KKR Real Estate Finance Trust (KREF) - 2019 Q4 - Annual Report

PART I. ITEM 1. BUSINESS KKR Real Estate Finance Trust Inc. (KREF) is a real estate finance company focused on originating and acquiring senior loans secured by institutional-quality commercial real estate (CRE), operating as an externally managed REIT and leveraging KKR's global investment platform Our Company KREF commenced investment activities in October 2014 with initial capital commitments and operates as a REIT for federal income tax purposes, avoiding Investment Company Act registration - KREF commenced investment activities in October 2014 with an initial $400.0 million commitment from KKR, followed by $438.1 million in equity commitments from third-party investors and KKR employees, totaling $838.1 million in committed capital prior to its IPO[18] - The company operates as a REIT for federal income tax purposes, aiming to avoid U.S. federal income taxes on distributed net taxable income, and seeks to avoid registration under the Investment Company Act of 1940[20] Our Manager and KKR KREF is externally managed by KKR Real Estate Finance Manager LLC, benefiting from KKR's extensive global investment platform and real estate expertise - KREF is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR, a global investment firm with $218.4 billion in AUM as of December 31, 2019[22] - The Manager benefits from KKR's real estate group, KKR Real Estate, which had $9.4 billion of AUM as of December 31, 2019, and a team of approximately 85 dedicated professionals globally, providing significant advantages in sourcing, evaluating, underwriting, and managing investments[23] - The Manager's investment committee, comprising senior KKR Real Estate professionals, advises on investment strategy, portfolio construction, financing, investment guidelines, and risk management, and approves all KREF investments[25] Our Investment Strategy KREF's investment strategy focuses on originating or acquiring senior loans collateralized by institutional-quality CRE assets, seeking opportunities for value increase - KREF's investment strategy focuses on originating or acquiring senior loans collateralized by institutional-quality CRE assets, owned and operated by experienced sponsors in liquid markets with strong fundamentals[26] - The company seeks opportunities where it can lend at a substantial discount to its Manager's intrinsic real estate value assessment and aims to invest in properties with potential for value increase through improved management or capital initiatives[27] Our Target Assets KREF targets a range of real estate debt-related assets, including senior loans, mezzanine loans, preferred equity, and CMBS B-Pieces - Senior Loans: Primarily first-priority mortgages on CRE properties, typically floating-rate and shorter-term duration, including whole loans or pari passu participations[29] - Mezzanine Loans: Subordinated debt positions, secured by equity interests in the mortgage borrower, subordinate to senior loans but senior to owner's equity[29] - Preferred Equity: Investments subordinate to mortgage or mezzanine loans but senior to common equity, typically paying a preferred return from cash flow[29] - CMBS B-Pieces (New Issue): Below investment-grade bonds from CMBS securitization pools, acquired in aggregate, with a first-loss position and subject to Dodd-Frank Act risk retention rules (e.g., 5-year holding period)[29] - Other Real Estate Securities: Investments in CMBS (other than B-Pieces) or Collateralized Loan Obligations (CLO) collateralized by real estate debt, or debt securities of other REITs/real estate entities[31] Our Portfolio As of December 31, 2019, KREF's diversified portfolio of performing senior loans and other investments totaled $5,075.0 million, showing a 23% increase from 2018 - As of December 31, 2019, KREF's portfolio of diversified investments had a value of $5,075.0 million, representing a 23% increase from 2018. The portfolio consists of performing senior loans, mezzanine loans, and CMBS B-Pieces (indirectly-owned)[30] - The portfolio is 100% performing, with no impairments or legacy assets originated prior to October 2014, and all investments are located in the United States[30] Loan Portfolio Diversification (as of December 31, 2019) | Category | Percentage of Total Assets | | :-------------------- | :------------------------- | | Type of Investment | | | Senior Loans | 99.9% | | Mezzanine Loans | 0.1% | | CMBS B-Pieces (indirect) | Excluded from this chart (A) | | Interest Rate | | | Floating Rate | 99.2% | | Fixed Rate | 0.8% | | Underlying Property Type | | | Multifamily | 58.3% | | Office | 25.5% | | Retail | 4.7% | | Hospitality | 4.4% | | Condo (Residential) | 3.0% | | Industrial | 2.8% | | Student Housing | 1.3% | | Geographic Location | | | New York | 22.5% | | Illinois | 9.7% | | Pennsylvania | 9.2% | | Virginia | 8.2% | | Massachusetts | 7.7% | | California | 6.9% | | Florida | 6.9% | | Washington | 6.9% | | Georgia | 4.3% | | Minnesota | 3.7% | | New Jersey | 3.1% | | Colorado | 2.8% | | Oregon | 2.5% | | Texas | 2.5% | | Alabama | 1.2% | | Washington D.C. | 0.9% | | Tennessee | — | | Other U.S. | 1.0% | | Weighted Average LTV | 66% | Our Financing Strategy KREF diversifies its capital sources through equity and debt offerings, utilizing various leverage types, and increased non-mark-to-market financing to reduce market exposure - KREF raises capital through equity and debt securities offerings and utilizes both direct and structural leverage, including repurchase facilities, term lending arrangements, asset-based financing, collateralized loan obligations (CLOs), and revolving credit agreements[37] - The company increased its non-mark-to-market financing to $2.8 billion as of December 31, 2019, representing 72% of total outstanding portfolio financing, up from 60% in 2018, to reduce exposure to market fluctuations[38] Outstanding Financing Arrangements (as of December 31, 2019) | Financing Type | Balance (thousands) | Maximum Capacity (thousands) | | :-------------------------- | :-------------------- | :--------------------------- | | Master repurchase agreements | $1,088,217 | $2,000,000 | | Term loan financing | $798,180 | $1,000,000 | | Term lending agreement | $870,051 | $900,000 | | Collateralized loan obligations | $810,000 | $810,000 | | Asset specific financing | $142,268 | $300,000 | | Revolving credit agreements | $— | $250,000 | | Non-consolidated senior interests | $143,600 | $143,600 | | Total portfolio financing | $3,852,316 | $5,403,600 | Financing Risk Management KREF targets a specific leverage ratio and aims to match asset and liability terms to minimize mark-to-market and recourse borrowing risks - KREF targets a leverage ratio on senior loans between 3.5 and 4.0-to-1 on a debt to