Sasha Hamilton – Investor Relations Chris Lee – Co-Chief Executive Officer Matt Salem – Co-Chief Executive Officer Patrick Mattson – Chief Operating Officer Mostafa Nagaty – Chief Financial Officer.

Stephen Laws – Raymond James Jade Rahmani – KBW Steve Delaney – JMP Securities Rick Shane – JPMorgan Ben Zucker – BTIG.

Good morning, and welcome to the KKR Real Estate Finance Trust Inc. First Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Sasha Hamilton. Please go ahead..

Thank you. Welcome to the KKR Real Estate Finance Trust earnings call for the first quarter 2018. I'm joined today by Chris Lee and Matt Salem, our Co-CEOs; Patrick Mattson, our COO; and Mostafa Nagaty, our CFO.

Before we begin, 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 should not guarantee future events or performance. Please refer to our most recently filed 10-K for cautionary factors related to these statements. A quick recap of our results before I turn things over to Chris.

For the first quarter of 2018, our GAAP net income was $23.3 million or $0.44 per share, up 37% from the fourth quarter 2017. Net core earnings were $18.9 million or $0.35 per share, up 10%, and book value per share as of March 31 was $19.79, up $0.06. In April, we paid a dividend of $0.40 per share with respect to the first quarter.

Due to the timing and magnitude of our recent CMBS B-Piece sale, which Matt will discuss in more detail shortly, we accelerated the dividend declaration for the second quarter. As you saw earlier this week, we declared a dividend of $0.43 per share with respect to the second quarter.

The dividend will be paid on July 13 to shareholders of record on June 29. Based on yesterday's closing stock price, the dividend reflects an annualized yield of 8.6%. In the third quarter, we expect to resume our regular dividend declaration cadence. Our board will meet in the September and will make announcement shortly thereafter.

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

Thank you, Sasha. Good morning, and thank you for joining us for our first quarter earnings call. This month marks the one-year anniversary since our IPO. We've been extremely active since then. Since March 31, 2017, through today, we've originated $2 billion of senior floating-rate loans.

We increased our total funded portfolio by 149% to $2.7 billion from $1.1 billion, and we've increased our funding capacity by $725 million to $2.2 billion. On our last earnings call, we discussed a few key initiatives we are focused on in 2018.

First, we've continued to deploy capital prudently with a focus on quality sponsors, liquid real estate market and prudent business plans. The first four months of the year have been strong from a capital deployment perspective. In the first quarter, we originated $411 million of floating-rate senior loans.

Post quarter-end, we closed a $350 million loan and have built up a robust pipeline of another $657 million of loans currently under exclusivity that we expect to close in the coming months subject to customary closing conditions.

Despite increased competition, we believe that our improved market presence, brand awareness and competitive cost of capital are allowing us to originate high-quality loans.

We're in our fourth year of operations, and the positive feedback on our process and our commitment to providing borrowers with a first-class experience is resonating in the market and leading to an increased conversion rate for us on competitive transactions.

We are encouraged by our recent deals and current pipeline, and we feel confident in our ability to secure our share of the highest-quality transition lending opportunities. In April, we executed an opportunistic sale of the majority of our CMBS B-Piece investments.

This is a great example of us taking advantage of attractive market conditions to accretively sell the portfolio, to increase our book value per share, simplify our balance sheet, increase our floating-rate exposure and increase our earnings power. One thing we cannot overemphasize is the value of the K in KREF.

Our affiliation with KKR, one of the largest global asset managers with over $176 billion in assets under management as of March 31, provides us with several competitive advantages.

We have talked about the sourcing and underwriting synergies with our broader real estate platform, but KKR's broader influence on our access to the capital markets is a true differentiator for us. Another initiative we discussed last quarter was our work with KKR Capital Markets to improve the cost and structure of our liabilities.

We've made significant progress on this front. And in April, we entered into a $400 million term loan financing that provides us matched-term financing on a non-mark-to-market basis and a nonrecourse basis. The financing facility does two things for us.

