CLO or another facility, there's no requirement to purchase that back. But if you get enough of those types of defaults, it might start to impact your ability to cash flow back to the equity, i.e., some of your triggers may trip, and you may end up flipping to something that's more of a sequential pay, where all of the lender is going to get sort of paid back. And obviously, it depends ultimately on the asset, right, that's being financed on there. It's -- obviously, not all assets are equal. And for a multifamily, that's going to be treated different than, let's say, another property type.

Your next question is from Charlie Arestia with JPMorgan.

I wanted to ask about the corporate loan. I thought that was interesting, given the focus near exclusively on senior loans in recent years. Just wondering if you could give a little more color on the decision process on that loan, the underlying business plan. I mean LIBOR plus 12 definitely caught my eye there. And I'm wondering, is the underlying real estate portfolio there entirely multifamily?

Thanks for the questions. It's Matt. I can jump in there. It's a little different than what we've done in the past in a unique situation. But first of all, is an existing sponsor for us, someone we've lent to multiple times. And so we've got a great relationship there and know how excellent they are operating assets. And we called it the corporate loan. I think that's a good description. If you want to translate that into like a more real estate speak, it's really more of a mezzanine type position. And but we were able to do that across the entire portfolio of the company. So obviously, creating a pretty strong collateral package for the loan and diversifying across the entire asset base.

And the underlying collateral is all multifamily properties, majority of which are in some level of stabilization, built assets that are in some level of stabilization. So overall, it's a strong -- we think a great credit. And certainly one we were highly focused on coming out of COVID to try to take advantage of some of the pricing in the market or some of the unique situations in the market, and this was in the sponsors again that we knew very well and liked a lot, and we're happy to be able to get something done with them.

Okay, got it. And I'm getting the sense that this was relatively opportunistic and kind of a unique situation. Do you think going forward that you guys will kind of diversify the loans that you make in 2021? Or is this kind of like a one-off situation?

I think it's more one-off. There was kind of a unique capital markets activity for the company there that created the opportunity. In a market like this, and obviously, going back to pre-COVID as well, so we like the senior lending market for a number of reasons. First of all, our clients like it because we're showing up with an entire solution to them. And they don't need to worry about a senior sub relationships or closing issues. So it gives them certainty of execution.

Number two, it allows us to capture all of the economics and then figure out what the best -- how to optimize the financing and create the best ROE. And then obviously, there's the security package that goes along with that, that we like be in a senior loan. So I think that's going to continue going forward for those reasons.

The next question is from Tim Hayes with BTIG.

My first question here, just on the comments around net interest margin. Can you just give us a little color on the all-in coupons on the pipeline today versus the existing portfolio? And then kind of part B of my question there is, you mentioned and we all know just how accommodative the capital markets are right now. And I'm curious if that -- if there are options for you to lower your cost of funds through execution on the capital market side or if you're seeing any pressure on banks to take down your repo cost given the execution there. So I know that's a couple of questions there, but I appreciate the comments.

Tim, I'll take that one. So I guess, first, just thinking about the existing, I guess, cost of capital. Clearly, the market's improved from financing standpoint. So we're seeing that across the liabilities, we're seeing a tightening on the credit facilities, and we can see demonstrations of this in the CLO market. When I think about our net interest margins, if you look at our coupons on our existing portfolio, they're around 480 at the end of last year. That's down 20 basis points from the beginning of the year. And so that just demonstrates a little bit of the benefit that we had from the LIBOR floors. And the LIBOR dropped from about 175 basis points to around 11 basis points today, but we only saw around the 20-basis-point drop in our asset spread. So pretty remarkable and effectively took what was floating rate loans and essentially made them almost fixed rate loans at that point.

Our liabilities obviously dropped and so if you look at our effective NIM today, it's something north of 2.5%. Now pre-COVID, some of those loans were being quoted in a low 100s type of area. And I would say today that, that market is probably closer to mid 100s to high 100s. And so if you think about the walk a little bit, we've got around a 480 coupon in the portfolio.

Looking at our senior loans that we originated in the fourth quarter, that was somewhere in the mid-4s. And I would say with the pipeline today, that somewhere probably on a blended basis in and around the high 3s to low 4% area, just to give some context there.

And so as I look at our liabilities, we're pretty efficient at the moment just given our existing structure in place, our existing CLO was priced at a pretty attractive level 2 years ago. We continue to get benefit there. And our other facilities equally are attractively priced, predominantly in the kind of 100s over spreads and then LIBOR, again, today at sort of 11 basis points. So we're getting a lot of pull-through with that net interest income.

Okay. That's a great walk through. I appreciate it. So I guess maybe to kind of recap all that. I'm calculating about a core ROE of just over 10% this quarter. I'm curious how you feel about KREF's ability to achieve a double-digit ROE given this type of environment. And we're going to keep rates static in this example, will stay in the vacuum. So just curious, how you feel about the dollar we're able to achieve?

