KKR Real Estate Finance Trust Inc

NYSE:KREF

Earnings Call Analysis

KREF Q3 2023: Solid Performance Amid High Liquidity

In Q3 2023, KREF's GAAP net income hit $21.4 million, with diluted earnings per share at $0.31. Distributable earnings were $17.4 million or $0.25 per share, including a $15 million write-off impacting earnings by $0.22 per share. The pre-loss distributable earnings were at $0.47 per share compared to a $0.43 per share dividend paid. Book value per share gently fell to $16.29, marking a less than 1% quarterly drop. Liquidity-wise, KREF maintains a robust position with $716 million available, including cash on hand and a corporate revolver. There were no new corporate debt or final facility maturities due until Q4 2025. Repayments amounted to $152 million across four loans this quarter, and multifamily assets showed strong performance with average rent increase of 4.1%. The company signaled expectations for limited loan repayments in 2023 but increased repayments over future fundings in 2024.

Third Quarter Financials Show Resilience Amid Interest Rate Changes

KKR Real Estate Finance Trust reported a solid third quarter in 2023, with a GAAP net income of $21.4 million or $0.31 per diluted share, despite a $15 million write-off. The company displayed its ability to generate steady returns by posting distributable earnings of $17.4 million or $0.25 per share, which surpassed the dividend payment of $0.43 per share when realized losses are excluded.

Adapting to a High Interest Rate Environment

The rising interest rate environment has been favorable for KKR Real Estate Finance Trust, averaging distributable earnings of $0.48 per quarter throughout 2023, excluding realized losses. The company is malleable and has strategized to thrive amidst increasing interest rates which now seem to be the long-term market expectation. With savvy liquidity management and proactive asset oversight, KREF ended the quarter with $716 million in available funds, bolstering its resilience against market volatilities.

Robust Liquidity and Non-Mark-to-Market Financing

KREF's strategy includes maintaining robust liquidity and securing financing that is insulated from market fluctuations. A substantial 76% of their secured financing is non-mark-to-market, deferring corporate debt or facility maturities until the fourth quarter of 2025. They exhibited proactive management by maintaining a stable $7.9 billion portfolio and successfully handling office loan repayments. These strategic moves showcase KREF's strong positioning in the face of market changes and its focus on safeguarding investor value.

Portfolio Management and Credit Enhancement Measures

A notable portfolio action this quarter was the restructuring of a risk-rated 4 office property loan in Chicago, where proactive management increased the loan term and introduced new capital. This shows the company's capability to manage its portfolio actively, addressing potential issues and strengthening the credit profile of its loans, as evidenced by the decreased CECL allowance and loan risk rating improvements.

Proactive Approach to Maximizing Shareholder Value

KREF's focus on resolving watch list loans is aimed at maximizing shareholder returns. Whether via loan modifications or strategic property management, the company's potential maneuvers with assets like the Mountain View office loan and the Philadelphia office portfolio demonstrate their commitment to effective resolution strategies and value optimization.

Optimistic Outlook on Loan Performance

Positive leasing developments led to notable occupancy rates and advantageous leasing terms, paving the way for possible risk-rating upgrades in the upcoming quarter. This suggests an upward momentum in KREF's loan portfolio performance and demonstrates the company's successful asset management capabilities.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to the KKR Real Estate Finance Trust Incorporated Third Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.I would now like to turn the conference over to Jack Switala. Please go ahead.

[Jack Switala, executive]

Great. Thanks operator, and welcome to the KKR Real Estate Finance Trust earnings call for the third quarter of 2023. As the operator mentioned, this is Jack Switala. Today, 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-Q for cautionary factors related to these statements.Before I turn the call over to Matt, I'll provide a brief recap of our results. For the third quarter of 2023, we reported GAAP net income of $21.4 million or $0.31 per diluted share. Distributable earnings this quarter were $17.4 million or $0.25 per share, including a write-off of $15 million or $0.22 per share.Distributable earnings prior to realized losses were $0.47 per share relative to our Q3 $0.43 per share dividend. Book value per share as of September 30, 2023, was $16.29, a decline of less than 1% quarter-over-quarter. Our CECL allowance decreased to $3.21 per share from $3.30 per share of last quarter. Finally, in mid-October, we paid a cash dividend of $0.43 per common share with respect to the third quarter.With that, I'd now like to turn the call over to Matt.