First, the attractive cost allows us to compete for the highest quality lending opportunities for better credits for the Company while still delivering an attractive return.

Second, the liability structure is more durable from a mark-to-market perspective and improves our ability to manage risk and liquidity on the balance sheet during more challenging market cycles. Patrick will elaborate more later on the call. This new financing facility is a great example of the power of being integrated with a firm like KKR.

We were able to take advantage of the one firm culture to innovate and create positive economic outcomes for KREF and our shareholders. This current activity level plus our near-term pipeline puts us on pace to be substantially fully deployed by the end of the second quarter.

Including the recent CMBS sale, we have a lot more clarity on our 2018 dividend. As Sasha mentioned, we have increased our quarterly dividend to $0.43 per share, representing an 8.6% yield on yesterday's close. We believe this is an attractive and competitive risk-adjusted yield in today's rate environment.

Lastly, I would like to officially introduce our new Chief Financial Officer, Mostafa Nagaty, to you. Mostafa joined us March 27 and has a strong background in managing the financials and operations of mortgage REITs.

We're extremely excited to add his wealth of experience to our team and look forward to many of you meeting with him in the coming months. In summary, we've had a strong start to the year and are pleased with our origination activity, our market positioning and the progress we're making on the right side of the balance sheet.

We look forward to continuing this momentum for the remainder of 2018. With that, I'll turn it over to Matt..

Thanks, Chris, and good morning, everyone. I'll start by discussing our recent investments. In the first quarter, we originated five floating-rate senior loans totaling $411 million.

These loans are collateralized by two Class A multifamily properties in New York, a Class B+ multifamily property in Orlando and two Class A office properties, one located in St. Paul, Minnesota and the other in Seattle. The weighted average LTV and coupon for these loans are 64% and LIBOR plus 3.1%, respectively.

And on a levered basis, the five loans have a weighted average underwritten IRR of 13% and spot LIBOR, which is consistent with our existing portfolio. Our strong origination pace has continued into the second quarter. We have already closed a $350 million senior loan secured by a Class B office and warehouse property in Long Island City.

This loan has an LTV of 71% and a coupon of LIBOR plus 3.25%. The property is 71% occupied on a long-term lease. This origination is KREF's largest to date and demonstrates the depth of our relationships with high-quality, well-capitalized sponsors operating in the largest, most liquid markets.

We have made significant progress in enhancing our brand awareness and building relationships with existing and new borrowers. And our ability to expand these relationships has increased our origination pace.

In the last 12 months ended May 10, 2018, we originated $1.8 billion of senior loans, a 79% increase over the same period ended May 10, 2017 and a 20% increase over full year 2017 originations. Our forward pipeline is particularly strong with five loans totaling approximately $657 million under exclusivity to close over the next few months.

As always, these are subject to customary closing conditions. This pipeline is driven by existing relationships as four of the five loans are to repeat borrowers. Borrower experience is important in transitional lending. We pride ourselves on being responsive and providing high-quality service.

Our ability to convert existing borrowers to repeat borrowers speaks volumes about our team and process. In terms of repayments in the quarter, we received a $33 million repayment of a mezzanine loan secured by a hotel property. As a reminder, our portfolio has a weighted average seasoning of only 11 months.

So while we will continue to see periodic repayments, we do not expect to see more consistent repayments until 2019. Turning to our portfolio. As of March 31, we had a funded portfolio totaling $2.5 billion with another $329 million of future funding obligations. 100% of our loans are performing, and our securities portfolio is performing as expected.

The portfolio is 93% invested in senior loans and is diversified both geographically and across property types. The three largest exposures by property type are 41% office, 33% multifamily and 11% retail. Also of note, our hotel exposure is less than 1%. We continue to concentrate on the multifamily and office property types.

We are focused on these because of their short-term, light transitional business plans. To illustrate this point further, as of quarter-end, the occupancy of the office properties in our portfolio was 69%, which creates in-place cash flow and the possibility for near-term stabilization.

