KKR Real Estate Finance Trust Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2025

There are 9 speakers on the call.

Operator

Good morning, and welcome to the KKR Real Estate Finance Trust, Inc. First Quarter twenty twenty five Financial Results Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Jack Sreedala.

Operator

Please go ahead.

Speaker 1

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for the first quarter of twenty twenty five. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem our President and COO, Patrick Matson and our CFO, Kendra Deschis. 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.

Speaker 1

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 go through our results. For the first quarter of twenty twenty five, we reported a GAAP net loss of $10,600,000 or $0.15 per share. Book value as of March 31 is $14.44 per share.

Speaker 1

Distributable earnings this quarter was $17,000,000 or $0.25 per share, which is in line with our $0.25 per share dividend. With that, I'd now like to turn the call over to Matt.

Speaker 2

Thank you, Jack. Good morning, and thanks for joining our call today. Since our last earnings call and tariff implementations, market volatility and recession expectations have increased significantly, creating uncertainty for both businesses and households. The early recovery of real estate has likely been put on hold until we have more clarity on the scale and impact of the tariff regime. That said, we do believe real estate is better positioned for this environment compared to past cycles and other asset classes given the reset in values over the last three years.

Speaker 2

In times like this, the first thing we think about is defense. It's a get your house in order mentality. And to that end, we are in a very good position. We have no corporate maturities until 02/1930 having just upsized and extended our corporate revolver for new five year term and refinanced our term loan B with a new seven year facility. We have ample liquidity with over $700,000,000 today.

Speaker 2

Given this secure position, we will remain on offense, actively looking to reinvest repayments into new originations. In terms of what we are seeing in the real estate credit market, it is still functioning and all market participants remain active, including the banking sector. Warehouse financing and senior loan spreads are approximately 10 to 15 basis points wider, while the transitional loan sector spreads are approximately 15 to 20 basis points wider. CMBS spreads have been more volatile and are currently 50 to 75 basis points wider. Many owners are now coming to us for a balance sheet solution to avoid the capital markets volatility.

Speaker 2

From an opportunity perspective, it's significant. Our pipeline is the largest it's ever been, totaling over $30,000,000,000 and is very high quality. I expect this market will lead our sponsors to seek out more short term bridge loans instead of testing the investment sales market. Interestingly, our repayment expectations have increased since our last call. As we articulated last quarter, repayments are expected to exceed $1,000,000,000 this year and we are tracking well above that.

Speaker 2

We had an active quarter and closed four loans for a total of $376,000,080 percent of which were secured by Class A multifamily properties. It had a weighted average LTV of 69% and a coupon of SOFR plus two seventy seven basis points. Repayments in the quarter were $184,000,000 and along with future funding from existing loans, our net fundings totaled $222,000,000 We are actively looking at opportunities to diversify our portfolio and add duration. To that end, we are focused on the European lending market. We have built a strong team over the last few years.

Speaker 2

We are also looking at new issue CMBS conduit B pieces, where we can leverage our position as one of the largest market participants as well as KSTAR, which is our rated special servicer. Turning next to risk ratings. We downgraded two loans this quarter. First, a Raleigh, North Carolina multifamily loan from a four rated loan to a five rated loan. We are still evaluating numerous scenarios for this loan and are engaged in workout discussions, which could lead to an ownership position.

Speaker 2

Second, Boston Life Science from a three rated to a four rated loan due to current occupancy trends. With the two downgrades in the quarter and therefore increased CECL provisions, book value per share is $14.44 down approximately 2% compared to the prior quarter. We will continue to be transparent and proactive in managing the KRF portfolio and we'll provide updates on those two loans in the coming quarters. Before turning it over to Patrick, I will touch on our life science exposure. This is a sector that we believe has long term positive fundamentals, but faces cyclical headwinds, which could be exacerbated by an economic downturn or NIH funding costs funding cuts.