[Matthew Salem, executive]

Thanks, Jack. Good morning and thank you for joining us today. The portfolio continues to benefit from a higher interest rate environment. KREF averaged run rate distributable earnings of $0.48 per quarter throughout 2023, excluding realized losses. KREF benefits from KKR's large real estate team with access to real-time market data across our $64 billion equity and credit portfolio.In addition, KKR has a dedicated, rated special servicer and asset management platform called K-Star. Started in 2022, K-Star has over 45 people and $40 billion of special servicing rights, which enhances our market connectivity, gives us real-time performance information, and enhances our ability to offer differentiated, high-quality service to our borrowers and to drive asset management outcomes.The rate complex continues to evolve, with higher for longer now the predominant theory, and the 10-year treasury closing in on 5% for the first time since 2007. This recent increase will likely lead to further declines in real estate values and create a more cautious market sentiment.Borrowers continue to feel pressure from higher carrying costs, including the need to purchase interest rate caps and near-term loan maturities. However, this is not a surprise for us. We have positioned KREF to manage this market environment with proactive asset management, market-leading levels of liquidity and diverse, largely non-mark-to-market financing.With the assistance of KKR Capital Markets, we have built high levels of liquidity and ended the quarter with $716 million of availability, including $108 million of cash on hand and $500 million of corporate revolver capacity. 76% of our secured financing as of September 30th was fully non-mark-to-market, with the remaining balance mark-to-credit only.We have succeeded in terming out our debt and we have no corporate debt or final facility maturities due until Q4 of 2025. The composition of KREF's financing structure remains a true differentiator. We continue to proactively manage our current portfolio of $7.9 billion, which remained effectively flat quarter-over-quarter. We received repayments of $152 million in the quarter across 4 loans, the majority of which was related to office paydowns.Consistent with what we have previously stated, we expect limited repayments for the remainder of 2023, although we do expect repayments to exceed future fundings through 2024. As we determine the run rate earnings potential of the business into 2024, the main drivers will be interest rates, portfolio performance and the ability to unlock equity held in our risk-rated 5 assets.At quarter end, multifamily remains our largest segment by property type. Our multifamily portfolio has performed well, with weighted average rent increases of 4.1% year-over-year, weighted average occupancy of 91% and median year built on the multifamily portfolio of 2015. Office assets represent 25% of KREF's outstanding portfolio. And as mentioned last quarter, we feel that we have identified the potential office issues within our watch list and do not anticipate further negative ratings migrations to the watch list from the office sector.Furthermore, in the third quarter, we did not downgrade any loans across the portfolio, while we amended the risk ratings of 2 of our office loans higher. We raised our Chicago loan that had been on the watch list to a risk rating of 3 following a modification, another example of our proactive approach to asset management. We also upgraded our Oakland, California office loan to a risk rating of 2 as we received a large partial paydown of approximately 68%. We expect full repayment of the Oakland office loan in mid-2024.With that, I'll turn the call over to Patrick.

[W. Mattson, executive]

