KKR Real Estate Finance Trust (KREF) - 2025 Q3 - Quarterly Report

Part I - Financial Information This section presents KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated financial statements and management's analysis of its financial condition and operational results Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements of KKR Real Estate Finance Trust Inc. and its subsidiaries, including the balance sheets, statements of income, changes in equity, and cash flows, along with detailed notes explaining the company's business, significant accounting policies, and specific financial line items Condensed Consolidated Balance Sheets (Unaudited) This table presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates | Metric | September 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Assets | | | | Cash and cash equivalents | $204,094 | $104,933 | | Commercial real estate loans, held-for-investment, net | $5,139,266 | $5,771,519 | | Total Assets | $6,484,974 | $6,350,398 | | Liabilities | | | | Secured financing agreements, net | $2,699,119 | $2,798,674 | | Collateralized loan obligations, net | $1,324,409 | $1,766,104 | | Secured term loan, net | $633,541 | $333,853 | | Total Liabilities | $5,202,861 | $4,951,519 | | Equity | | | | Total KKR Real Estate Finance Trust Inc. Stockholders' Equity | $1,229,763 | $1,345,030 | | Total Equity | $1,282,113 | $1,398,879 | Condensed Consolidated Statements of Income (Unaudited) This table presents the company's financial performance, detailing revenues, expenses, and net income over specific periods | Metric | Three Months Ended Sep 30, 2025 (in thousands) | Three Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2025 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | | :------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Interest income | $108,019 | $140,150 | $334,258 | $441,019 | | Interest expense | $82,685 | $103,145 | $247,412 | $324,437 | | Total net interest income | $25,334 | $37,005 | $86,846 | $116,582 | | Total other income | $6,080 | $10,015 | $15,655 | $24,850 | | Total operating expenses | $18,642 | $54,257 | $126,051 | $126,458 | | Net Income (Loss) Attributable to KKR Real Estate Finance Trust Inc. and Subsidiaries | $13,778 | $(7,388) | $(20,809) | $15,336 | | Net Income (Loss) Attributable to Common Stockholders | $8,079 | $(12,991) | $(37,896) | $(1,507) | | Net Income (Loss) Per Share of Common Stock (Basic and Diluted) | $0.12 | $(0.19) | $(0.56) | $(0.02) | | Dividends Declared per Share of Common Stock | $0.25 | $0.25 | $0.75 | $0.75 | Condensed Consolidated Statements of Changes in Equity (Unaudited) This table details changes in the company's equity, including net income, dividends, and share repurchases, over specific periods | Metric | Balance at Dec 31, 2024 (in thousands) | Balance at Sep 30, 2025 (in thousands) | | :------------------------------------- | :------------------------------------- | :------------------------------------- | | Total KKR Real Estate Finance Trust Inc. Stockholders' Equity | $1,345,030 | $1,229,763 | | Noncontrolling Interests in Equity of Consolidated Joint Ventures | $53,849 | $52,350 | | Total Equity | $1,398,879 | $1,282,113 | | Common Stock Repurchase and Retirement | $(9,831) (Q1 2025) | $(20,064) (Q2 2025) | $(4,236) (Q3 2025) | | Net Income (Loss) | $(4,861) (Q1 2025) | $(29,726) (Q2 2025) | $13,778 (Q3 2025) | | Common Dividends Declared ($0.25 per share) | $(16,956) (Q1 2025) | $(16,419) (Q2 2025) | $(16,307) (Q3 2025) | Condensed Consolidated Statements of Cash Flows (Unaudited) This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities over specific periods | Cash Flow Activity | Nine Months Ended Sep 30, 2025 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | | :----------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash provided by (used in) operating activities | $55,548 | $114,241 | | Net cash provided by (used in) investing activities | $399,764 | $708,640 | | Net cash provided by (used in) financing activities | $(354,723) | $(860,051) | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $100,589 | $(37,170) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $207,136 | $111,143 | - Cash paid for interest decreased from $308,807 thousand in 2024 to $243,838 thousand in 2025 