Speaker 2

As a reminder, 12% of our loan portfolio is life science and we have one REO property. We thought it'd be helpful to provide additional details in our supplemental, which is on Page 10 of the presentation. At a high level, 100% of our loan exposure is located in the top two life science markets, Boston and South San Francisco, and we provided construction financing for over half of our exposure. So these are very high quality and purpose built for life science. We've seen some green shoots as well.

Speaker 2

In March, we executed a 32,000 square foot lease in our Seattle life science REO property to the Institute for Protein Design at the University of Washington. The tenant has created AI technologies and computationally designed protein medicines and is led by a recent Nobel Prize winner for chemistry. With that, I'll turn it over to Patrick.

Speaker 3

Thanks, Matt. Good morning, everyone. This quarter, we worked closely with our KKR Capital Markets team to maintain our best in class financing. In March, we closed on a new $550,000,000 Term Loan B, upsizing from the prior loan of $340,000,000 and resetting the term for seven years. Proceeds were used to repay indebtedness, including our existing Term Loan B and for general corporate purposes.

Speaker 3

The new Term Loan B priced at 99.875% and bears interest at SOFR plus three twenty five basis points. This loan further bolsters our liquidity position and enables us to continue to focus on offense. In the quarter, we also upsized our corporate revolver to $660,000,000 and extended the maturity for a new five year term to March 2030, eliminating corporate liability maturities over the next several years. Additionally, we added a new non mark to market secured loan facility this quarter with an initial funded size of $122,000,000 and the ability to grow as new loans are included further diversifying our financing capacity. Our financing availability now sits at 8,300,000,000 including $3,100,000,000 of undrawn capacity.

Speaker 3

At quarter end, we had $720,000,000 of liquidity available, including $106,000,000 of cash on hand and $570,000,000 of undrawn corporate revolver capacity. 78% of our financing is non mark to market and KREF has no final facility maturities until 2026 and no corporate debt due until 02/1930. In addition to originations this quarter, we also invested capital in share repurchases. In the first quarter, we repurchased $10,000,000 of KREF stock representing a weighted average price of $11.03 This raises our total shares repurchased in the past two quarters to $20,000,000 at a weighted average price of $11.33 Our CECL reserve increased to 144,000,000 with two rating downgrades Matt mentioned. Our loan portfolio remains relatively stable with 90% of the portfolio risk rated three or better.

Speaker 3

As an update on our West Hollywood multifamily loan risk rated five as of quarter end, we took title to the asset earlier this month and are proceeding on our condo execution strategy with unit closings anticipated for late summer. As a result of the assignment in lieu of foreclosure, we expect to realize a loss tied to this investment of approximately $21,000,000 to distributable earnings in 2Q, which is consistent with our CECL reserve as of 1Q. As a reminder, our REO assets could generate an additional $0.12 per share per quarter on our distributable earnings as we effectuate our business plans, repatriate capital and reinvest into performing loans. As of the first quarter, KREF's debt to equity ratio is 1.9 times and our leverage ratio is 3.9 times. Following two repayments totaling $283,000,000 early in the second quarter.

Speaker 3

On a spot basis, the current leverage ratio is 3.7 times, which is the midpoint of our target range. In closing, we're positioned well for this market environment given steps that we've taken over the years to manage our liabilities including our most recent activity in the first quarter to increase and extend our corporate facilities. We're continuing to make progress on our OREO assets and are supported by a deep and experienced credit team of over 110 associates and who together with KSTAR managed $37,000,000,000 of CRE loans and our named special servicer on over $46,000,000,000 of CMBS. Origination activity is picking up speed and we're expanding our investment opportunity into the European loan markets and The U. S.

Speaker 3

CMBS market. Finally, the portfolio grew 4% quarter over quarter and we expect to recycle capital into new opportunities throughout the balance of this year. Thank you for joining us. And now we're happy to take your questions.