Yes. I think at the moment, we feel good. I mean if you look at the fourth quarter, and we look at what our underwritten IRRs are there, we've got a number. Now this is again a sort of blended with some of those nonsenior loans that we talked about. But you're talking about an IRR that's in the kind of the 14% context. So we're getting pretty good return on that profile of deals. Obviously, as we continue to see some asset compression in the market, we'll see further pressure on that level. But at the moment, it's been a pretty good environment to make new loans. So obviously, we're happy to have gotten back on to the offense. And obviously, as we said, the pipeline looks really good for us. And so at the moment, we feel like we're in a good spot.

Okay. I appreciate those comments there. And then just one more from me. Back to the Portland retail loan. If you could just remind me, I know, obviously, it was placed on nonaccrual status this quarter versus last quarter. But was there any major impact in the actual earnings collection that you were accruing for that loan quarter-over-quarter?

I would say, it's Patrick again. I would say when we think about kind of third quarter to fourth quarter earnings, that was certainly one of the impacts that kind of flow through in this quarter. Another impact being repayments that we received earlier in the fourth quarter. We obviously had a good origination quarter, but a lot of those originations were back ended. And then obviously, as we've been talking about some of that rotation down in spread or in coupon from, call it, the upper 4s to the sort of mid-4s. So those are really the kind of driving forces over this quarter. Obviously, we're really pleased with where we ended up. But those were the areas where we saw some impact quarter-over-quarter.

The next question is from Matthew Howlett with Wolfe Research.

And just on a modeling question for me. I know you don't provide forecast on distributed earnings, but you've got great coverage on the dividend. You had that for a couple of quarters. I hear you with the NIM coming in. But it sounds like you were a little bit under deployed in the fourth quarter and then with your comments on the IRRs, can we assume that, that cushion to the dividend is going to be maintained? And at what point would you think about distributing 100% of your distributed earnings?

It's Matt. I can jump in there. I'd say I think that the 2 major factors, as we think about the go-forward right now, our repayments, as we mentioned, and then obviously, what the yield on the new loans are. The existing portfolio is -- you can see in this quarter, previous quarters and for the year, it's earning substantial amount given the LIBOR floors, Patrick described. So I think that's kind of first order of business is, try to understand what that repayment can look like before we get into more normalized historically pre-COVID type of earnings level.

And as we mentioned on the call, difficult to predict repayments. But what we can see now and we go through this portfolio every quarter and kind of update our assumptions, not only from a credit perspective, but also just from, when do we think these will repay perspective also. We think that repayments are going to be more back half of the year. So that creates some sustainability to earnings if that plays out, given other things staying the same. So that gives us a little bit of confidence in the go-forward here.

And then as Patrick mentioned, we're still able to create, I think, good returns on the new loans that we're making, albeit not the same earnings level we've seen over the last couple of quarters here, given the power of those LIBOR floors.

In terms of your last question, like, we'll continue to look at our earnings and look at the dividend. We're living in a 0 -- effectively a 0% interest rate world right now in the short end of the curve. And so we'll make the determination, the Board will make that determination as we move forward here. But right now, we're comfortable with where we're at.

And just on the visibility with prepayments, are you just seeing really strong lease-up rates and access to other parts of the market. Is that how you sort of forecast what you think is going to get repaid?

I mean we're looking at -- it's a number of factors, clearly capital markets is a part of that. But I think what COVID has done is some of -- you think about a transitional business plan, it's elongated that business plan. And it's going to take a little bit more time, even on what we lend on a simple, think about a simple lease-up of a multifamily property. Well, that's going to take a little bit longer to lease that up. You're going to give away more concessions in a market like this to accomplish that lease-up. And therefore, the sponsors may -- they may wait another quarter or 2 to lease it up a little bit more or to burn off some of those concessions. So it's just pushed things out. Things are progressing well, but it's just going to take a little bit more time. And quite frankly, we'll be the beneficiary of that, again, given the LIBOR floors versus the liabilities and the NIM that we've got in the portfolio today. So I think that's really what we're seeing on the ground.

Great. And just one last one. In terms of loan participation sales, taking on more structural leverage. Any -- what's the appetite -- given many of them, what's the appetite to do that?

I mean -- Patrick, feel free to jump in after I go. I think it's -- for us, we take -- we make a loan and then we figure out what the -- how to optimize the ROE through the financing. So it's really not driving the decisions at all in terms of, do we do an A note sale, do we finance it on a CLO, one of our bespoke financing facilities that we spent so much time putting in place. Each of those options has different requirements. And we kind of look at each loan and see where it fits best on the different financing options that we have. And so I think it's hard to sit right today and say, hey, we're going to pick, we're going to do more A note sales, we're going to do -- put it more in the CLO. It's hard to say. It really depends on what the pipeline looks like, what the originations look like. And ultimately, where that puzzle piece fits in, if that makes sense.

The next question is a follow-up from Jade Rahmani with KBW.

Besides the loans on watch list, are there any others that jump out in terms of areas that investors should be focused on in terms of risks?