Thank you, Matt. Good morning, everyone. I'll begin with updates to our CECL allowance and watch list, followed by our efforts on the capital and liquidity front. This quarter, there was a $6 million decrease in our CECL allowance for a total of $222 million, or 293 basis points on our loan principal balance. The decrease in our allowance was partially a result of a subordinated note write-off in connection with an office loan that we restructured.We continue to proactively manage the portfolio. And to that end, in September, KREF closed on a modification of a $118 million senior loan backed by an office property located in Chicago, previously risk rated 4. As a part of this modification, the sponsor contributed $18.5 million of new capital, including a $15 million principal paydown of the senior loan.In connection with the principal reduction, we increased the loan term for an additional 5 years and agreed to subordinate $15 million to the prior loan balance to the new contributed capital and subsequently wrote off the subordinated loan. Following the modification, we upgraded the reduced senior loan of $88 million to a risk rating of 3 as of quarter end.Similar to last quarter, approximately 2/3 of our total CECL allowance is held against 3 5-rated loans. We continue to focus on solutions to efficiently resolve watch list loans while seeking to maximize shareholder value. Whether the best path leads to a loan modification or taking title and managing the property, we have the tools at our disposal to maximize outcomes across a host of scenarios.With this in mind, I'll provide a brief update to some of our watch list office loans. Regarding our Mountain View office loan, we continue to consider next steps for the asset, which may include taking ownership as we work with the sponsor on a transition plan, including exploring a path with a JV partner.As a reminder, this property is recently renovated, very high-quality Class-A office campus located in a more challenged leasing market. While precise timing is uncertain, we would anticipate transition to a new structure to be complete within the next couple of quarters.Regarding our $156 million Philadelphia office loan, the previously discussed short sale process for the entire portfolio did not result in a sale of the asset this quarter and so we provided the existing sponsor another short-term loan extension as we evaluate next steps. The loan is secured by a portfolio of 4 separate buildings totaling 711,000 square feet, including a 500-space parking garage and we are exploring parallel paths of taking ownership of one or more of the properties while continuing to explore individual asset sales. We will provide further updates to this process next quarter.Additionally, subsequent to quarter end, KREF finalized a modification on a risk-rated 4 $176 million Washington, D.C., loan, which included a $20 million partial paydown, an additional year of term, and spread reduction. Following some positive leasing momentum, the property is currently 92% leased with a weighted average lease term of 12.8 years. As a result of the paydown and recent leasing activity, we would anticipate a potential risk-rating upgrade during the fourth quarter.On the other risk-rated 4 Washington, D.C., office loan, with a current balance of $169 million, the property is now currently 88% leased following strong leasing activity this year. The sponsor is currently pursuing a recapitalization. Away from the watch list, our risk-rated 3 or better office portfolio, which equates to just under half of the outstanding principal balance of the office segment, continues to perform well and has attractive credit metrics.In aggregate, the 8 properties representing these underlying risk-rated 3 or better office properties are 90% leased with a weighted average debt yield of 9.5% and a median 8.2 years of weighted average lease term remaining. Consistent with the prior quarter, the average risk-rating of the portfolio was 3.2 and 85% of our portfolio is risk-rated 3 or better. Our portfolio is 99% floating rate and all of our floating rate assets and liabilities are benchmarked to SOFR. KREF has built a fortified liability structure with $8.9 billion of financing capacity and $2.7 billion under owned capacity.The portion of our non-mark-to-market capacity remains substantial at 76% and is diversified across 2 CRE CLOs and a number of matched term lending agreements and asset-specific financing structures as well as our corporate revolver. We continue to optimize our 2 CRE CLOs, reinvesting over $400 million of proceeds year-to-date on attractive financing terms. Excluding matched term secured financing, there are no corporate debt or final facility maturities until late 2025.KREF is well capitalized with a debt-to-equity ratio of 2.3x and a total look-through leverage of 4.1x as of quarter end. As of September 30, KREF had $108 million of cash and $500 million of corporate revolver capacity available. Our best-in-class non-mark-to-market financing and high levels of liquidity, coupled with our deep relationships with both our financing partners and borrowers, position KREF strongly for this dynamic CRE credit and interest rate environment.Thank you for joining us today. Now we're happy to take your questions.

[Operator]

[Operator Instructions] Today's first question comes from Sarah Barcomb with BTIG.

[Sarah Barcomb, analyst]

So you commented in the prepared remarks that approximately 2/3 of that total CECL reserve is allocated to those 3 5-rated office loans, pretty similar to last quarter. It looks like the reserve on those assets are still being triangulated with a cap rate of about 6.6% to 8.7% in the queue, whereas the implied cap rates in the equity markets for high-quality, stabilized office rates are north of 9% in some cases. So I'm just curious as to what's driving the reserves there, especially given that we haven't yet seen a resolution or a buyer come in for those assets that we might have expected as part of these results. Thanks for any comment there.

[Matthew Salem, executive]

Thanks, Sarah. It's Matt. I appreciate the question and you joining us today. Yes, I mean, obviously, there's a number of assumptions that are going into that, one of which is cap. There's lease-up assumptions as well. And then we're also looking at, when you think about some of these assets that are a little bit further down the road or have gone through some form of sales processes, we're actually looking at where things are pricing in the market around us or specifically for these assets. So when we look at those reserves, I think we still feel pretty good about the quantity of those reserves against those 5-rated loans when we factor in kind of all those different inputs at this point in time.