Operator

We will now begin the question and answer session. The first question comes from Rick Shane with JPMorgan. Please go ahead.

Speaker 4

Good morning. Thanks for taking my question today. Look, I think there are two things that are going on here. You're working through some of the portfolio issues that you've identified previously. You've raised concerns related to the macro environment.

Speaker 4

Two things. One, when you think about the macro issues, are you looking at this from a big picture perspective and just saying, hey, risk and uncertainty is increasing? Or are there specific properties within the portfolio that you identify is for whatever reason being a greater risk? And then the second part of the question is, given the return on capital that you're it appears that you're going to generate in 2025, how do you think about the dividend policy as we move through the year?

Speaker 2

Good morning, Rick. It's Matt. Thank you for the question and for joining us. I think I could start off and take both those pieces. As it relates to the economic environment, I'd say we're probably thinking about both sides of it from a macro perspective.

Speaker 2

Trying to think through what is the impact to really jobs, right? How much is it going to slow the economy and then what's the flow through into the job market? And will it be significant, will there be a significant impact there? And obviously, so, that could be felt broader economy and have a little bit bigger impact on the real estate sector. That's probably not our base case certainly here, at KKR, we're not calling for a recession.

Speaker 2

We think growth will slow down to somewhere between 01%, from a GDP perspective. So, are kind of watching the broader macro, in unemployment pretty carefully. I don't expect that to have a very big impact on real estate because values have obviously declined a lot already. And from a supply perspective, we're getting through the big supply wave. We all know construction starts are down across every property type somewhere between 6070%.

Speaker 2

I think that's why in our opening remarks we make the comment about real estate is a little bit different position than other asset classes. But if we certainly if we're going enter a recession and we see that unemployment rate go up, you're going to have impacts kind of broadly. But again, think we're pretty well positioned for that. But more concerned about what you're talking about, and how will it impact individual properties. The two things that come to mind are some of the port markets for industrial, especially on the West Coast obviously if you think about the slowdown in trade from China.

Speaker 2

So we're clearly watching that sector more. Don't think there's any one asset in our portfolio that we're like particularly concerned about, but we have heightened, just awareness of the potential market impact there. The second is just around decision making. In this kind of uncertain market, I think you could see decision making slow down which can impact CapEx, it could impact leasing decisions. And so some of our assets are still in lease up mode and, are looking for larger tenants and just a little bit concerned that there's going to be a kind of a pause in that decision making, around some of these leasing.

Speaker 2

So those are the really the two things I would say we're focused on.

Speaker 4

Got it. And I really appreciate that answer there. It's very thoughtful, and I realize it's there's no easy answer to that. Do you mind circling back on the dividend policy? And I do want to acknowledge having asked the question about buying back stock for probably every quarter for ages that you guys were in the market this quarter.

Speaker 4

And I think that's constructive for shareholders. But can you talk a little bit about dividend policy in light of the ROE characteristics right now?

Speaker 2

Yes. Happy to. So I think on the dividend when we initially cut it, we had a number of different scenarios in mind and a big part of that clearly was thinking through the REO and giving us time to just effectuate those business plans. There's been a lot of change since we initially set that dividend, but I think when we kind of net net it all together, we still feel pretty comfortable where we set it. Of course, it's a Board decision and we'll evaluate it every quarter, but I don't think we feel a lot of pressure right now to do anything different.

Speaker 2

From where we sit, we have all that upside in the REO as well. And we know at some point in time, we're going to sell those assets, repatriate that capital and Patrick mentioned in his section that if we did all that, we could reinvest that into new loans and have a can drive earnings by zero one two dollars a share per quarter. So even though our current earnings rate is right around that dividend level, we know there's like this embedded earnings power within the company that will unlock, at some point in time and keep in mind that's we calculate those numbers on our existing cost basis and we think we're going to do better than that as we implement these business plans. So that's a little bit how we're thinking about the dividend now. You asked about the share buybacks.