for the nine months ended September 30[23] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations of the company's business, significant accounting policies, and specific financial statement line items Note 1. Business and Organization This note describes KKR Real Estate Finance Trust Inc.'s formation, business model as a mortgage REIT, and external management structure - KKR Real Estate Finance Trust Inc. (KREF) is a Maryland corporation formed in October 2014, operating as a mortgage REIT focused on originating and acquiring transitional senior loans secured by commercial real estate (CRE) assets[26] - KREF is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR & Co. Inc., which provides management and investment advisory services[28][249] - As of September 30, 2025, KKR beneficially owned 15.3% of KREF's outstanding common stock[29] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing KREF's financial statements, including consolidation and credit loss recognition - KREF's financial statements are prepared in accordance with GAAP for interim financial information and include accounts of KREF and its consolidated subsidiaries, with intercompany transactions eliminated[33] - KREF consolidates entities it controls through majority ownership, voting rights, or as the primary beneficiary of Variable Interest Entities (VIEs), including certain Commercial Mortgage-Backed Securities (CMBS) trusts and Collateralized Loan Obligations (CLOs)[35][38][44] - KREF recognizes and measures the allowance for credit losses under the Current Expected Credit Loss (CECL) model, using the Weighted-Average Remaining Maturity (WARM) method, which considers historical loss data, expected repayments, future funding, and macroeconomic conditions[67][68][70] - A new accounting pronouncement, ASU No. 2024-03, effective for KREF in 2027, requires disaggregated expense disclosures in financial statement notes[110][356] Note 3. Commercial Real Estate Loans This note provides detailed information on KREF's commercial real estate loan portfolio, including outstanding balances, changes, and credit loss allowances Commercial Real Estate Loans, Held-for-Investment (in thousands) | Metric | September 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Outstanding Principal | $5,310,411 | $5,900,163 | | Amortized Cost | $5,296,610 | $5,888,622 | | Carrying Value (net of allowance) | $5,139,266 | $5,771,519 | | Loan Count | 52 | 51 | | Weighted Average Floating Rate Loan % | 98.6% | 98.6% | | Weighted Average Coupon | 7.4% | 7.5% | | Weighted Average Life (Years) | 1.7 | 2.0 | Changes in Loan Portfolio (Nine Months Ended Sep 30, 2025, in thousands) | Activity | Amount (in thousands) | | :------------------------------------ | :-------------------- | | Balance at December 31, 2024 | $5,888,622 | | Originations and future fundings, net | $706,368 | | Proceeds from loan repayments | $(1,113,990) | | (Provision for) Reversal of credit losses | $(75,069) | | Write-offs charged | $(34,828) | | Transfer to real estate owned | $(162,847) | | Balance at September 30, 2025 | $5,296,610 | - The average risk rating of KREF's loan portfolio was 3.1 as of September 30, 2025, consistent with December 31, 2024, weighted by outstanding loan principal[122][281] Allowance for Credit Losses (Nine Months Ended Sep 30, in thousands) | Metric | 2025 (in thousands) | 2024 (in thousands) | | :------------------------------------ | :------------------ | :------------------ | | Balance at December 31, 2024/2023 | $117,103 | $210,470 | | Provision for (reversal of) credit losses, net | $75,069 | $75,187 | | Write-offs charged | $(34,828) | $(137,869) | | Balance at September 30 | $157,344 | $148,013 | - The CECL provision for the nine months ended September 30, 2025, was $75.7 million, primarily due to additional reserves for risk-rated 5 loans in the life science and office sectors[126] Note 4. Real Estate Owned This note details KREF's Real Estate Owned (REO) properties, including acquisitions, sales, and their classification as held for investment or sale - KREF acquired several Real Estate Owned (REO) properties through foreclosure or assignment-in-lieu of foreclosure, including a Portland, OR retail/redevelopment property, a Mountain View, CA office property, and a Raleigh, NC