[Sarah Barcomb, analyst]

Okay. And then just another one for me. So excluding that $15 million loss on the Chicago asset that you talked about, earnings and cash flows comfortably covered the dividend this quarter. So with that in mind, are you thinking about a potential pivot to offense here, just given liquidity is looking pretty good? And at what point do you go out into the market and maybe start to take a look at sourcing high-coupon loans with any comment on sector interest there?And just given the equity markets are a bit tough right now, how are you thinking about sourcing capital? Are you comfortable with liquidity in place for offense versus defense? Is there any opportunity for KKR to come in for the REIT? Just curious on any comments there.

[Matthew Salem, executive]

Sure. Thanks, Sarah. It's Matt again. I'll try to -- I think there's a couple of questions embedded there. Let me try to answer those in totality. One, from just a liquidity perspective, which I think was towards the end of the questions, I think we feel really good about where we stand from a liquidity perspective. We addressed that in some of the call -- some of the remarks, prepared remarks on the call here. And we're still at pretty close to our highest levels of liquidity, so we'll continue to maintain that.From an offense-defense perspective, I still think we're in the maintain liquidity mode here. We want to understand what the market environment looks like. We want to see more velocity and repayments in our loan book. We want to see a return to normal across the broader real estate equity complex and the broader capital markets as well. We're obviously still in a very dynamic rate environment. The geopolitical landscape is quite volatile right now. So I'd say we're still in, let's continue to maintain this high level of liquidity.As we start to get into 2024, could you see that pivot? I think that's a potential for sure. We are anticipating more repayments in 2024 in our portfolio. And so if certainly if that starts to come to fruition and we start to see more velocity there, we would want to go out and redeploy that capital into the market. Away from KREF, as you well know, we're actively lending. We're actively lending across insurance capital, bank capital as well as debt fund capital. So we are actively pursuing the market.And it is a market where you just want to kind of keep it simple. So we're sticking to those on-theme property types that we all know, so multifamily and industrial and just trying to take advantage of not only the volatility I just described, but there's clearly some capital sources out of the market, namely U.S.-domiciled banks. So I think that's, to the extent we turned on KREF, we'd be pursuing some of those same type of themes into next year.

[Operator]

The next question comes from Stephen Laws with Raymond James.

[Stephen Laws, analyst]

Patrick, I appreciate the comments on the loans. I may have missed it, but could you give us an update on the Minneapolis office and what the outlook is for an option there?

[W. Mattson, executive]

Sure, Stephen. So we didn't have any comments specifically on that asset. Not too much to report from last quarter. As you know, we've done the modification. That asset on the new senior rate covers, we've got lease term in place for some considerable duration. And so -- and that loan's got term through 2025. So no real update. We continue to actively work on that asset, particularly just on around some of the leasing activity, but no sort of further updates on the market.

[Stephen Laws, analyst]

Great. And could you talk a little bit about the restructuring for the modification process? I think if I'm looking at my notes correctly, maybe one received a short-term extension, I think it was 3 years, though, maybe on the restructuring on the new senior. Can you talk about the considerations that go into how much additional duration you're willing to give, is it certain property types, certain borrowers, certain business plans? Can you maybe talk a little bit about how the modification and restructure discussions are going as you look at, what, 6 or 7 loans left to address?

[Matthew Salem, executive]

Sure, Stephen, it's Matt. I can jump in there. I would say, first of all, as you're highlighting, every modification or negotiation is very facts and circumstances dependent, and a lot of it is related to what your borrower is willing to do, obviously what the occupancy and cash flow is at a particular asset, et cetera. Where we've given longer term, that typically is around a more holistic solution where you've got a committed sponsor, there's typically dollars coming in the door to delever us at times in conjunction with us writing down or subordinating some of our mortgage to induce that payment and get to a capital structure that makes more sense and our sponsors can then lease -- have a lower basis and lease from that -- from that new basis.So that's really what it comes down to. When you see short-term extensions, that's just a way for us to try to effectuate a broader, either modification or loan sale or foreclosure or typically it's we're in the middle of just effectuating something else and we need a little bit more time. So I kind of think about it as the longer terms, or you've basically reached a resolution to that loan, at least in the intermediate term and then any of these short-term ones as you're trying to get to that moment in time.

[Operator]

The next question comes from Don Fandetti with Wells Fargo.

[Donald Fandetti, analyst]

Hey, Matt. Can you talk a little bit about your thoughts on multifamily credit? If the Fed has to raise, let's say, another 50 basis points, is that a manageable situation?