Speaker 2

Similar to last quarter, I think we need to be balanced. The stock where it trades right now, it's very attractive. So you saw us buying it back and we've got a long track record buying back stock when we thought, it was trading at attractive prices. It's very accretive, to our book value per share. So I think we'll have to continue to evaluate that as an option for capital, especially kind of given where it is today.

Speaker 2

But at the same time and similar to like you saw us in the first quarter, we to invest in our portfolio as well. We need to make loans. We need to continue to diversify the portfolio from a vintage perspective. We talked about potentially adding Europe and CMBS to the portfolio and I think it's important for the market to see us front footed and active and we think the market's pretty attractive from an investing perspective. So I think we need to continue to be kind of balanced as we think about allocation of capital across investing and share repurchases.

Speaker 4

Makes sense. Matt, thank you very much.

Operator

We have our next question from Tom Catherwood with BTIG. Please go ahead.

Speaker 5

Thank you. Good morning, everybody. Maybe Matt or Patrick, you both mentioned Europe in your prepared remarks. And I know this has been the target market for quite some time. What has to be done to start originating there?

Speaker 5

And do you expect to be active broadly across Europe or would it be more targeted to start?

Speaker 2

Thanks Tom. It's Matt. Yes, I can take that. We've been actively originating there for a couple of years now. And so I'd expect to close deals in the next quarter or two.

Speaker 2

I mean, we're quoting stuff. It's just a timing game at this point. Our focus there is really Western Europe and The UK. So I think that's really where we've been targeting opportunities. So I think in the near term we expect to add to the portfolio in Europe.

Speaker 5

Got it. Appreciate that, Matt. And then obviously it was an active quarter in 1Q for originations and you mentioned the pipeline being strong as ever. But with debt now up to 3.9 times, do you see originations primarily being tied to repayments? And you mentioned obviously repayment activity tracking ahead of expectations.

Speaker 5

Or how much kind of more do you think you can push that leverage level with originations?

Speaker 3

Good morning, Tom. I'll take that question. It's Patrick. Yes, we were three times 3.9 times end of the quarter. But as I said, we had pretty sizable repayments early in April.

Speaker 3

So on a spot basis, we're actually at 3.7. So we're at the midpoint. And part of that is trying to get a little bit ahead of some of these repayments. As Matt mentioned, it feels like we're tracking ahead of schedule. Some of the repayments that we got in this quarter were deals that we were really forecasting to get repaid in 2026 and we saw an acceleration of those repayments.

Speaker 3

So we'll be within the range and sometimes we're going to be towards the high end as we anticipate some of those repayments, but our target is still the same. But knowing that we've got a pretty good pipeline of repayments, we're going to be focused on the origination side and making sure that we're staying deployed and that we're maximizing earnings.

Speaker 5

Got it. And then just a follow-up Patrick on those repayments. Has your expectation or the pace of those been impacted at all by the tariffs? Or is it just too early to tell whether there's any link between kind of market dislocation and repayment activity?

Speaker 3

I think it's a little early to tell. That said, there are a number of deals that we're aware of that are in the market seeking refinancing. As you recall, a lot of these loans when we initially originated them, there was typically some lease up strategy involved. Many of those assets have now effectively stabilized. And so, despite the fact that you've seen this volatility in the broader market, in the CRE market, we see a lot of liquidity.

Speaker 3

And so while spreads may have backed up 10 basis 20 basis points, if you think about what those spreads were when we initially had those loans as a lease up, they're still down and sponsors still have an opportunity to improve their cost of capital in this environment. So, we very much see kind of a functioning market here and early to tell whether a deal or two gets sort of pushed off because of this. But as of right now, at least in our near term projections, we're not seeing a lot of impact.

Speaker 5

Appreciate the answers. Thanks everyone.

Operator

The next question is from Jade Rahmani with KBW. Please go ahead.