multifamily property, which are held for investment[134][136][137] - KREF sold portions of its Portland, OR retail property for $6.0 million, recognizing a $0.7 million gain, and a Philadelphia office portfolio for $25.3 million, recognizing a $0.5 million gain[135][140] - Two properties, Philadelphia, PA Office and West Hollywood, CA Condo, were classified as held for sale as of September 30, 2025, resulting in loan write-offs of $14.4 million and $20.4 million, respectively, upon acquisition[137][141][142] REO Assets and Liabilities (in thousands) | Metric | September 30, 2025 | December 31, 2024 | | :------------------------------------ | :----------------- | :----------------- | | Real estate owned, held for investment | | | | Real estate owned, net | $338,937 | $262,479 | | Total Assets (held for investment) | $342,726 | $265,877 | | Total Liabilities (held for investment) | $7,935 | $4,298 | | Real estate owned, held for sale | | | | Total Assets (held for sale) | $127,871 | $56,554 | | Total Liabilities (held for sale) | $1,132 | $1,328 | Note 5. Debt Obligations This note describes KREF's various debt obligations, including secured financing agreements, their terms, and compliance with financial covenants Secured Financing Arrangements (in thousands) | Facility Type | September 30, 2025 Outstanding Principal | September 30, 2025 Carrying Value | December 31, 2024 Carrying Value | | :-------------------------- | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Master Repurchase Agreements | $1,090,710 | $1,087,195 | $1,704,665 | | Term Loan Facility | $527,166 | $527,085 | $675,566 | | Term Lending Agreements | $730,633 | $729,867 | $934,850 | | Asset Specific Financing | $358,268 | $357,078 | $343,216 | | Revolving Credit Agreement | $0 | $0 | $80,000 | | Total | $2,706,777 | $2,699,119 | $2,798,674 | - The weighted average funding cost for secured financing agreements was 6.3% as of September 30, 2025[150] - KREF's Revolver borrowing capacity increased from $610.0 million to $660.0 million in March 2025, and further to $700.0 million in September 2025[153] - As of September 30, 2025, KREF was in compliance with all financial debt covenants, including interest income to expense ratio, consolidated tangible net worth, total indebtedness, and cash liquidity[161][162] Note 6. Collateralized Loan Obligations This note explains KREF's use of managed Collateralized Loan Obligations (CLOs) for financing, detailing their structure and net interest income - KREF utilizes managed CLOs (KREF 2021-FL2 and KREF 2022-FL3) to finance loan participations, providing match-term, non-mark-to-market, and non-recourse financing[165] CLO Collateral Assets and Borrowings (in thousands) | CLO | September 30, 2025 Outstanding Principal | September 30, 2025 Carrying Value | December 31, 2024 Carrying Value | | :---------------- | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | KREF 2021-FL2 | $735,614 | $735,544 | $930,070 | | KREF 2022-FL3 | $588,865 | $588,865 | $836,034 | | Total | $1,324,479 | $1,324,409 | $1,766,104 | CLO Net Interest Income (in thousands) | Metric | Three Months Ended Sep 30, 2025 | Three Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2025 | Nine Months Ended Sep 30, 2024 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income | $32,307 | $48,468 | $103,522 | $146,163 | | Interest expense | $21,822 | $34,009 | $69,164 | $102,127 | | Net interest income | $10,485 | $14,459 | $34,358 | $44,036 | Note 7. Secured Term Loan, Net This note details the refinancing and upsizing of KREF's secured term loan, including its principal, carrying value, and total cost - In March 2025, KREF refinanced its existing secured term loan of $339.5 million with a new $550.0 million loan due March 2032. In September 2025, the loan was upsized to $650.0 million, and the spread was reduced by 0.75% to S+2.5%[170] Secured Term Loan (in thousands) | Metric | September 30, 2025 | December 31, 2024 | | :-------------------- | :----------------- | :----------------- | | Principal | $648,375 | $339,500 | | Deferred financing costs | $(11,934) | $(2,988) | | Unamortized discount | $(2,900) | $(2,659) | | Carrying value | $633,541 | $333,853 | - The total cost of the secured term loan, inclusive of discount and issuance cost amortization, was