No. I don't think so. For the last quarterly -- again, through our last quarterly review process of each loan, I think we're -- and we made this comment in the prepared remarks, we feel pretty good about the non watch list loans and the stability there from a credit or ratings perspective. And we already covered where we are on the watch list loans, you could potentially have some positive migrations on a few of those.

You mentioned that you're seeing increased opportunities on the industrial side, and that seems to be one of the most heated, if not, the most heated sectors. So are you building in protections -- additional protections into your underwriting? I know that historically, like warehouse, definitely is one of the easiest assets to develop. So there's a risk that, that market can be oversupplied. I assume that's something that you factor into your underwriting.

Yes. Of course, I mean, I think it's -- I don't think our underwriting has changed materially from pre-COVID to today outside of just adjusting for that increased demand. But of course, with industrial, as you suggest, it's not the hardest thing to build. It's relatively straightforward. And so you really got to think about replacement cost as you're entering these projects.

But clearly, as you get more infill and some of the deals we've done have been relatively infill, those costs are still pretty high. And we're active on the equity side of our business in the industrial sector. We clearly went on some and within KREF, and it's really -- the demand we're seeing there is quite strong. And the lease-up rates are very good. So I think it's a sector we'll continue to focus on. We like and hopefully we could do more of.

On the Portland loan, is one of the options, potentially a joint venture in which KREF takes an equity stake in a redevelopment of the building or otherwise, bring then one of KKR's vehicles to assume some kind of interest?

Yes. I don't think we've -- we haven't ruled out any options at this point in time. And it's going to be a redevelopment of some sort. And the question is, who's going to be a part of that. So that's a possibility for us. I don't think we would partner up with other capital within KKR from a conflicts perspective. But I think there's a lot of interest from developers, large national plan developers in the market that -- for that particular site, that particular location. So we'll see how it plays forward. But at this point in time, we're trying to keep all our options available.

Okay. And just last question, something I've asked some of your peers, and a couple of them have been kind enough to provide the answer. Do you have the percentage of loans in the portfolio that to date have been modified since the onset of the pandemic? And I know the sector has a habit of giving this interest collections percentage. But if you modify a loan, then you could be able to maintain a high percent of interest collection. So do you know also the percentage interest collections relative to, say, a snapshot of the pre-pandemic portfolio, just how that 98% compares to what it would have been previous?

Jade, it's Patrick. Let me take that one. So I think in terms of modifications, I think the watch list page is a good place to look at. In reality, there's only been a handful of loans that I would think about as kind of material modifications.

Modifications are a part of business plans, right. As things are progressing, whether you're in a pandemic or not. But I think as we've talked about in the past, where I would sort of focus on is, what's happened, certainly on the interest rate side, there's been no cuts in interest rates on any of our loans. There has been, as we've talked about on the hotel side, 2 loans where we did partial deferments of interest or partial forbearances. Matt mentioned on one of those, we've subsequent to year-end have done another modification to that loan. But this modification brought the deferred interest current, set up a carrier reserve and had a partial pay down on the loan. So we would consider that a pretty major modification, but clearly, I don't think that's the area that you're sort of focused on.

And so when I think about that 98% number, what it really is, is the 2 loans that are on nonaccrual. We've talked about both of those, the mezzanine -- small mezzanine loan and then the Portland retail asset. So even when you look at our percentages kind of in the fourth quarter and in the first quarter number that we quoted, there wasn't a change in sort of the performance. It's a change of the denominator. But it's still those 2 same loans that are on nonaccrual. Everything else is paying current. And no other loan has been sort of reduced from an interest rate standpoint. So I think that's really what we think about when we think about modifications. And obviously, we think that's pretty strong track record.

Yes. I appreciate the clarity there. Definitely sounds like the portfolio is performing well and certainly on a relative basis also.

Lastly, with the comment around scarce capital and the company's -- the management team's historical experience that in the CMBS space, wondering if you could comment as to, one, whether the sale of the CMBS portfolio, that equity interest, I think it's $34 million or so, could be a source of funds. Although that's modest, but also whether you would consider forming a CMBS conduit. Clearly, the company has a lot of multifamily. And I think that collateral is probably in high demand in the CMBS market, the GSEs are highly competitive, but that could also be contributed to CMBS securitizations. Would you consider -- or are you considering formation of a CMBS conduit to be able to provide longer duration loans on stabilized assets, and that would also supplement the company's earnings stream?

Jade, from a capital perspective, we obviously have an interest set of fund that we manage that invests in CMBS. It's a small position. So I don't think about that -- but you mentioned as like, really a source of capital for us if we were to sell that. I think we'll continue to be invested in that fund. And obviously, there's different liquidity in investing in a fund than directly in security. So as it relates to the conduit origination business, it's not something we're contemplating currently. So there's been a lot of changes in that market. We're a very large investor in that space, but still think that the best way to play that is on the investing side as opposed to origination and contribution of loans to deals.

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

Hi, everyone. Thank you for joining our call today. Feel free to reach out to me or the team with any follow-ups. Thanks.

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