equity basis, with a total leverage ratio of 3.5-to-1 as of December 31, 2019[42] - The company aims to match the terms and indices of its assets and liabilities and minimize risks associated with mark-to-market and recourse borrowing[42] Investment Guidelines KREF's investment guidelines focus on broad CRE debt investments, REIT qualification, and limits on individual investment concentration - Invest capital in a broad range of CRE debt-related investments[45] - Avoid investments that would jeopardize REIT qualification or require Investment Company Act registration[45] - Allow allocation of investment opportunities sourced by the Manager to KKR funds or affiliates, consistent with allocation policy[45] - Invest capital in short-term, high-quality instruments prior to deployment into long-term investments[45] - Limit individual investment concentration to not more than 25% of equity without board approval[45] Impact of Interest Rate Environment KREF's net income generally increases with rising interest rates and benefits from LIBOR floors in its predominantly floating-rate loan portfolio - Rising interest rates generally increase KREF's net income, while declining rates decrease it. The company's net interest income benefits from in-the-money LIBOR floors in its loan portfolio, which are expected to decrease as LIBOR increases[43] - As of December 31, 2019, 99.2% of KREF's investments earned a floating rate of interest indexed to one-month LIBOR, and all financed investments were with floating-rate liabilities, strategically positioning the portfolio for a rising interest rate environment[43] - Approximately half of the loan portfolio had a LIBOR floor of 2.0% or higher as of December 31, 2019, which can offset some impact from declining rates[46] Taxation of the Company KREF operates as a REIT for U.S. federal income tax purposes, aiming to avoid corporate income taxes on distributed net taxable income, subject to continuous compliance with REIT tests - KREF elected to be treated as a REIT for U.S. federal income tax purposes starting December 31, 2014, and expects to maintain this qualification, generally avoiding U.S. federal income tax on distributed net taxable income[50] - Maintaining REIT qualification requires continuous satisfaction of tests regarding income sources, asset composition, stockholder distributions, and stock ownership diversity, which may limit investment and expansion opportunities[50] Competition KREF operates in a competitive lending and investing market, facing various institutional lenders, but leverages KKR's expertise for competitive advantages - KREF operates in a competitive lending and investing market, competing with various institutional lenders and investors, including other REITs, specialty finance companies, and commercial banks[52] - Competitors may have lower cost of funds, access to different funding sources, or different risk tolerances, potentially limiting KREF's ability to originate desirable loans or achieve satisfactory returns[52] - KREF believes its access to KKR's professionals, industry expertise, and relationships provides competitive advantages in assessing risks and pricing investments[53] Employees KREF does not have direct employees, as it is externally managed by its Manager, whose employees serve as KREF's executive officers - KREF does not have any direct employees; it is externally managed by its Manager, and its executive officers are employees of the Manager or its affiliates[54] - KREF is a real estate finance company primarily focused on originating and acquiring senior loans secured by institutional-quality commercial real estate (CRE) properties. Its investment objective is capital preservation and attractive risk-adjusted returns, primarily through dividends[17] - KREF is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR, leveraging KKR's extensive resources, relationships, and expertise in real estate and credit markets for investment sourcing, evaluation, underwriting, and management[19][22][23] Key Financial and Portfolio Metrics (as of December 31, 2019) | Metric | Value | | :--------------------------------- | :------------------- | | Book Value | $1,122.0 million | | Portfolio Value | $5,075.0 million | | Portfolio Increase (YoY) | 23% | | Non-Mark-to-Market Financing | $2.8 billion (72% of total) | | Borrowing Capacity Increase (YoY) | 28% (to $5.5 billion) | | Average Loan Size Originated | $173.0 million (20% increase over 2018) | | Portfolio Performance | 100% performing, no impairments | | Floating-Rate Loans | 99% of portfolio | | Weighted Average LTV | 66% | | AUM (KKR) | $218.4 billion | | AUM (KKR Real Estate) | $9.4 billion | ITEM 1A. RISK FACTORS This section outlines various risks that could materially and adversely affect KREF's business, financial condition, results of operations, and stock price, including market competition, real estate market volatility, and interest rate fluctuations Risks Related to Our Lending and Investment Activities KREF's lending and investment activities are exposed to risks such as market competition, real estate market deterioration, interest rate fluctuations, and the illiquidity of target assets - Competition from other lenders and investors may limit KREF's ability to originate or acquire desirable loans and investments, affecting yields and profitability[57] - Investments are exposed to general real estate market deterioration, increasing default risk for borrowers and making it harder to generate returns[58] - Fluctuations in interest rates and credit spreads can reduce income, cash flows, and investment values, potentially impairing distributions[59] - Lack of control over certain loans and investments (e.g., minority participations, reliance on third-party management) may limit KREF's ability to manage its portfolio effectively[60] - CRE-related investments are subject to delinquency, foreclosure, and loss, dependent on property operations and economic conditions[61] - Transitional loans involve greater risk of loss due to potential cost overruns, noncompletion of renovations, or inability of borrowers to secure permanent financing[62] - Prepayment rates can adversely affect portfolio value and reinvestment opportunities, especially in declining interest rate environments[63] - Difficulty in redeploying proceeds from repayments may lead to lower financial performance and returns[64] - Due diligence may not reveal all relevant facts, and incorrect risk evaluations can lead to losses[65] - Subordinated investments (CMBS B-Pieces, mezzanine loans, preferred equity) carry greater risk of loss due to their junior position in the capital structure[66] - Concentration in geography, asset types, or sponsors increases risk of loss from localized downturns[67] - Investments in CMBS