[Matthew Salem, executive]

Sure, Don. I appreciate the question. So I think that taking a step back even beyond multifamily, obviously this rate environment, as we mentioned in our prepared remarks is creating a lot of pressure on values, pressure on sponsors and you're going to need a lot of liquidity to carry these assets through. As it relates to multifamily specifically, in our own portfolio we haven't seen any real challenges yet from the rate environment on that component of the multifamily portfolio.We're watching it closely and certainly understand that the longer this period goes, obviously the more stress or pressure is in the system. But I'd say right now we're not really seeing it within our own portfolio. I do expect over time, taking a step out of KREF, but just broadly in the sector, for floating rate loans secured by multifamily to have some issues, especially if you have a sponsor that doesn't have a lot of liquidity to carry the asset through to a more or a lower interest rate environment.That being said, if you think about the fundamentals of multifamily away from value and away from cap rates, we're still seeing a lot of positive trends there. Occupancies remain high. We mentioned some of the rental increases year-over-year in our own portfolio within KREF. And obviously if you go back further over a longer period of time to like 2021, you're talking about high-teens-type of rental increases over that period. So we're still seeing positive fundamentals there.It's still a very liquid asset class. The agencies are heavily -- are still heavily involved from a financing perspective. So it's got a lot of positives, but clearly the rate environment is a headwind there. And we'll continue to watch our portfolio closely to see if it creates any potential noise there. But long-term value, I think we feel relatively good about that sector from our -- from a loan basis perspective.

[Operator]

The next question comes from Jade Rahmani with KBW.

[Jade Rahmani, analyst]

First one would be a broad question around cash flow from operations, the dividend as well as attentiveness to covenants. So in the quarter, cash flow did cover the dividend, which is a strong result. However, considering that the portfolio continues to shrink and with rates, there is clearly the risk of further credit migration. The average earning portfolio should be smaller for 2024 and therefore, it would follow that cash flow from operations would be pressured.So can you give any color as to your thinking around those 2 metrics? Secondly, as it relates to covenants, there's 2 main ones that come out. One is the interest coverage covenant, which is a function of interest income versus interest expense. And then the second would be liquidity as a percentage of loans. How are you feeling about adequacy on both of those?

[Matthew Salem, executive]

Got it. Thanks, Jade. It's Matt. I can jump in for the first one, and then maybe Patrick can cover the second questions around the covenant. I think from a dividend perspective, like you're highlighting some of the things that we highlighted in our own commentary, just about what some of the big drivers are going to be as we think about the go forward and over the next handful of quarters.Nothing has really changed in terms of how we evaluate that dividend. And the Board makes a decision every quarter. And we're really coming at it from a run rate operating earnings perspective, as you're identifying and not really from like a liquidity perspective. So as we start to go down the road here and understand what the market environment looks like, then we'll make a decision that point in time.But this is a very difficult market to be projecting that far out in the future in terms of what things may or may not look like. So we'll take a quarter-to-quarter and the Board will make that decision.

[W. Mattson, executive]

Jade, this is Patrick, and I'll follow up on the covenant question. So you asked the question specifically with regard to interest coverage. That's something that we've been monitoring, frankly, the whole market's been monitoring because it's so affected by the increase in SOFR. It's just math. At some point, that coverage becomes sort of tighter. But we did proactively this quarter reduce that covenant from 1.5 to 1.4x. We would have still cleared the covenant this quarter without that adjustment.But I think just an example of us being sort of proactive around the covenants. And that went smoothly with all of our financing sort of partners. With regard to the other covenants, whether it be net worth or liquidity, as we've indicated in our prepared remarks this quarter and past quarters, we feel really good on the liquidity side. And so I don't feel challenged on either of those covenants. So really interest coverage was the one that was most in focus. And we made a adjustment this past quarter just to give us further breathing room.

[Jade Rahmani, analyst]

The follow-up to Don's question about multifamily, do you know what the in-place debt yield is? Because the occupancy stats you cited and rent growth stats are very strong. So I'd assume that it's close to a stabilized debt yield. What's the current debt yield?