Speaker 6

Hi, thank you. This is actually Jason Satchan on for Jade. Thanks for taking my questions today. So first, it would be helpful to discuss what about the Raleigh multifamily that drove the downgrade? Is it a matter of basis, lease up, operating costs, location or all these factors?

Speaker 6

It would just be helpful to get some more color.

Speaker 2

Jason, it's Matt. I can jump in. I think the downgrade, it's been on our watch list for a while and now we're coming up on a maturity date. So that was really the I think the reason for the downgrade from the four to the five. I think the reason it's been on the watch list for a while, is because we just haven't seen the ability to drive rents in this particular submarket.

Speaker 2

And this is a loan we made kind of at the peak of the market, right? This is a, I think, late first quarter, early second quarter '20 '20 '2 loan. So there's been obviously big value declines. But in most of our portfolio, on the multifamily side, when we've given these numbers in the past, we just saw a tremendous amount of rental growth. And in this particular pocket, we just haven't seen the same amount of that, in terms of just being able to drive me, to be able to drive NOI, higher.

Speaker 2

So it's really a function of that. I mean, it's a good property. It's performing well. It's just hasn't had that same, push in the rental rate as we've seen in most other markets and then we've got a near term maturity here. So we'll have to figure out exactly the go forward from here.

Speaker 2

As we mentioned on the call, it could be a modification. We could go to title and kind of run the property ourselves, but we'll have to negotiate that with our borrower.

Speaker 6

Great. Thank you. And just on Life Science, over what time period do you think the capital is patient to wait is patient enough to wait for a pickup in leasing? And due to softness in the sector, would you be able to discuss the outlook for the risk series?

Speaker 2

Yes. And we this is why we tried to give a little bit more information both in our prepared remarks and as well as added some detail in our presentation. Most of our exposure is kind of in these newer built, purpose built assets that are really targeting larger tenants or big pharma, which we don't think is as susceptible as some of the cyclical issues that the sector is facing. Certainly a part of it, maybe not as susceptible to some of the smaller kind of earlier stage companies. So, we'd expect that to come back earlier.

Speaker 2

I think it's anybody's guess in terms of just at what point, you really start to see a pickup in overall life science leasing and a lot of that I think will depend on what happens with the tariff regime and what happens therefore to overall economic environment that will certainly weigh on the overall sectors as well. That's I think that's generally speaking how we're kind of thinking about it. In terms of the three rated loans that you asked, we've modified a couple of those already, and so kind of have dealt with our sponsors and getting them to a better spot. And then as I just mentioned, about half of the three rated loans, we have three assets that, were construction loans. And so we still feel pretty good about those.

Speaker 2

Those are, built now and are mostly built and then just in the lease up period, but just given that they were new, quality there is very high. And so we think it's just a matter of time before, you know, it attracts the right tenants.

Speaker 6

Great. Thank you.

Operator

The next question is from Steve Delaney with Citizens Capital Markets. Please go ahead.

Speaker 7

Thank you. Good morning, everyone. So look, applaud the buyback activity, of course, and it would seem it's even better today after the 15% or so decline after tariffs. But what I'm really intrigued by is if we're to be on a lot of these calls in the next two weeks, and I don't think we're going to hear a lot of commercial mortgage REITs talking enthusiastically about new lending opportunities. It feels like we're still in more of a defensive mode.

Speaker 7

Just in a broad sense, I'm just curious, Matt, as you guys look at sort of the menu of new opportunities, I guess first question is what is different in the either the quality or the pricing, the return profile? If you look at today's opportunity set versus what you've maybe seen on average over the last couple of years, I'd love you to compare and contrast that, if you would, in terms of the new opportunities on the lending side.

Speaker 2

Sure, Steve. Thank you for the question. I think you have to start with basis. I think the biggest change right now, is just the opportunity to lend at these much lower valuations. And you still have real estate values somewhere around or below replacement cost.