We are focused on creating a defensively positioned portfolio, and we will continue to target the highest-quality opportunities, trading incremental yield for credit quality. One final thing to note on the portfolio. As Chris mentioned, in April, we sold the majority of our CMBS B-Piece portfolio for net proceeds of approximately $113 million.

The sale represents the exit from four of our five B-Piece investments and accounts for 88% of the total B-Piece portfolio's market value as of March 1 – or, excuse me, as of March 31. We held these securities at a fair market value at year-end of $100 million.

We recorded a $5 million unrealized gain in the first quarter and an additional net gain of $7 million in the second quarter for a total of $12 million year-to-date. Our B-Piece portfolio has been an excellent investment. For the investments exited to date, we have generated a weighted average IRR of 18%.

We are pleased with the outcome of this sale and the positive economic impact for the company and our shareholders. This sale is going to increase our book value per share and will simplify our balance sheet.

We will continue to invest in B-Pieces through our commitment to RECOP, and we intend to opportunistically invest in CMBS when the risk-adjusted return and relative value is favorable. In summary, we made good progress since the start of the year.

We're in line with our target pace of originations with approximately $1.4 billion of loans closed or pending closing as of today, and we are pleased with the quality and performance of the portfolio. Now I'll turn the call over to Patrick..

Thank you, Matt, and good morning, everyone. Our portfolio, which totaled $2.5 billion at the end of the quarter, has a weighted average risk rating of 2.9 on a five-point scale, consistent with the prior quarter.

Additionally, as of quarter-end, 94% of the portfolio was invested in LIBOR-based, floating-rate loans, which positions us well to benefit from increases in short-term interest rates. Looking at the right-hand side of the balance sheet, we continue to enhance our liquidity.

We've been working closely with KKR Capital Markets to explore a number of funding options. With the help of their expertise in relationships, we entered into a $400 million term loan financing facility in April.

This facility is a non-mark-to-market, matched term and nonrecourse for the company and allows for advanced rates ranging from 75% to 85% depending on the underlying collateral.

We believe securing this differentiated facility creates a very positive outcome for the company, allowing us to de-risk the balance sheet and continue to compete for high-quality originations with lower loan spreads while still maintaining attractive ROEs.

We are focused on increasing the size of this facility and continue to work with KKR Capital Markets to create additional non-mark-to-market, matched-term financing capacity. We'll keep you updated as we make progress. Turning to leverage.

We closed the quarter with a debt to equity ratio of 1.2 times, and we continue to releverage the portfolio as we fund new originations. We generally target a three times leverage ratio on new senior loans and a slightly higher ratio on financing on non-mark-to-market basis.

So we expect the leverage ratio to further increase over time to a level closer to two times but remain at a prudent level. One other note on the balance sheet. As a reminder, we have a $100 million share repurchase authorization in place, of which $50 million was available to repurchase stock when the market price traded below book value.

Year-to-date, we purchased 662,000 shares at a weighted average price of $19.53 per share, leaving approximately $37 million in place for future stock repurchases below book value.

The current repurchase program was set to expire in June, and our board recently authorized a new, identical $100 million program beginning next month for our duration of one year. In summary, we had another strong quarter and a solid start to the second quarter. Our origination pace remains robust. Our portfolio is performing.

And we made significant progress creating differentiated financing for the company. Thank you again for joining us today. And now we're happy to take your questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Stephen Laws of Raymond James..

Hi, good morning. First, I wanted to touch on asset yields and what you're seeing in the market. And maybe, Chris and Matt, if we could get some comments around what do you think is competition driven and what's mix driven. It looks like new investments for Q1 were at L plus 310 versus L plus 400 in Q4.

Of course, Q1 seemed to be mainly refinances, including a little LTV multifamily. I know Q4, you had an origination of – I believe it was an – some type of acquisition financing.

So can you maybe talk about the changes you're seeing in asset yields and what's competition driven and what's been mix driven?.