S+2.9% as of September 30, 2025[171] Note 8. Variable Interest Entity Assets and Liabilities, CMBS Trust, at Fair Value This note describes KREF's consolidation of a CMBS trust as a Variable Interest Entity (VIE) and the fair value accounting for its assets and liabilities - KREF consolidated a CMBS trust from June 18, 2025, after determining it was a VIE and KREF was the primary beneficiary, electing the fair value option for its assets and liabilities[174] Consolidated CMBS Trust Assets and Liabilities (in thousands) | Metric | September 30, 2025 | December 31, 2024 | | :------------------------------------------ | :----------------- | :----------------- | | Assets | | | | Commercial real estate loans, at fair value | $503,418 | $0 | | Total Variable interest entity assets | $505,820 | $0 | | Liabilities | | | | Commercial mortgage-backed securities, at fair value | $494,397 | $0 | | Total Variable interest entity liabilities | $496,703 | $0 | Change in Net Assets of Consolidated CMBS Trust (in thousands) | Metric | Three Months Ended Sep 30, 2025 | Nine Months Ended Sep 30, 2025 | | :---------------------------------------------------- | :------------------------------ | :----------------------------- | | Net interest income | $293 | $334 | | Unrealized gain (loss) | $54 | $54 | | Change in net assets of consolidated variable interest entity, CMBS trust | $347 | $388 | Note 9. Other Assets and Liabilities This note provides a breakdown of KREF's other assets and liabilities, including restricted cash, deferred financing costs, and allowances for unfunded commitments Other Assets (in thousands) | Metric | September 30, 2025 | December 31, 2024 | | :------------------------------------ | :----------------- | :----------------- | | Restricted cash | $3,042 | $1,614 | | Deferred financing cost, Revolver | $6,242 | $2,811 | | Loan principal repayments held by a servicer | $1,500 | $0 | | Assets related to real estate owned, held for investment | $1,902 | $2,651 | | Other | $2,274 | $1,777 | | Total Other Assets | $14,960 | $8,853 | Other Liabilities (in thousands) | Metric | September 30, 2025 | December 31, 2024 | | :------------------------------------------ | :----------------- | :----------------- | | Liabilities related to real estate owned, held for investment | $7,935 | $4,298 | | Allowance for credit losses on unfunded commitments | $3,095 | $2,478 | | Other | $1,848 | $1,748 | | Total Other Liabilities | $12,878 | $8,524 | Note 10. Consolidation and Equity Method Investments This note explains KREF's consolidation of Variable Interest Entities (VIEs) and Real Estate Owned (REO) joint ventures, along with its equity method investments - KREF consolidates CMBS trusts and CLO issuers as Variable Interest Entities (VIEs) where it is the primary beneficiary, controlling significant activities and absorbing losses or receiving benefits[180][181] - KREF consolidates two Real Estate Owned (REO) joint ventures, including a Portland retail property (90% interest) and a Mountain View office property (68.9% interest), due to decision-making power and significant economic interests[182][183] - KREF accounts for its 74.6% economic interest in a Seattle life science property, held through a Tenant-in-Common (TIC) agreement with a KKR affiliate, as an equity method investment[184] - KREF holds a 3.5% interest in RECOP I, an unconsolidated VIE that primarily acquires junior tranches of CMBS, accounted for as an equity method investment[185] Note 11. Equity This note details KREF's equity structure, including common shares outstanding, share repurchase activity, and dividends declared for common and preferred stock - As of September 30, 2025, KREF had 65,227,255 common shares issued and outstanding[188] - Under its share repurchase program, KREF repurchased and retired 3,508,881 common shares for $34.0 million during the nine months ended September 30, 2025, with $56.0 million remaining capacity[190] - KREF did not issue or sell any common stock under its At the Market (ATM) offering program during the nine months ended September 30, 2025, with $93.2 million remaining available[192] Common Stock Dividends Declared ($0.25 per share, in thousands) | Declaration Date | Record Date | Payment Date | Amount (in