Speaker 2

When we're lending at some discount to that, it just feels like this vintage should be very safe from just an overall basis perspective. Of course, translates into cash flow and debt service coverage and other things. But the first thing I think about this vintage is really basis and that'll translate into this vintage and the safety of it could be quite strong. So that's probably the first thing. The second thing we're seeing is, there's less there's more opportunity, in less transitional assets.

Speaker 2

And let me explain that. Think I mentioned this on maybe our last earnings call. If you think about what we were doing in 2021 and 2022, a lot of it was like lending on brand new assets that had just been delivered in their initial lease up period and a lot of that was multifamily. And we'd lending at a 10% occupancy or 20% occupancy and providing that bridge to occupancy stabilization and burning off of concessions. Fast forward to today, and we're lending on what I call, you know, we went from kind of a transitional lender to like an almost stabilized lender.

Speaker 2

We're lending on assets that are 90% leased and maybe there's a little bit of concession in there but the vast majority of the cash flows are in place today and all we're doing is providing our sponsors a bridge to a better capital markets environment and maybe a little bit lower interest rate environment. And as we all know, with values down so much, I think many institutional owners just they don't want to sell right now. They hold out another year or two or three, they're going to get into this supply dynamic where they're back in the market raising rents pretty substantially and they can kind of dig themselves out of a basis in 2021 that is just not very favorable today. So that's probably part of the big change in terms of the business plan that we're lending on. Locally here and I don't know how long this will last, there's a big opportunity in sizable transactions.

Speaker 2

As we mentioned in the prepared remarks with the CMBS market having widened much more than the loan market, we're seeing a lot of sponsors coming to us and say $500,000,000 loan, dollars 1,000,000,000 loan, which should have been SASB or should be SASB issuance coming to us and saying can you guys help with this because we don't want to we don't know what's going to happen tomorrow and the market's volatile in the CMBS market. So, that's kind of a local opportunity that we're focused on right now. But I don't again, I think that that market will heal and be more effective as we kind of progress through the year. And then lastly, would just comment that one of the big changes in my mind, from like pre rate hike inflation pressures today will be how the banks participate in the market. They've always been kind of loan on loan providers, but it is much more pronounced now, in terms of just their willingness, and their focus on putting some of their capital into these loan on loan facilities just given how much more capital efficient is for them, how much safer it is for them to lend to other lenders than it is to make a direct mortgage loan.

Speaker 2

And I don't want to make it sound like they're not going to continue to lend on properties but we are seeing that allocation shift more towards loan on loan facilities. So I think that'll be another on the financing side, I think that'll be another we are seeing that as a kind of a meaningful shift from what we saw before.

Speaker 7

That's really helpful color. And are you seeing obviously, have development type borrowers who are out there, new projects, developing new projects, and you make them there's either construction loans and maybe then you flip it into a bridge. But are you seeing new equity coming in from institutional buyers where they're seeing projects where they are the potential value is much greater than where the rents are today and where the basis is. So I'm just curious how much of your new financing is going in side by side with new equity into a project rather than you just refinancing the original developer?

Speaker 2

Yes. Our pipeline and our activity is still heavily weighted towards refinance. It's right now it's around if you look at our pipeline, it's around 70% refinance like 30 ish percent acquisitions and it'll slow down a little bit just given the market volatility here, you know, since the tariff increases. But historically that may have been 60% acquisitions and 40% refinance. So it's a little bit turned upside down there.

Speaker 2

As it relates to like the construction side, I know you didn't ask this question directly but, it's probably somewhat relevant here. There's debt capital available. You can go get a construction loan but we're making one right now and in the fourth quarter we did a big data center loan. You can get it you can definitely access the financing markets for construction and the challenge is the equity. I just don't think it pencils out very well right now and now you've got a scenario where costs are increasing with tariffs that's going be even more difficult.

Speaker 2

So, think when you talk about like the 60%, seventy % decline in some of this construction, Maybe early on it was driven by debt, and lack of availability, but now it's just the equity math doesn't work from a yield on cost perspective.

