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Stanger Upgrades KKR Real Estate Select Trust Rating to Overweight

Investment banking firm Robert A. Stanger & Co., Inc. has upgraded its rating for KKR Real Estate Select Trust Inc., to overweight.

Structured as a ’40 Act closed-end fund that qualifies for tax treatment as a real estate investment trust, the company – also known as KREST – has a property portfolio exceeding $3.3 billion, supplemented by $250 million in credit investments.

The new research report comes one month after the REIT’s announcement of its shareholder priority plan to enhance returns for investors. With the plan, affiliates of KKR & Co., Inc. injected $50 million of equity capital into the REIT and agreed to potentially forfeit up to 7.7 million shares – currently valued at nearly $200 million – to support a $27.00 NAV per share on June 1, 2027.

“With KREST, you have a portfolio with sound fundamentals that has experienced a 21.5% price correction off its peak, which was already a compelling value story, even with the more aggressive leverage that KREST employs,” said David J. Inauen, head of research at Stanger.

“Now you have this downside protection from the shareholder priority plan, and the equity upside potential from levered assets at bottom-of-market pricing. That is a recipe for enhanced returns with a very attractive risk-reward profile,” he added.

The REIT, with a property portfolio concentrated in residential, industrial and West Coast office properties, had an aggregate NAV of $1.2 billion as of May 31, 2024.

Following a series of interest rate hikes that began in 2022, NAV REITs have struggled to raise equity; for the first five months of 2024, NAV REITs raised only $2.6 billion, down 86% from the same period in 2022. NAV REITs have also experienced a prolonged period of heightened share redemption requests since 2022. KKR REIT’s most recent self-tender offer conducted in April was oversubscribed, and KREST was only able to satisfy 48% of investors’ redemption requests.

“To address share redemption requests, we typically like to see NAV REITs maintain a liquidity sleeve – unrestricted cash, liquid securities, and general availability under credit facilities – of at least 15% of NAV,” said Inauen. “KREST has actively managed its financial resources to stay ahead of elevated redemption demand, and we estimate that following the $50 million contribution from affiliates, its liquidity sleeve totals 33% of NAV, more than double the 15% threshold. That provides strong confidence in KREST’s ability to continue to offer liquidity to shareholders at its intended level of 5% of NAV per quarter.”

This latest report focused on the KKR REIT follows a recent outlook Stanger provided on the other nine NAV REITs in its research coverage universe. KKR was not included in that update because the company conducts self-tender offers quarterly and thereby had no redemptions in May 2024. In the prior outlook, Stanger called out a 65% average surge in monthly redemption requests across the top NAV REITs since Starwood Real Estate Income Trust Inc. lowered the capacity under its share repurchase plan.

Robert A. Stanger & Co., Inc., founded in 1978, is an investment banking firm specializing in providing investment banking, financial advisory, fairness opinion and asset and securities valuation services to partnerships, real estate investment trusts, and real estate advisory and management companies in support of strategic planning and execution, capital formation and financings, mergers, acquisitions, reorganizations, and consolidations.

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