and structured finance pose additional risks, including securitization process risks, potential for non-recovery, regulatory impacts (e.g., Dodd-Frank risk retention rules), and illiquidity[69][70][71][72][73][74][75][77][78][79][80][81][82][83][84][85][86][87][88][89][90][91][92][93][94][95][96][97][98][99][100][101][102][103][104][105][106][107][108][109][110][111][112][113][114][115][116][117][118] - Credit ratings on investments are subject to downgrades, which could significantly decline value and liquidity[69] - Foreclosure processes can be lengthy, expensive, and may not recover full cost basis, potentially leading to losses[70] - Exposure to lender liability claims and risks associated with distressed loans or bankruptcy proceedings[71] - Prolonged economic slowdowns or declining real estate values can impair investments and harm operations[72] - Decline in fair value of assets may require recognition of 'other-than-temporary' impairments under GAAP[73] - Uncertainty in valuing non-publicly traded investments recorded at fair value[74] - Investment in derivative instruments may subject KREF to increased risk of loss due to leverage, illiquidity, volatility, imperfect correlation, valuation risk, and counterparty risk[75] - Transactions in foreign currencies expose KREF to foreign currency risks[77] - Investments in international real estate-related assets are subject to special risks (e.g., currency exchange, less developed markets, political hostility)[78] - Illiquidity of target assets may make timely disposition difficult, potentially realizing less than recorded value[79] - Non-recourse long-term securitizations may expose KREF to losses if sufficient eligible investments are not acquired or market conditions are unfavorable, and risk retention requirements may increase liabilities or reduce profits[80] Risks Related to Our Company KREF faces risks related to its investment strategy, complex accounting rules, operational vulnerabilities, and compliance with various legal and regulatory requirements - KREF's investment strategy can be changed without stockholder consent, potentially leading to riskier investments[119] - Complex accounting rules for loan impairment, securitization, and consolidation involve significant judgment, which could impact timely financial statement preparation[120] - Provisions for loan losses are difficult to estimate, and the adoption of the CECL model in fiscal 2020 is expected to materially affect allowance for loan losses, potentially increasing volatility[121] - Operational risks, including reliance on KKR's systems, cyberattacks, and third-party service providers, could disrupt business, result in losses, or limit growth[122] - All KREF assets may be subject to recourse to satisfy liabilities[123] - State licensing requirements incur expenses, and failure to be properly licensed could adversely affect operations[124] - Avoiding Investment Company Act registration imposes significant limits on operations and investment structuring, potentially hindering profit maximization[125] - Changes in laws or regulations (e.g., Dodd-Frank Act, Basel III, 'shadow banking' oversight) could require business practice changes, negatively impact operations, or increase competition[126] - Changes in laws or regulations governing borrowers' operations (e.g., taxes, zoning, rent control) could affect KREF's returns[127] - KREF is subject to litigation risks, including lender liability claims and bankruptcy proceedings, which could result in substantial losses[128] - Obligations as a public company require significant resources and attention from the Manager's senior management[129] - Inability to implement and maintain effective internal controls over financial reporting could negatively affect investor confidence and stock price[130] - As an 'emerging growth company,' KREF benefits from reduced reporting requirements, but this status may make its common stock less attractive to some investors[131] Risks Related to Our Financing and Hedging KREF's financing and hedging strategies involve risks such as substantial indebtedness, restrictive covenants, interest rate fluctuations, and counterparty risk - Substantial indebtedness increases risk of loss, potentially leading to insufficient cash flow for debt payments, inability to obtain financing, or loss of collateral[151] - Leveraging target assets may reduce returns and cash available for distribution if financing costs increase relative to asset income[152] - Utilization of repurchase facilities is subject to lender pre-approval, potentially limiting financing options[153] - Master repurchase agreements and other lending facilities impose restrictive covenants (e.g., financial ratios, liquidity requirements) that could limit operational flexibility or lead to defaults and acceleration of debt[154] - Dependence on various financing sources means inability to access funding could materially adversely affect operations, financial condition, and business[155] - Interest rate fluctuations could increase financing costs, decreasing results of operations, cash flows, and investment market value[156] - Changes in LIBOR determination or its replacement (e.g., SOFR) may affect the value of LIBOR-linked financial obligations and could impact KREF's financial condition or results of operations[157] - Counterparty risk associated with debt obligations, as financial institutions may face turmoil or insolvency, restricting KREF's access to financing[158] - Use of derivative financial instruments for risk management entails greater than ordinary investment risks, including ineffectiveness, imperfect correlation, and counterparty risk[159] - Hedging may adversely affect earnings and reduce cash available for distributions due to costs, imperfect correlation, and tax limitations[160] - Hedging transactions could expose KREF to contingent liabilities, requiring cash payments in certain circumstances[161] - Failure to obtain and maintain an exemption from being regulated as a commodity pool operator by the Manager could subject KREF to additional regulation and compliance requirements[162] Risks Related to Our Relationship with Our Manager and Its Affiliates KREF's success depends on its Manager and personnel, and potential conflicts of interest with KKR and its affiliates may arise due to fee structures and competing activities - KREF's success depends on its Manager and its personnel; finding a suitable replacement or retaining key personnel is a risk[181] - Termination of the management agreement without cause would be costly, requiring a significant termination fee[182] - The Manager's liability is limited under the management agreement, and KREF indemnifies the Manager against certain liabilities, potentially leading to uncompensated