Speaker 7

Got it. Okay. And just the final thing for me. Obviously, the tariff kind of discussions kind of threw a wrinkle into the stock market broadly, and certainly that hurt mortgage REITs in the last in the month of April for sure. Given that the stock at last night's closed $9.28 down about 15% as a result I think largely of tariffs.

Speaker 7

I mean should we assume that if the buyback was attractive in first quarter, it's even more attractive to you and your Board as you sit looking at the stock with the nine handle or so?

Speaker 2

Yes. I mean, similar to the question asked earlier, I don't think our view has really changed that much. The stocks come down a little bit, so it's certainly more attractive from buyback perspective, but we need to be balanced. And as we approach the market, we need to invest capital, we need to diversify the portfolio, but we certainly feel like we have ample liquidity right now and so we'll take a balanced approach to allocating that capital across the buybacks and the new originations.

Speaker 7

Got it. Really appreciate your comments, Matt. Thank you.

Operator

Thank you. Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Speaker 8

Yes. With repayments coming in a little bit higher, how are you feeling about net portfolio growth? I know you're sort of more on offense now. Do you think that you're in a situation where every quarter through 2025 you're seeing a little bit of portfolio growth?

Speaker 3

Don, it's Patrick. I can take that. I think that as we think about the rest of the year, there's probably some incremental growth that we can have, but we're getting pretty close to I think what's our target size when you factor in our leverage targets, the capital that we have here. I think just what you'll see though is, us looking to as we've said kind of match those repayments. So if those repayments start to kick up even more, we'll accelerate on the origination front.

Speaker 3

But I don't think there's a lot more incremental size as we're kind of approaching our upper limit of our target leverage.

Speaker 8

Got it. And then on some of the originations, the multifamily this quarter, it looked like the spreads were in the two thirty basis range. Are those sort of what are the leverage returns on those loans? And are those examples of that more stabilized type lending you're seeing?

Speaker 2

Yeah, Don. It's Matt. I can jump in. I think our weighted average spread was a little bit more than that like two seventy seven. The market got as tight as that probably that number you're mentioning like two thirty, two 40 area again on those mostly stabilized leased multifamily assets and those at that level, the back our back leverage had declined, spreads have declined there as well, pre tariffs.

Speaker 2

But we were on the tightest end probably like 11 to 12% type of IRRs there on a gross basis. Most of the stuff we're doing is kind of north of there but it is always a range, right, as you kind of portfolio construct and you deal with different risk profiles in the market. But I'd say most of what we're getting right now is centered around that 12% to kind of 13% IRR when you start to think about embedding the fees and things like that.

Speaker 8

Got it. And then I just wanted to go back on Life Science a bit. Appreciate the disclosure. I guess is this a situation where you could see like a significant amount of these loans migrate from three to four? And how do you think about values on these assets?

Speaker 8

They're probably a little more unique, than a multifamily or industrial. I mean, do you expect is it harder to kind of triangulate value on these types of assets?

Speaker 2

Yes. I mean, given the lease profile isn't as granular, right, on the multifamily side. Certainly there's more of a timing element to thinking about value. And it's not our expectation right now that these would migrate from three to four because either one it's already been kind of modified, and, kind of adjusted or like I said like it's the quality of the assets are there. For the most part, our sponsorship is very strong.

Speaker 2

And if you look at these locations, we're kind of like Maine and Maine in terms of you want to be in some of these markets and we're in Cambridge, we're in Seaport and South San Francisco. So it's not certainly not our expectation right now that we would go from a three to a four or put this on the watch list, but they still need to get restocked. There's risk there and there's some level of uncertainty especially when you, kind of sprinkle in this type of economic

Speaker 6

environment that we're in.

Speaker 8

Got it. Thank you.

Operator

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

Speaker 1

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

Operator

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

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