This year’s Q4 earnings season has confirmed expectations that write-downs are coming for many real estate portfolios, but a quarterly valuation hit on KKR’s higher risk and return investments has stood out.
The New York-based firm saw its opportunistic portfolio written down by 8 percent in Q4, resulting in a 3 percent gain for the full year of 2022. Craig Larson, partner and head of investor relations at KKR, said on the firm’s earnings call this was driven by a widening of cap rates on unrealized investments.
By comparison to some of its public peers, Blackstone saw a 2 percent quarterly dip in its opportunistic portfolio and a 1.5 percent quarterly drop in performance for its core-plus bucket. In the full year, the New York-based mega-manager saw 7.1 percent gains and 10.3 percent gains in those respective buckets for the full year. It was a similar story at Carlyle Group which registered a 1 percent loss in Q4 but maintained a stronger 16 percent return over the course of last year.
KKR said many of the write-downs happened due to the wider, challenging market environment. Larson also noted some of the widening of cap rates were offset by stronger rent growth. He noted that was in part due to the construction of the portfolio, more than 80 percent of which is in property types that continue to grow income including industrial, data centers, rental housing, student housing and storage.
Another major factor in KKR’s real estate asset value decline, he said, was the methodology employed to value assets. The firm both internally values its own property and uses a third-party valuer. In the current market, a large portion of the assets the firm was looking to value were classed as ‘level three’ assets, defined as assets that have little comparison due to an inactivity in the market, according to the firm’s 10-Q filing. “Those that don’t have observable marks,” Lewin said.
Larson added that the third-party valuer would typically look at recent transactions to determine cap rate and discount rate assumptions to value any given property. Most of KKR’s portfolio is in the US, and transaction volume in the US fell 63 percent year-over-year in 2022, according to data from broker CBRE. In the observable transactions, KKR’s cap rates widened, Larson said. “That’s what really drove the performance figures in real estate you saw for the quarter,” he added.
Larson’s final justification was that if cap rates and discount rate assumptions had been similar throughout the year, the portfolio would have produced a positive return, noting NOI growth at the property level would have driven that.
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