losses[183] - Historical returns of KKR-managed funds are not indicative of KREF's future results due to differing investment objectives, leverage, fee structures, and market conditions[184] - The Manager's fee structure (base management fees and incentive fees) may create incentives for riskier or speculative investments, potentially misaligning interests with stockholders[185] - Various conflicts of interest exist due to KKR's control and its affiliates' activities, including fee arrangements, competing investment advisory and proprietary activities, allocation of investment opportunities, duties owed to other KKR vehicles, co-investments, and information sharing limitations[186] - The Manager operates under broad investment guidelines and is not required to seek board approval for every decision, potentially leading to riskier loans and investments[187] - KREF's use of the 'KKR' name is under a license agreement, and its termination or use by other parties could harm KREF's business and market recognition[188] Risks Related to Our REIT Status and Certain Other Tax Considerations Failure to maintain REIT qualification would subject KREF to corporate tax and limit investment opportunities, while compliance may necessitate disadvantageous distributions or asset restructuring - Failure to maintain REIT qualification would subject KREF to corporate tax, substantial tax liability, and ineligibility for REIT status for four subsequent years[200] - Even with REIT qualification, KREF may incur tax liabilities (e.g., prohibited transactions tax, excise taxes, state/local taxes) that reduce cash available for distributions[201] - Complying with REIT requirements may force KREF to forego attractive opportunities, limit expansion, or make distributions at disadvantageous times[202] - REIT requirements may necessitate liquidating or restructuring otherwise attractive investments to meet asset and income tests[203] - REIT provisions limit KREF's ability to hedge effectively, potentially increasing hedging costs or exposing it to greater interest rate risks[204] - KREF's charter limits individual ownership to 9.8% of capital stock (with KKR exemption) to maintain REIT status, which could deter takeover attempts[205] - KREF may make distributions in stock, requiring stockholders to pay income taxes without receiving cash dividends, potentially leading to stock sales and downward pressure on market price[206] - REIT dividends do not qualify for reduced tax rates available for some dividends, potentially making REIT investments less attractive to certain non-corporate investors[207] - Taxable income may exceed cash flow, leading to 'phantom income' and requiring KREF to sell assets, borrow, or make taxable stock distributions to meet REIT distribution requirements[208] - Modifications of debt instruments could be deemed 'significant modifications,' potentially jeopardizing REIT asset qualification or causing income recognition[209] - Failure of mezzanine loans to qualify as real estate assets could adversely affect REIT qualification[210] - IRS challenges to estimates of real property improvements' fair value for construction loans could jeopardize REIT qualification[211] - IRS successfully recharacterizing mezzanine loans or preferred equity as equity or debt could cause KREF to fail REIT income or asset tests[212] - The 100% tax on prohibited transactions limits KREF's ability to engage in certain sales, securitizations, or syndications of mortgage loans[213] - Failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect REIT qualification[214] - Liquidation of assets may jeopardize REIT qualification or incur a 100% tax on gains from dealer property[215] - Certain financing activities (e.g., taxable mortgage pools) may subject KREF to U.S. federal income tax and negative tax consequences for stockholders (e.g., 'excess inclusion income')[216] - REIT qualification may depend on the accuracy of legal opinions or issuer statements, and inaccuracies could result in significant corporate-level tax[217] - Taxable REIT subsidiaries are subject to corporate-level taxes, and dealings with them may incur a 100% excise tax[218] - Adverse legislative or regulatory tax changes could increase KREF's tax liability, reduce operating flexibility, and decrease common stock price[219] Risks Related to Ownership of Our Common Stock Ownership of KREF's common stock carries risks related to KKR's control, limited stockholder protections, and potential conflicts of interest, as well as uncertainties regarding distributions - KKR controls KREF (38% voting power as of December 31, 2019) and can influence business affairs and stockholder approvals, potentially conflicting with other stockholders' interests[229] - As a 'controlled company' under NYSE rules, KREF relies on exemptions from certain corporate governance requirements, reducing protections for stockholders[230] - Pre-IPO stockholders holding interests in the Manager may have incentives that conflict with other stockholders' interests[231] - Provisions in KREF's charter, bylaws, and Maryland law (e.g., issuance of stock without stockholder approval, advance notice bylaws, takeover statutes) may deter takeover attempts, limiting opportunities for stockholders to sell shares at a favorable price[232] - Rights of stockholders to take action against directors and officers are limited by KREF's charter and Maryland law, reducing recourse for actions not in their best interests[233] - Charter provisions make director removal difficult, potentially hindering changes to management[234] - Charter provisions reduce or eliminate duties of KKR and its affiliates and KREF directors regarding corporate opportunities and competitive activities[235] - KREF has not established a minimum distribution payment level, and its ability to pay distributions depends on various factors, with no assurance of market yield or maintenance over time[236] - Distributions are generally taxable as ordinary income, and stock distributions may require U.S. holders to pay taxes without receiving cash[237] - KREF faces significant competition for lending and investment opportunities, which may limit its ability to acquire desirable assets or affect yields, potentially impacting its business, financial condition, and results of operations[57][58] - Fluctuations in interest rates and credit spreads could reduce KREF's income, cash flows, and investment values, potentially impairing its ability to pay distributions to stockholders, especially given its reliance on floating-rate investments and financing[63][64] - KREF's external management structure means its success depends heavily on its Manager and key personnel, and conflicts of interest with KKR and its affiliates, particularly in investment allocation and fee