Sure, Stephen. It's Matt, and thanks for – appreciate you joining the call. I would say a little bit of it is mix driven. But let me just frame the market and where we see it today, which I think would be helpful. Now we would characterize the market as competitive, as we mentioned on the previous statements.

We've seen another round of spread tightening this year. For the highest-quality and lowest-risk opportunities within the transitional loan segment, the market is now pricing in the mid-200s to low 300s over LIBOR.

That's approximately 25 to 50 basis points tighter over the last handful of months, and this has been offset by more efficient financing as well as an increase in LIBOR of over 30 basis points since the beginning of the year. And then when you look at the supply side of the equation, I'd say our pipeline is very robust.

And as you can see, we feel like we're on target for our annual origination volume. And then if you look at our ability to convert clients from existing to repeat, I think we've really demonstrated the ability to create these new opportunities from our existing client base..

Great. And thinking about ROEs, the other side of the coin from here is financing costs. It looks like the facilities declined about seven basis points from your average cost.

Where do you think those can go? And did you provide – did I miss it? Did you provide a cost of financing on the new term loan? Or how should we think about that from a financing cost standpoint as we build out our models?.

It's Patrick. Thanks for the question. So with regard to cost, obviously, on the repo side, as you saw, there's been some decrease quarter-over-quarter, and we're going to continue to focus on driving that cost down over time.

On the facility itself, we didn't give a specific number, but that's pricing in the mid-100s, to give you a sense of the type of cost that we have. And then obviously, what we've also seen within the A note market is further compression as well.

And so we expect that many of the types of loans that we're originating in the A-node market will have appetite somewhere in the 100s..

Great. And lastly, thinking about the origination pipeline, seems like you've got a number of things queued up to date, I believe all the – all in the U.S. Is there any thought of looking at the U.K.? Or any opportunities outside of the U.S.

where you may view risk-adjusted returns as more attractive? Or would you expect your focus to remain here domestically?.

Sure, thanks, Stephen. It's Matt again. I would say, at this point, the U.S. is such a large investable market that we're focused solely in the U.S. at this point..

Great. Thanks for taking my questions..

The next question will be from Jade Rahmani with KBW..

Thanks.

With the multifamily concentration in the portfolio, is there some kind of opportunity for a joint venture with someone that has a GSE license to do – to capture some of the refinance business once those assets hit stabilization?.

It's Chris. We don't love that strategy as much. I think what we're really focused on are a lot of the highest-quality assets that are in lease-up. And our belief is that the best risk-adjusted opportunities tend to be in the larger loan size there. So we don't see any real benefit of participating in a joint venture.

And I think the last part is we have pretty robust sourcing channels there. So we wouldn't want to be in a situation where we're sharing economics and not feeling that we're getting a ton of benefit for that..

Okay. In April, the press release on those four loan originations had an average coupon of, I think, around L plus 3%.

Could you walk us through the math that gets to your 13.4% IRR that you cited? Was that on a forward LIBOR basis? And what kind of leverage were you assuming?.

It's Patrick. So with regard to those assets, a couple of things. One, it's reflective of our new facility. As we've talked about, the range on advance rates vary from 75% to 85%. And as indicated on the prior question, that's priced in the mid-100s. So that is part of the driver of that return..

Okay. And would you say that the spreads in that press release are indicated – indicative of where the current market is given the types of levered returns that, that funds are shooting for? After fees, those spreads would seem to be representative of the current market..

It's Matt. I mean, I think that our best indication of where spreads are, or what I mentioned to Stephen earlier, were really the highest-quality opportunities for very light transitional pricing in the mid-200s. And that range is all the way to the low 300s. And so that's really where we see the market today, and that's where we're participating.

And I think if you look at that press release, you can see that we can still generate attractive returns on those opportunities given some of the financing that we have in place. And then just one follow-up because I know you mentioned it to the question Patrick answered. Those are based on spot LIBOR, those returns..

Okay.

Lastly, do you have a book value estimate pro forma for the 2Q gain?.