[Matthew Salem, executive]

I don't have that data by fingertips. We can follow up with you offline on that. But there's still a -- I mean, keep in mind, there's still a range there in terms of where we are in the different stages of the business plan. We obviously leased out some new loan -- I mean, loans on some newer assets that are still in lease-up. And then there's a handful of assets that have renovation programs and kind of upgrades going on as well.So these are still in transition in terms of what we think about as, like, fully stabilized cash flows, debt yield and assets. But we could follow up.

[Operator]

The next question comes from Rick Shane with JPMorgan.

[Richard Shane, analyst]

I'd love to talk a little bit about Mountain View in Philadelphia. Incrementally, it sounds like what's changed at Mountain View is still considering the possibility of taking ownership, but perhaps doing it in JV structure. And Philadelphia sounds like the sale fell through. And now you're adding the possibility of taking ownership for at least portions of that, those properties as well.I'm curious a couple of things. With those changes, incrementally in the context of what you expect your losses will be there, and again, Category 5 loans, so you're expecting losses. Do those developments increase or decrease your potential loss expectations?

[Matthew Salem, executive]

Yes, it's Matt. Appreciate the question. I would say that our reserves are updated every quarter. And so as these processes continue to evolve, we're updating the reserves to reflect that. And so that's the basic answer to your question. And so we shouldn't anticipate any potential changes as it relates to, like, our comments and where we are currently in the process because that's already been factored in.

[Richard Shane, analyst]

Understood. And look, I understand that that's the GAAP accounting. And there's -- but at the same time from a probability perspective, I'm assuming that you guys say, okay, wait a second, these developments were incrementally positive or incrementally negative. And since the reserve itself remains at that 2/3 of the overall reserve, and we can't see what's specific to those 3 Level 5s other than that sort of broader comment, I'm just -- how should we -- what should we take from this?It sounds to me like things are -- obviously, the short sale not going through, the implication seems to be negative in that you were willing to sell the property below cost and take a loss and you weren't able to achieve that. I'm assuming it's not because you came back and said, well, we actually think we can get a better deal.

[Matthew Salem, executive]

Right. I think you should take away a few things. First of all, the market's very illiquid. And a lot of our reserves are accounting for that level of liquidity. And even on the Philly sale that you're identifying, while we had a real process, we had a real engaged buyer, I think all of us here were always mindful that, like, nothing is done until it's done in this market. And so we were always somewhat discounting that happening.We're moving on from that, obviously, one buyer and have a potential buyer on a subset of the properties and then the other ones being more stabilized cash flow and we could potentially own. So a little bit just more color on Philadelphia specifically. But again, I wouldn't necessarily think about this as like, all right, we're trying to be transparent. We're trying to give you information as it evolves, understanding that it will evolve because this market is opaque and illiquid. But we're trying to give as much information as we can. I would say our reserves are always get updated to the extent the process changes and it impacts value. So that's kind of where we are on those 2 assets in particular.

[Richard Shane, analyst]

Got it. Look, I appreciate having a very imperfect crystal ball. I certainly struggle with that as well in terms of what we do. From a mechanical perspective, look, I appreciate the intellectual integrity of when you restructure the loan, creating a subordinated loan and writing it off immediately as opposed to sort of carrying that on balance sheet and sort of extending and pretending. If and when you are to take possession of properties, do you -- would you generally speaking expect to realize losses then or do -- does it get deferred further as part of that resolution?

[Matthew Salem, executive]

No, if we go to title, we would take realized loss at that moment in time based on an appraised value.

[Operator]

[Operator Instructions] The next question comes from Steve Delaney with JMP Securities.

[Steven Delaney, analyst]

Congratulations on the Chicago office loan workout. It's not one that we had on the watch list loans, 4 or 5, but it's nice to avoid a potential problem down the road, which is why I assume you took that action. Leads us to the discussion of Patrick's comments about the Washington, D.C., loan that is being reworked that that may be a fourth quarter item. In that rework, and I know you're limited probably in what you can say, do you anticipate that that reworking that would involve in any kind of a write-off to KREF as you put a new facility in for the borrower?

[Matthew Salem, executive]

Yes, so 2 comments there. Thank you for joining today. Just one, just to clarify, the Chicago office loan where we received a $15 million paydown and then a $15 million subsequent write-off on our loans, subordination and write-off, that was a 4-rated loan. So that is one of the watch list loans that --

[Steven Delaney, analyst]

That's correct. That was watch list. Yes.