thousands) | | :--------------- | :---------- | :----------- | :-------------------- | | March 14, 2025 | March 31, 2025 | April 15, 2025 | $16,956 | | June 10, 2025 | June 30, 2025 | July 15, 2025 | $16,419 | | September 11, 2025 | September 30, 2025 | October 15, 2025 | $16,307 | | Total 2025 | | | $49,682 | | Total 2024 | | | $51,994 | Series A Preferred Stock Dividends Declared ($0.41 per share, in thousands) | Declaration Date | Record Date | Payment Date | Amount (in thousands) | | :--------------- | :---------- | :----------- | :-------------------- | | January 31, 2025 | February 28, 2025 | March 14, 2025 | $5,326 | | April 21, 2025 | May 30, 2025 | June 13, 2025 | $5,326 | | July 17, 2025 | August 29, 2025 | September 15, 2025 | $5,326 | | Total 2025 | | | $15,978 | | Total 2024 | | | $15,978 | Note 12. Stock-based Compensation This note describes KREF's stock-based compensation plans, including the 2025 Omnibus Incentive Plan, and the recognized and unrecognized compensation expense - KREF's 2025 Omnibus Incentive Plan replaced the Prior Plan, making 2,750,000 common shares available for awards to directors and Manager employees, with no new awards under the Prior Plan after April 25, 2025[198][199] - During the nine months ended September 30, 2025, KREF recognized $6.4 million in stock-based compensation expense, with $7.7 million of unrecognized expense remaining, expected to be recognized over 0.9 years[203][205] Restricted Stock Unit (RSU) Activity | Metric | Restricted Stock Units | Weighted Average Grant Date Fair Value Per RSU | | :-------------------------- | :--------------------- | :--------------------------------------------- | | Unvested as of Dec 31, 2024 | 1,248,813 | $12.35 | | Granted | 61,935 | $8.88 | | Vested | (56,350) | $9.76 | | Forfeited / cancelled | (1,250) | $11.27 | | Unvested as of Sep 30, 2025 | 1,253,148 | $12.30 | Note 13. Earnings (Loss) per Share This note explains KREF's calculation of basic and diluted earnings per share, including the two-class method for participating securities - KREF calculates basic EPS using the two-class method, treating unvested share-based payment awards with nonforfeitable dividend rights as participating securities[211] Net Income (Loss) Attributable to Common Stockholders and EPS (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2025 | Three Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2025 | Nine Months Ended Sep 30, 2024 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income (Loss) Attributable to Common Stockholders | $8,079 | $(12,991) | $(37,896) | $(1,507) | | Basic and Diluted Common Share EPS | $0.12 | $(0.19) | $(0.56) | $(0.02) | | Diluted Weighted Average Common Shares Outstanding | 65,876,727 | 69,434,938 | 67,267,388 | 69,414,990 | Note 14. Commitments and Contingencies This note outlines KREF's future funding commitments for commercial real estate loans, investments in CMBS B-Pieces, and legal proceedings - As of September 30, 2025, KREF had future funding commitments of $426.3 million related to commercial real estate loans, primarily for construction projects, capital improvements, tenant improvements, and leasing commissions[218] - KREF had a remaining commitment of $4.3 million to RECOP I, an aggregator vehicle for CMBS B-Pieces, as of September 30, 2025[219] - KREF is involved in various claims and legal actions in the ordinary course of business but was not involved in any material legal proceedings as of September 30, 2025[215][216] Note 15. Related Party Transactions This note details KREF's transactions with related parties, including management fees, expense reimbursements, and investments with KKR affiliates - KREF's Manager is entitled to a quarterly management fee (greater of $62,500 or 0.375% of weighted average adjusted equity) and quarterly incentive compensation (20.0% of trailing 12-month distributable earnings exceeding a 7.0% Hurdle Rate)[224] Fees Incurred with Affiliates (in thousands) | Fee Type | Three Months Ended Sep 30, 2025 | Three Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2025 | Nine Months Ended Sep 30, 2024 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Management fees | $5,619 | $5,901 | $17,153 | $18,614 | | Expense reimbursements | $1,073 | $890 | $3,701 | $2,967 | | Structuring fees (KCM) | $1,604 | $0 | $6,655 | $0 | | Diligence and servicing fees (K-Star) | $124 | $0 | $319 | $0 | | Total | $8,420 | $6,791 | $27,828 | $21,581 | - In June 2025, KREF and a KKR affiliate invested in securities issued by a CMBS trust, with the KKR affiliate holding $54.6 million in fair value of CMBS securities as of September 30, 2025[232] Note 16. Fair Value of Financial Instruments This note provides fair value disclosures for KREF's financial assets and liabilities, including valuation methods and unobservable inputs for Level 3 measurements Fair Value of Financial Assets (in thousands) | Asset | September 30, 2025 Carrying Value | September 30, 2025 Fair Value (Total) | December 31, 2024 Carrying Value | December 31, 2024 Fair Value (Total) | | :---------------------------------------------------- | :-------------------------------- | :----------------------------------- | :-------------------------------- | :----------------------------------- | | Cash and cash equivalents | $204,094 | $204,094 | $104,933 | $104,933 | | Commercial real estate loans, held-for-investment, net | $5,139,266 | $5,150,536 | $5,771,519 | $5,768,648 | | Variable interest entity assets, CMBS trust, at fair value | $503,418 | $503,418 | $0 | $0 | | Total Assets | $5,846,778 | $5,858,048 | $5,876,452 | $5,873,581 | Fair Value of Financial Liabilities (in thousands) | Liability | September 30, 2025 Carrying Value | September 30, 2025 Fair Value (Total) | December 31, 2024 Carrying Value | December 31, 2024 Fair Value (Total) | | :------------------------------------------------------ | :-------------------------------- | :----------------------------------- | :-------------------------------- | :----------------------------------- | | Secured financing agreements, net | $2,699,119 | $2,699,119 | $2,798,674 | $2,798,674 | | Collateralized loan obligations, net | $1,324,409 | $1,314,678 | $1,766,104 | $1,745,561 | | Secured term loan, net | $633,541 | $647,973 | $333,853 | $341,198 | | Variable interest entity liabilities, CMBS trust, at fair value | $494,397 | $494,397 | $0 | $0 | | Total Liabilities | $5,151,466 | $5,156,167 | $4,898,631 | $4,885,433 | Level 3 Unobservable Inputs for Valuation (September 30, 2025) | Asset/Liability | Valuation Method | Unobservable Input | Weighted Average | Range | | :------------------------------------------------------ | :--------------- | :----------------- | :--------------- | :------------ | | Commercial real estate loans, held-for-investment | Discounted cash flow | Discount margin | 4.0% | 2.4% - 5.7% | | | | Discount rate | 11.0% | n.a. | | | | Capitalization rate | 9.9% | 9.4% - 10.3% | | Variable interest entity assets/liabilities, CMBS trust, at fair value | Discounted cash flow | Yield | 6.1% | 4.3% - 32.9% | | | | Duration | 6.9 | 2.3 - 7.3 | Note 17. Income Taxes This note explains KREF's REIT tax election, its implications for federal and state income taxes, and the tax status of its consolidated subsidiaries - KREF has elected to be taxed as a REIT since December 31, 2014, generally avoiding U.S. federal and state income tax on distributed income if at least 90% of its REIT taxable income is distributed[242] - Certain consolidated subsidiaries, including joint ventures and taxable REIT subsidiaries, are subject to federal, state, and local income taxes[103][243] - As of September 30, 2025, KREF did not have any material deferred tax assets or liabilities or uncertain tax positions[104][105][243] Note 18. Subsequent Event This note reports a significant event occurring after the reporting period, specifically the payment of common stock dividends in October 2025 - In October 2025, KREF paid $16.3 million in common stock dividends ($0.25 per share) for the third quarter of 2025[245] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on KREF's financial condition and operational results, highlighting its investment strategy, macroeconomic environment, key financial measures, portfolio performance, financing activities, and liquidity. It also discusses critical accounting policies and recent accounting pronouncements Overview This section provides an overview of KREF's business model, investment strategy, and the impact of the macroeconomic environment on its operations - KREF is a real estate finance company focused