REIT grapples with commercial real estate market turbulence
KKR Real Estate Finance Trust (KREF), a commercial mortgage investor, saw its shares tumble after it announced a hefty cut to its dividend, Bloomberg reported.
The decision came as a response to losses on some of its loans, including a $59 million hit from a loan tied to an office building in Philadelphia. Adding to the concern, KREF flagged two multifamily properties – one in Raleigh, NC and another in San Diego – alongside a life sciences property in Seattle, indicating that the troubles in commercial real estate extend beyond office spaces.
KREF stocks experienced their most dramatic drop since March 2020, plummeting nearly 15% to $10.01 in early trading hours in New York on Wednesday.
This downturn in KREF’s fortunes reflects a growing concern within the sector, especially after New York Community Bancorp announced a dividend cut last week and increased its reserves for loans at risk, particularly those to office and apartment landlords. Adding to the industry’s woes, Moody’s Investors Service downgraded the bank’s credit rating to junk status late Tuesday.
The crux of the problem traces back to the surge in interest rates that began in 2022, leading to higher refinancing costs for property owners as their existing loans come up for renewal. With Trepp reporting over $1 trillion in commercial mortgages due to mature in the next couple of years, the pressure is mounting on banks, insurance companies, and REITs like KREF.
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KREF chief executive officer Mark explained that slashing the dividend was a tough but necessary choice to give the company breathing room to offload assets that have been taken back from borrowers. During a call with analysts on Wednesday, he revealed ongoing discussions regarding the sale of two out of the four properties linked to the problematic Philadelphia loan.
“Today, we have a few assets where the best path forward to maximize value will be to take title, operate the real estate and stabilize cash flows before selling,” Salem said. “This is high-quality real estate that we have full confidence will lease and stabilize over time.”
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