No, we – It's Chris. We don't provide that estimate, but we try to give as much detail in the CMBS press release around that gain. And I think you might be able to extrapolate from how much of that we took in the first quarter relative to what we indicated in the total gain.

But we don't have an estimate given we have so much activity happening intraquarter..

Thanks for taking the questions..

The next question will be from Steve Delaney with JMP Securities..

Hey, good morning everyone and congratulations on your CMBS trade. Very timely. I guess the first thing I want to ask about, Chris, you implied that you thought you'd be substantially fully deployed at June 30. So leverage, all-in, with structured loans, I think, was 1.3 at March 31.

Give us a sense for what that fully deployed would have – implies in terms of debt-to-equity. If you could give us a range of kind of where you see it maxing out..

Yes, it's Patrick. On the leverage level, we expect that we're going to be closer to two times on a debt-to-equity ratio. On kind of a look-through kind of fully levered basis over time, we expect to approach closer to three times..

Wow, okay. And you guys had thus far, I note, have seen a couple of CLOs in recent months. You guys don't have a CLO in place yet.

Would that be – looking forward, would that be one of those tools, Patrick, that could push you? If you can get four turns on a CLO, would that help move you towards three from two?.

I think, on the CLO front, absolutely. I mean, we actively and proactively sort of track that market. So as we think about all of the financing options available to us currently, CLO is in that mix. And as we've said, our main focus really is to continue to produce matched-term, non-mark-to-market financing. And obviously, CLO is in that bucket..

Okay, great. And just one final thing. You guys – thanks for the detail on your credit ratings in the Q and your detail on your loan in your slide deck. You obviously have only one four-rated loan. So props for that. Just curious if you can give us any quick update on that Chicago retail property. And I'd like to kind of understand why it is a four.

And obviously, an 82% LTV catches one's eye. So any color you could give us there would be helpful..

It's Chris again. Yes, that loan was originated in 2015 at a higher LTV to begin with, and we think that, that LTV moved into the low 80s based on what's happening in retail. That being said, it is 100% leased to two credit tenants. Those credit tenants have lease expirations beyond the expiration of our loan term. We have a very strong sponsor there.

It is a very well-located asset on North Michigan Avenue. So we feel good about the underlying operating fundamentals there. But just given where the LTV is, we rated it a four, and that's the reason..

Understood. Thanks for the comments..

The next question will be from Rick Shane with JPMorgan..

Hey guys, thanks for taking my questions this morning. A couple of things. You point out the LIBOR spreads for the quarter of the newly originated loans as being about 3.1%. Obviously, that's pretty consistent with what we're seeing in terms of the cascade in the industry. I am curious where you see that in a historical context.

And then the second is sort of following up on Steve's question. I take the term facility that you did this quarter with a non-mark-to-market and the high advance rate as sort of be an alternative to a CLO.

I'm curious if there's a difference in the investor base, and the reason ultimately you'd consider a CLO would be to expand the number of investors that you have funding that.

And then finally, related to that, is the advantage of the facility that you created low restructuring costs? Or is there something all in that we need to think about in addition to that sort of L plus 1.5% that you laid out?.

Yes, thanks, Rick. It's Chris. I'm going to take the first part of that question and the hand over to Patrick for the second part. On relative spread, we still think these spreads are quite wide on a historical basis, especially if you compare them to what we have seen in the prior peak back in 2007.

I think, for example, when you had the CMBS technology on the floating-rate side in 2006, 2007, you could borrow 75% loan-to-value on transitional loans in the low 100s over LIBOR.

AAA spreads were in the 20 to 30 basis point range, and you had a very, very deep bid for the bottom of those deals, the mezz or – et cetera, that would then go – get put into CDOs.

We do not see that type of leverage in the system, and we have seen these spreads that we're talking about that Matt mentioned earlier in the 250 to 300-over range are still quite wide on a historical basis.

And when you think about the all-in cost of that financing in a 2% LIBOR environment, that is still a healthy cost of capital for, call it, the zero to, call it 70% of the capital structure.