structures, could arise and not always be resolved in KREF's favor[181][188][190] ITEM 1B. UNRESOLVED STAFF COMMENTS There are no unresolved staff comments to report - No unresolved staff comments were reported[255] ITEM 2. PROPERTIES KREF's principal executive offices are located in leased office space in New York, NY, which are considered suitable and adequate for business operations - KREF's principal executive offices are located in leased office space at 9 West 57th Street, New York, New York[256] - The company does not own any real property and considers its leased facilities suitable and adequate for its business[256] ITEM 3. LEGAL PROCEEDINGS As of December 31, 2019, KREF was not involved in any material legal proceedings - As of December 31, 2019, KREF was not involved in any material legal proceedings[257] ITEM 4. MINE SAFETY DISCLOSURES Mine safety disclosures are not applicable to KREF - Mine safety disclosures are not applicable[258] PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS KREF's common stock began trading on the NYSE in May 2017, with the company intending to make regular quarterly distributions and having a share repurchase program in place - KREF's common stock began trading on the NYSE under the symbol 'KREF' on May 5, 2017[260] - The company intends to make regular quarterly distributions to common stockholders, as U.S. federal income tax law generally requires REITs to distribute at least 90% of their REIT taxable income annually[261][262] Dividends Declared Per Share of Common Stock | Year | Q1 | Q2 | Q3 | Q4 | | :--- | :--- | :--- | :--- | :--- | | 2019 | $0.43 | $0.43 | $0.43 | $0.43 | | 2018 | $0.40 | $0.43 | $0.43 | $0.43 | - A $100.0 million share repurchase program, initially approved in May 2018, was extended through June 30, 2020. In 2019, KREF repurchased 212,809 shares for $4.1 million at an average price of $19.25 per share[270] - An 'At the Market' (ATM) stock offering program was established in February 2019, allowing KREF to sell up to $100.0 million of common stock, but no shares were sold under this program in 2019[281][582] ITEM 6. SELECTED FINANCIAL DATA This section presents selected consolidated financial data for KREF from 2015 to 2019, highlighting significant growth in total net interest income, total assets, and leverage ratio Selected Consolidated Financial Data (2015-2019) | Metric (in thousands, except per share) | 2019 | 2018 | 2017 | 2016 | 2015 | | :-------------------------------------- | :----- | :----- | :----- | :----- | :----- | | Operating Data: | | | | | | | Interest income | $274,335 | $183,575 | $83,145 | $32,659 | $12,536 | | Interest expense | $158,860 | $85,017 | $21,224 | $7,432 | $554 | | Total net interest income | $115,475 | $98,558 | $61,921 | $25,227 | $11,982 | | Total Net Revenue | $121,473 | $118,651 | $79,609 | $41,195 | $22,310 | | Operating Expenses | $30,929 | $28,914 | $18,428 | $8,569 | $4,745 | | Net Income (Loss) Attributable to KKR Real Estate Finance Trust Inc. and Subsidiaries | $89,965 | $89,744 | $59,062 | $31,157 | $16,763 | | Net Income (Loss) Attributable to Common Stockholders | $90,492 | $87,293 | $58,818 | $31,141 | $16,748 | | Per Share Data: | | | | | | | Net Income (Loss) Per Share of Common Stock (Diluted) | $1.57 | $1.58 | $1.30 | $1.61 | $1.95 | | Dividends declared per share of common stock | $1.72 | $1.69 | $1.62 | $1.22 | $0.73 | | Book value per share of common stock | $19.52 | $19.66 | $19.73 | $20.60 | $20.78 | | Leverage ratio | 3.5x | 2.6x | 1.0x | 0.7x | 0.3x | | Balance Sheet Data (at period end): | | | | | | | Total assets | $5,057,018 | $4,151,590 | $2,137,967 | $951,829 | $420,090 | | Total KKR Real Estate Finance Trust Inc. stockholders' equity | $1,122,018 | $1,132,342 | $1,059,145 | $497,698 | $281,460 | - Total net interest income increased from $11,982 thousand in 2015 to $115,475 thousand in 2019, demonstrating significant growth[274] - Total assets grew substantially from $420,090 thousand in 2015 to $5,057,018 thousand in 2019[274] - The leverage ratio increased from 0.3x in 2015 to 3.5x in 2019, indicating increased use of debt financing[274] ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides a detailed discussion of KREF's financial condition and results of operations, highlighting significant growth in its loan portfolio, diversification of financing sources, and key financial performance metrics for 2019 Introduction KKR Real Estate Finance Trust Inc. is a mortgage REIT focused on originating and acquiring senior CRE loans, externally managed by KKR Real Estate Finance Manager LLC - KKR Real Estate Finance Trust Inc. is a real estate finance company focused on originating and acquiring senior loans secured by CRE assets, externally managed by KKR Real Estate Finance Manager LLC, and operates as a REIT traded on the NYSE under 'KREF'[279] - KREF conducts operations as a REIT for U.S. federal income tax purposes, aiming to avoid registration under the Investment Company Act, and operates primarily through various subsidiaries as a holding company[280] 2019 Highlights KREF's 2019 highlights include increased net income, significant portfolio growth, enhanced non-mark-to-market financing, and capital markets activities - Operating Results: Net Income Attributable to Common Stockholders increased 4% to $90.5 million ($1.57 diluted EPS). Net Core Earnings decreased 3.7% to $96.3 million ($1.67 diluted EPS). Declared dividends of $1.72 per common share[281] - Investment Activity: Originated 18 floating-rate senior loans totaling $3.1 billion commitments ($2.7 billion funded). Current portfolio of $5.1 billion (23% increase YoY) is 100% performing and 99% floating-rate with 66% weighted average LTV. Exited direct CMBS B-piece investments with 18.8% gross realized IRR[282] - Portfolio Financing: Non-mark-to-market financing reached $2.8 billion (72% of total outstanding). Borrowing capacity increased 28% to $5.5 billion. Entered new $900.0 million non-mark-to-market term lending agreement and increased corporate revolving credit facility to $250.0 million[281] - Capital Markets Activity: Established $100.0 million 'At the Market' (ATM) stock offering program (no sales in 2019). Repurchased 212,809 shares for $4.1 million. Book value of $1.1 billion, consistent with 2018[282] Key Financial Measures and Indicators This section presents KREF's key financial measures, including earnings per share, dividends, and book value, along with non-GAAP Core Earnings Earnings Per Share and Dividends Declared | Metric | 2019 (Year Ended) | 2018 (Year Ended) | | :----------------------------------- | :------------------ | :------------------ | | Net income per share, basic | $1.58 | $1.58 | | Net income per share, diluted | $1.57 | $1.58 | | Dividends declared per share | $1.72 | $1.69 | - Core Earnings and Net Core Earnings are non-GAAP measures used to evaluate performance, excluding non-cash equity compensation, incentive compensation, depreciation/amortization, and unrealized gains/losses. Net Core Earnings for 2019 was $96.3 million ($1.67 per diluted share), a decrease from $100.0 million ($1.81 per diluted share) in 2018[285][286][288] Book Value per Share | Metric | December 31, 2019 | December 31, 2018 | | :-------------------------- | :------------------ | :------------------ | | KKR Real Estate Finance Trust Inc. stockholders' equity | $1,122,018 | $1,132,342 | | Shares of common stock outstanding | 57,486,583 | 57,596,217 | | Book value per share of common stock | $19.52 | $19.66 | Our Portfolio KREF's portfolio of diversified investments totaled $5,075.0 million as of December 31, 2019, primarily consisting of performing, floating-rate senior loans with an average risk rating of 2.9 - KREF's portfolio of diversified investments totaled $5,075.0 million as of December 31, 2019, primarily consisting of performing senior loans. The portfolio is 99.9% floating-rate, with approximately half subject to a LIBOR floor of 2.0% or higher[293][294] Quarterly Loan Activity (2019) | Metric (thousands) | Q1 2019 | Q2 2019 | Q3 2019 | Q4 2019 | Year Ended Dec 31, 2019 | | :----------------------- | :-------- | :-------- | :-------- | :-------- | :---------------------- | | Loan originations | $214,000 | $1,649,600 | $484,000 | $764,089 | $3,111,689 | | Loan fundings | $325,787 | $1,474,022 | $471,634 | $619,748 | $2,891,191 | | Loan repayments/syndications | $(648,493) | $(272,025) | $(193,470) | $(765,418) | $(1,879,406) | | Net fundings | $(322,706) | $1,201,997 | $278,164 | $(145,670) | $1,011,785 | Loan Portfolio Statistics (as of December 31, 2019) | Metric | Balance Sheet Portfolio | Total Loan Portfolio | | :--------------------------------- | :---------------------- | :------------------- | | Number of loans | 39 | 39 | | Principal balance | $4,960,698 | $5,039,298 | | Carrying value | $4,931,042 | $5,009,642 | | Unfunded loan commitments | $616,372 | $616,372 | | Weighted-average cash coupon | 5.1% | 5.0% | | Weighted-average all-in yield | 5.4% | 5.3% | | Weighted-average maximum maturity (years) | 4.1 | 4.1 | | LTV | 66% | 66% | - KREF's portfolio risk rating averaged 2.9 (Average Risk) as of December 31, 2019, weighted by total loan exposure, with 100% of commercial mortgage loans rated 3 (Average Risk) or better. No investments were rated 4 (High Risk/Potential for Loss) or 5 (Impaired/Loss Likely)[315] Portfolio Financing KREF continues to expand and diversify its financing sources, with non-mark-to-market financing representing 72% of its portfolio financing as of December 31, 2019 - KREF continues to expand and diversify its financing sources, with non-mark-to-market financing representing 72% of its portfolio financing as of December 31, 2019, primarily through term lending agreements, asset-based financing, term loan facilities, and CLOs[320] Portfolio Financing Outstanding Principal Balance (thousands) | Financing Type | December 31, 2019 | December 31, 2018 | | :-------------------------- | :------------------ | :------------------ | | Master repurchase agreements | $1,088,217 | $1,157,261 | | Term loan financing | $798,180 | $748,414 | | Term lending agreement | $870,051 | $— | | Collateralized loan obligations | $810,000 | $810,000 | | Asset specific financing | $142,268 | $60,000 | | Non-consolidated senior interests | $143,600 | $67,155 | | Total portfolio financing | $3,852,316 | $2,928,710 | - KREF entered into a new $900.0 million non-mark-to-market Term Lending Agreement in June 2019 and increased its corporate revolving credit facility to $250.0 million[330][332] - As of December 31, 2019, KREF was in compliance with all financial covenants of its financing facilities, including interest income to interest expense ratio (1.5 to 1.0), minimum consolidated tangible net worth, cash liquidity, and total indebtedness[346][542] Results of Operations This section summarizes KREF's consolidated statements of income, detailing changes in net interest income, other income, and operating expenses for 2017-2019 Consolidated Statements of Income Summary (2017-2019) | Metric (thousands) | 2019 | 2018 | 2017 | | :---------------------------------------------------- | :------- | :------- | :------- | | Net Interest Income | | | | | Interest income | $274,335 | $183,575 | $83,145 | | Interest expense | $158,860 | $85,017 | $21,224 | | Total net interest income | $115,475 | $98,558 | $61,921 | | Other Income (Loss) | | | | | (Loss) gain on sale of investments | $(2,688) | $13,000 | $— | | Total other income (loss) | $5,998 | $20,093 | $17,688 | | Operating Expenses | | | | | General and administrative | $10,522 | $7,812 | $4,936 | | Management fees to affiliate | $17,135 | $16,346 | $13,492 | | Incentive compensation to affiliate | $3,272 | $4,756 | $— | | Total operating expenses | $30,929 | $28,914 | $18,428 | | Net Income (Loss) Attributable to Common Stockholders | $90,492 | $87,293 | $58,818 | - 2019 vs. 2018: Net interest income increased by $16.9 million (17.2%) due to a $1.6 billion increase in the loan portfolio's weighted-average principal balance, partially offset by higher interest expense from increased borrowings. Total other income decreased by $14.1 million (70.1%) primarily due to a $13.0 million gain from CMBS B-Piece sales in 2018 not recurring in 2019. Total operating expenses increased by $2.0 million (7.0%) due to higher non-cash stock-based compensation and management fees, partially offset by a decrease in incentive compensation[352][353][354][355][356] - 2018 vs. 2017: Net interest income increased by $36.6 million (59.2%) due to a $1.6 billion increase in the loan portfolio's weighted-average principal balance. Total other income increased by $2.4 million (13.6%) primarily from a $2.1 million increase in equity method investment income and a $13.0 million realized gain from CMBS B-Piece sales, partially offset by a $13.3 million decrease in directly-held CMBS B-Piece income. Total operating expenses increased by $10.5 million (56.9%) due to $4.8 million in incentive compensation (none in 2017), increased management fees, and higher stock-based compensation and general and administrative expenses[358][359][360][361] Liquidity and Capital Resources KREF's liquidity needs include debt repayment and distributions, primarily funded by equity issuances, secured financing, and cash flows from operations, with a new cash management strategy implemented in Q4 2019 - KREF's primary liquidity needs include debt repayment, asset financing, funding obligations, stockholder distributions, and operating expenses. Primary sources are equity issuances, secured