[Matthew Salem, executive]

So I just want to make sure that was clarified. And then on the Washington, D.C., loan that you're highlighting, it's not our anticipation that there would be any kind of write-off or consideration in conjunction with that modification.

[Steven Delaney, analyst]

Okay, great. I would, just as a side comment, it would be great, I know there's legal issues with all this, but like the Chicago item of $0.22, I mean, we could argue whether that's material. It's certainly not with respect to book value. But I just ask you to consider like an [ 8K ] when you have one of these workouts. One, it shows progress. And two, it gives the analyst a chance to quickly go in and update an estimate before we get to the earnings call. So just a request and we can follow up offline on that.Gosh, so no write-down expected on D.C., but Matt, you had comments about rates and sort of the strategic thing. The Fed has kind of signaled late last week that maybe they're done. There's never done forever. But it feels like they're saying the bond market is at 5% has kind of done their job for them. I'm just curious if on the private equity side of KKR, if in fact there's a consensus that this is the peak of rates and that they have nowhere to go but down over the next 1 to 2 years, wouldn't that encourage some flows of private equity and strategic money kind of coming into the U.S. commercial real estate market once we get the Fed kind of get its foot off the throat of the market? Just curious what the connection you might see between where we are with rates and the rate cycle and the hope that some capital will flow into U.S. real estate.

[Matthew Salem, executive]

Sure. No, thank you. I would say, yes, we anticipate that once we get through this rate hike environment and the market understands where that's going to settle out, that transaction volume is going to pick up. I would say that's not just in real estate. I think we're seeing that across the broader KKR complex, including private equity, corporate credit, infrastructure.So it does feel like we certainly could be moving into somewhat different market environment as it relates to, again, transaction activity and acquisitions. At the same time, I think we're seeing good progress overall and the market is overall, just in terms of capital coming into the system from different fundraisers, I think the market, everybody understands that there's going to be a pretty good opportunity in commercial real estate over the course of the next year. So that just broadly is a consensus and you're seeing capital formation around that.

[Operator]

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

[Jade Rahmani, analyst]

Just on CECL, in the third quarter, the economy performed really well, including on the employment side. That's a tailwind for the CECL macro component. In 4Q, things should slow and we also have the Treasury rate spike. So do you think that alone drives an increase in just the macro component of CECL in the fourth quarter?

[Matthew Salem, executive]

It's Matt again. That's a tough one, Jade. I would say it's hard to predict what the macro output is going to be at this point and how those -- many of those different paths look. And part of the model is not just macro in terms of GDP, employment, interest rates, it's also CRE prices, which have adjusted a fair amount, as you know. So it's difficult to say. Certainly could happen, but it's not something we spend a lot of time thinking about or forecasting in terms of like what the next macro modeling CECL reserve is. I think we're much more focused on loan-by-loan outcomes from an asset management perspective and what we can control.

[Jade Rahmani, analyst]

Just have a office question. In the third quarter, there were definitely some green shoots in leasing within certain markets and also within a subset of best-in-breed-type properties. Some landlords also have said they're going to moderate TIs and it looks like there's a little bit of relief in our tracking on free rent. How would you characterize the major office trends you're seeing?

[Matthew Salem, executive]

Well, I think that the numbers you're referencing are likely a better indicator of what's going on in the broader market, because we don't have that big a portfolio and there's only really a handful of sold assets that we're focused on there. I would say that our general impression across our assets in the office space is that the leasing environment has been better than the capital markets anticipates, that there is demand for office and while it's costly, it's not uneconomic at a lender's basis. So that's where we -- our general impression has always been that things are a little bit better than people think.

[Jade Rahmani, analyst]

And then a technical question. When I look at the slide deck, it shows $152 million of repayments, but the cash flow statement subtracting the 9 months from the 6 months implies $43 million. Is the difference timing-related or something else?

[W. Mattson, executive]

Jade, it's Patrick. That has to do really with the Oakland partial paydown that Matt had referenced. On that deal, we originate a whole loan, sold a first mortgage and we retain a mezz. So that difference is due to the fact that we own a mezzanine loan and so while we're showing that paydown reflective of that full loan balance, the reality is we just own the mezz portion.

[Operator]

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, executive]

Great. Thanks, operator, and thanks, everyone, for joining today. Please reach out to me or the team here if you have any follow-up questions. Take care.

[Operator]

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