So we still feel like this is an attractive risk-adjusted return relative to what we've seen historically, but just, of course, a little bit different than what we saw 18 months ago in the space..

Rick, patrick. With regard to the questions on the CLO, so I think there are – your questions are sort of tied together in some ways. On the investor base question, certainly, obviously, a CLO kind of broadens the investor base, and we'll continue to kind of look at that market as an alternative.

And obviously, we're focused on really just generating the most efficient cost of financing for the company. With regard to the lower structural costs, certainly, with the kind of facility that we did, you don't have the broad-based marketing effort that's required to conduct and to execute on a CLO. And certainly, that's a savings for us..

Got it.

And when we think about any expenses that need to be amortized associated with this, how much should we be adding in just so we can sort of dial in how we price this?.

I think we disclosed in the subsequent events some of the fees that were associated with the facility. So that's a good proxy..

Okay, great. Thank you guys.

Our next question comes from Ben Zucker of BTIG..

Good morning and thanks for taking my questions. I know you guys target the large-balance loan segment. But that loan you originated post quarter-end is quite big compared to the rest of your portfolio.

I was just curious, do you intend to hold that on your balance sheet? Or do you think you might look to syndicate a portion of that off?.

It's Matt, and thanks for joining this morning. At this point, we intend to keep it. We have been increasing our average loan size within the portfolio. This particular loan is to a very high-quality sponsor. It's well leased, long-term lease. So at this point, I think we'd like to keep it all..

Great. And I guess following up on Jade's question, could we just quickly review the GAAP and core accounting for that CMBS sale in 2Q? For GAAP purposes, I imagine that you'll have a good realized gain of $11.9 million.

But should we also expect an unrealized loss of $5.4 million so that the net benefit in 2Q is about $6.5 million?.

No, this is Mostafa Nagaty. So I think for the CMBS for Q1 we have an unrealized gain taken from CMBS of $5.4 million. Post quarter in Q2 we have a net, or on a net-net basis $11.9 million gain. That includes the $5.4 million unrealized in Q1..

Got you. Okay, that makes sense.

And then lastly, I'm sure this is in the Q, but would you happen to know offhand what percent of your portfolio is currently subject to prepayment yield maintenance? Or maybe asked the other way, what percentage can repay without penalty? I think that's a nice piece of information to have in conjunction with the fully extended maturity you guys show on Slide 11..

We – this is Chris. We can provide that in a future submit – our weighted average seasoning is about 11 months on the portfolio. So a lot of the existing loans are still subject to spread maintenance or some sort of penalty on prepay. But we can provide that detail. We don't have that number in front of us right now..

Okay. But that's helpful to still to know that most of the book is still protected on a prepayment basis. And nice job continuing to scale the company..

Thank you..

[Operator Instructions] The next question is a follow-up from Jade Rahmani with KBW..

The term loan facility, I think there's a 75 basis point structuring fee.

Is that going to be amortized over the full five-year term?.

That fee is going to be amortized consistent with the way that we would amortize costs on the loans, which is typically to the initial term of the underlying loans..

Okay.

So closer to three years?.

That's correct..

And can you just give a little color on the Long Island City loan, just what the current occupancy is, what the strategy is just given the size of that loan?.

Sure. It's Matt. I think I touched on this in the prepared remarks. But it's a pretty simple business plan. The property is well leased to a tenant, and that represents about 71% of the property on a long-term lease.

And there's a twofold business plan to renovate their space and then also renovate the remaining vacancy, the approximately 30% vacancy, and then lease that up. So consistent with a lot of our other loans, we've got a well-leased building to start with, with a value-add plan in terms of lease the remaining vacancy.

And again, in this case, it's around 30%..

And will the current tenant, 71%, vacate the – that space?.

No. I mean, a part of their space is under renovation. So I think at times, we'll have some vacancy within floor plan, but we'll have occupancy as well..

Okay. Thanks very much..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Sasha Hamilton for any closing remarks..

Thank you, everyone, again for joining the call. If you have any follow-up questions, feel free to follow up with us directly. Thanks..

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