financing agreements, CLOs, convertible notes, and cash flows from operations[363][364] - As of December 31, 2019, cash and cash equivalents were $67.6 million. KREF implemented a new cash management strategy in Q4 2019, acquiring and subsequently selling $94.0 million of investment grade available-for-sale CMBS securities to minimize cash drag[365] Debt-to-Equity Ratio and Total Leverage Ratio | Ratio | December 31, 2019 | December 31, 2018 | | :------------------ | :------------------ | :------------------ | | Debt-to-equity ratio | 1.9x | 1.1x | | Total leverage ratio | 3.5x | 2.6x | Sources of Liquidity (thousands) | Source | December 31, 2019 | December 31, 2018 | | :---------------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $67,619 | $86,531 | | Available borrowings under master repurchase agreements | $6,174 | $58,751 | | Available borrowings under term loan financing facility | $41,364 | $33,637 | | Available borrowings under term lending agreement | $15,922 | $— | | Available borrowings under asset specific financing | $2,592 | $5,423 | | Available borrowings under revolving credit agreements | $250,000 | $100,000 | | Total | $383,671 | $284,342 | Cash Flows Summary (thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :--------------------------------------- | :--------- | :----------- | :--------- | | Cash Flows From Operating Activities | $91,713 | $76,830 | $53,801 | | Cash Flows From Investing Activities | $(926,314) | $(1,997,213) | $(1,083,677) | | Cash Flows From Financing Activities | $815,689 | $1,903,394 | $1,037,050 | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $(18,912) | $(16,989) | $7,174 | Contractual Obligations and Commitments (thousands) | Obligation Type | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | Thereafter | | :------------------------------------ | :---------- | :--------------- | :------------- | :------------- | :--------- | | Recourse Obligations: | | | | | | | Master Repurchase Facilities | $1,151,808 | $261,766 | $889,042 | $1,000 | $— | | Term Lending Agreement | $917,728 | $32,195 | $885,533 | $— | $— | | Asset Specific Financing | $152,626 | $64,930 | $87,696 | $— | $— | | Convertible Notes | $173,856 | $8,951 | $17,829 | $147,076 | $— | | Future funding obligations | $616,372 | $263,156 | $286,234 | $66,247 | $735 | | RECOP I commitment | $4,324 | $4,324 | $— | $— | $— | | Non-Recourse Obligations: | | | | | | | Collateralized Loan Obligations | $937,359 | $25,514 | $50,818 | $861,027 | $— | | Term Loan Financing | $903,220 | $108,670 | $627,499 | $167,051 | $— | | Total | $4,857,293 | $769,506 | $2,845,651 | $1,241,401 | $735 | Subsequent Events Subsequent events are detailed in Note 15 to the consolidated financial statements - Subsequent events are detailed in Note 15 to the consolidated financial statements[386] Off-Balance Sheet Arrangements KREF has off-balance sheet arrangements related to Variable Interest Entities (VIEs) accounted for using the equity method, with limited maximum risk of loss - KREF has off-balance sheet arrangements related to Variable Interest Entities (VIEs) accounted for using the equity method, with a maximum risk of loss limited to the carrying value of its investment and unfunded capital commitments[387] - As of December 31, 2019, KREF held $37.5 million of interests in such entities and had a remaining commitment of $4.3 million to RECOP I[387] Critical Accounting Policies and Use of Estimates This section outlines KREF's critical accounting policies, including interest income recognition, allowance for loan losses, and income taxes, and the expected impact of the CECL model - Interest Income Recognition: Accrues interest on performing loans based on contractual terms; loans are considered past due at 60 days and non-performing at 120 days past due (unless well secured and in collection). No nonaccrual or past due loans as of December 31, 2019[389][390][391][392][393][394] - Allowance for Loan Losses: Quarterly evaluation for impairment on a loan-by-loan basis for held-for-investment loans. Impairment indicated if collection of contractual amounts is improbable, leading to an allowance reducing carrying value to present value of expected future cash flows or collateral fair value. Loans are rated 1 (Very Low Risk) to 5 (Impaired/Loss Likely)[395][396][397][398][399][400] - Income Taxes: KREF elected REIT status, generally avoiding U.S. federal income tax on distributed income. Subject to state/local taxes through consolidated subsidiaries. No material deferred tax assets/liabilities or uncertain tax positions as of December 31, 2019[400] - KREF adopted the Current Expected Credit Loss (CECL) model in Q1 2020, which is expected to result in a cumulative-effect adjustment to accumulated deficit of approximately $16.1 million ($0.28 per common share) as of January 1, 2020[402][404] - KREF achieved Net Income Attributable to Common Stockholders of $90.5 million ($1.57 per diluted share) in 2019, a 4% increase from 2018, and declared dividends of $1.72 per common share[281][284] - The company's current portfolio grew 23% over 2018 to $5.1 billion, is 100% performing, 99% floating-rate, and has a weighted average LTV of 66%[281][294] - Non-mark-to-market financing reached $2.8 billion, representing 72% of total outstanding portfolio financing, up from 60% in 2018, enhancing stability[281][320] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section details KREF's exposure to various market risks, including credit, interest rate, liquidity, prepayment, and real estate risks, with a focus on managing interest rate risk and the LIBOR transition - Credit Risk: Investments are subject to default risk, monitored through regular contact with sponsors and performance review of underlying properties[406] - Credit Yield Risk: No credit yields exposure as of December 31, 2019, due to the sale of directly held CMBS investments[407] - Interest Rate Risk: Rising interest rates generally increase net income, while declining rates decrease it. 99.2% of investments are floating-rate (indexed to one-month USD LIBOR). Approximately half of the loan portfolio has a LIBOR floor of 2.0% or higher[408][409][410] - LIBOR Transition: LIBOR is expected to be discontinued after 2021. 99.9% of loans and 100% of financing arrangements are LIBOR-indexed. KREF is monitoring developments and working to minimize impact, but alternative rates may be more or less favorable[411][412] - Prepayment Risk: Risk that principal is repaid earlier than anticipated, potentially reducing returns. Increased prepayment rates accelerate amortization of premiums (reducing income) or accretion of discounts (increasing income)[413] - Financing Risk: Dependence on various financing facilities (repurchase, term lending, CLOs). Weakness in financial markets could limit access to financing or increase costs[414] - Real Estate Risk: Market values of commercial mortgage assets are volatile, affected by economic conditions, local real estate dynamics, and property values, which could lead to losses[415] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents KREF's audited consolidated financial statements for 2017-2019, including balance sheets, income statements, equity changes, cash flows, and comprehensive notes, along with the independent auditor's report Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on KREF's consolidated financial statements for the three years ended December 31, 2019, confirming fair presentation in accordance with GAAP - Deloitte & Touche LLP audited KREF's consolidated financial statements for the three years ended December 31, 2019, and issued an unqualified opinion, confirming fair presentation in accordance with GAAP[418] - The audit assessed risks of material misstatement and evaluated accounting principles and significant management estimates, but did not include an audit of internal control over financial reporting[420] Consolidated Balance Sheets This section presents KREF's consolidated balance sheets as of December 31, 2019 and 2018, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheets (thousands) | Asset/Liability | December 31, 2019 | December 31, 2018 | | :---------------------------------------------------- | :------------------ | :------------------ | | Assets | | | | Cash and cash equivalents | $67,619 | $86,531 | | Commercial mortgage loans, held-for-investment, net | $4,931,042 | $4,001,820 | | Equity method investments | $37,469 | $30,734 | | Commercial mortgage loans held in variable interest entities, at fair value | $— | $1,092,986 | | Total Assets | $5,057,018 | $5,231,845 | | Liabilities | | | | Secured financing agreements, net | $2,884,887 | $1,951,049 | | Collateralized loan obligation, net | $803,376 | $800,346 | | Convertible notes, net | $139,075 | $137,688 | | Loan participations sold, net | $64,966 | $85,465 | | Variable interest entity liabilities, at fair value | $— | $1,080,255 | | Total Liabilities | $3,933,306 | $4,096,657 | | Total KKR Real Estate Finance Trust Inc. stockholders' equity | $1,122,018 | $1,132,342 | - Total assets decreased from $5,231,845 thousand in 2018 to $5,057,018 thousand in 2019, primarily due to the deconsolidation of CMBS variable interest entities[425] - Commercial mortgage loans held-for-investment, net, increased from $4,001,820 thousand in 2018 to $4,931,042 thousand in 2019[425] - Secured financing agreements, net, increased from $1,951,049 thousand in 2018 to $2,884,887 thousand in 2019[425] Consolidated Statements of Income This section presents KREF's consolidated statements of income for the years ended December 31, 2019, 2018, and 2017, detailing revenues, expenses, and net income Consolidated Statements of Income (thousands) | Metric | 2019 | 2018 | 2017 | | :---------------------------------------------------- | :------- | :------- | :------- | | Interest income | $274,335 | $183,575 | $83,145 | | Interest expense | $158,860 | $85,017 | $21,224 | | Total net interest income | $115,475 | $98,558 | $61,921 | | (Loss) gain on sale of investments | $(2,688) | $13,000 | $— | | Change in net assets related to CMBS consolidated variable interest entities | $1,665 | $2,588 | $15,845 | | Income from equity method investments | $4,568 | $3,065 | $875 | | Other income | $2,453 | $1,440 | $968 | | Total other income (loss) | $5,998 | $20,093 | $17,688 | | General and administrative | $10,522 | $7,812 | $4,936 | | Management fees to affiliate | $17,135 | $16,346 | $13,492 | | Incentive compensation to affiliate | $3,272 | $4,756 | $— | | Total operating expenses | $30,929 | $28,914 | $18,428 | | Net Income (Loss) Attributable to Common Stockholders | $90,492 | $87,293 | $58,818 | | Basic EPS | $1.58 | $1.58 | $1.30 | | Diluted EPS | $1.57 | $1.58 | $1.30 | | Dividends Declared per Share of Common Stock | $1.72 | $1.69 | $1.62 | - Net interest income increased by $16.9 million (17.2%) from 2018 to 2019[427] - Total other income decreased by $14.1 million (70.1%) from 2018 to 2019, primarily due to a non-recurring gain on sale of investments in 2018[427] - Total operating expenses increased by $2.0 million (7.0%) from 2018 to 2019[427] - Net Income Attributable to Common Stockholders increased by $3.2 million (3.7%) from 2018 to 2019[427] Consolidated Statements of Changes in Equity This section presents KREF's consolidated statements of changes in equity for the years ended December 31, 2019, 2018, and 2017, detailing changes in stockholders' equity and preferred stock Consolidated Statements of Changes in Equity (thousands) | Metric | December 31, 2019 | December 31, 2018 | December 31, 2017 | | :---------------------------------------------------- | :------------------ | :------------------ | :------------------ | | Total KKR Real Estate Finance Trust Inc. Stockholders' Equity | $1,122,018 | $1,132,342 | $1,059,145 | | Total Permanent Equity | $1,122,018 | $1,132,342 | $1,059,145 | | Redeemable Preferred Stock | $1,694 | $2,846 | $949 | - Total KKR Real Estate Finance Trust Inc. stockholders' equity decreased by $10.3 million from $1,132,342 thousand in 2018 to $1,122,018 thousand in 2019[429][430] - Common dividends declared amounted to $98,860 thousand in 2019, compared to $93,798 thousand in 2018[429][430] - Repurchases of common stock totaled $4,106 thousand in 2019, a decrease from $31,347 thousand in 2018[429][430] Consolidated Statements of Cash Flows This section presents KREF's consolidated statements of cash flows for the years ended December 31, 2019, 2018, and 2017, detailing cash flows from operating, investing, and financing activities Consolidated Statements of Cash Flows (thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | | :---------------------------------------------------- | :--------- | :----------- | :--------- | | Cash Flows From Operating Activities | $91,713 | $76,830 | $53,801 | | Cash Flows From Investing Activities | $(926,314) | $(1,997,213) | $(1,083,677) | | Cash Flows From Financing Activities | $815,689 | $1,903,394 | $1,037,050 | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $(18,912) | $(16,989) | $7,174 | | Cash, Cash Equivalents at End of Period | $67,619 | $86,531 | $103,520 | - Net cash provided by operating activities increased to $91,713 thousand in 2019 from $76,830 thousand in 2018[433][434] - Net cash used in investing activities decreased significantly from $(1,997,213) thousand in 2018 to $(926,314) thousand in 2019[433][434] - Net cash provided by financing activities decreased from $1,903,394 thousand in 2018 to $815,689 thousand in 2019[433][434] [Note 1. Business and Organization](index=97&