on originating and acquiring transitional senior loans secured by commercial real estate (CRE) assets, aiming for capital preservation and attractive risk-adjusted returns primarily through dividends[248] - The macroeconomic environment, characterized by inflation, elevated interest rates, and slowing economic growth, has adversely impacted the real estate industry, leading to lower demand for office space and increased vacancy/default rates[250] - The Federal Reserve lowered interest rates multiple times in 2024 and once in September 2025, but rates remain elevated, creating uncertainty for future changes and potential impacts on KREF's net income and borrower performance[251] Key Financial Measures and Indicators This section presents key financial metrics, including net income per share, distributable earnings, and book value per share, to assess KREF's performance Net Income (Loss) Per Share and Dividends Declared (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2025 | Three Months Ended Jun 30, 2025 | | :------------------------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) attributable to common stockholders | $8,079 | $(35,425) | | Weighted-average number of shares of common stock outstanding, basic and diluted | 65,876,727 | 67,191,309 | | Net income (loss) per share, basic and diluted | $0.12 | $(0.53) | | Dividends declared per share | $0.25 | $0.25 | - Distributable Earnings, a non-GAAP measure, is used to assess KREF's ability to pay quarterly dividends and determine their amount, excluding non-cash equity compensation, depreciation/amortization, unrealized gains/losses, and certain one-time items[254][255] Distributable Earnings (Loss) Reconciliation (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2025 | Per Diluted Share | Three Months Ended Jun 30, 2025 | Per Diluted Share | | :------------------------------------------------- | :------------------------------ | :---------------- | :------------------------------ | :---------------- | | Net Income (Loss) Attributable to Common Stockholders | $8,079 | $0.12 | $(35,425) | $(0.53) | | Adjustments (Non-cash equity comp, D&A, Unrealized G/L, Provision for credit losses, Gain on sale) | $3,175 | $0.05 | $50,995 | $0.76 | | Distributable Earnings before realized gains or losses | $12,144 | $0.18 | $16,350 | $0.24 | | Realized loss on loan write-offs, net | $(14,394) | $(0.22) | $(20,434) | $(0.30) | | Realized gain on sale of investments | $0 | $0.00 | $1,192 | $0.02 | | Distributable Earnings (Loss) | $(2,250) | $(0.03) | $(2,892) | $(0.04) | Book Value per Share (in thousands, except share and per share data) | Metric | September 30, 2025 | December 31, 2024 | | :------------------------------------------ | :----------------- | :----------------- | | KKR Real Estate Finance Trust Inc. stockholders' equity | $1,229,763 | $1,345,030 | | Series A preferred stock (liquidation preference) | $(327,750) | $(327,750) | | Common stockholders' equity | $902,013 | $1,017,280 | | Shares of common stock issued and outstanding at period end | 65,227,255 | 68,713,596 | | Add: Deferred stock units | 239,922 | 206,112 | | Total shares outstanding at period end | 65,467,177 | 68,919,708 | | Book value per share | $13.78 | $14.76 | Our Portfolio This section details KREF's loan portfolio, including its size, composition, interest payment collection rates, and key statistics - As of September 30, 2025, KREF's portfolio totaled $5,850.8 million, primarily consisting of senior commercial real estate loans, with 100% of interest payments collected during the quarter[262][263] - The loan portfolio's average risk rating was 3.1, and multifamily and industrial loans comprised 58% of the portfolio, with substantially all loans earning a floating rate of interest[263][265] Quarterly Loan Activity (in thousands) | Activity | Sep 30, 2025 | Jun 30, 2025 | Mar 31, 2025 | Dec 31, 2024 | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Loan originations | $131,850 | $210,650 | $376,270 | $0 | | Loan fundings | $84,149 | $230,232 | $405,667 | $53,044 | | Loan repayments | $(479,658) | $(450,053) | $(183,595) | $(457,033) | | Net fundings | $(395,509) | $(219,821) | $222,072 | $(403,989) | | Net write-offs | $(14,394) | $(20,434) | $0 | $(35,902) | | Transfer to REO | $(71,081) | $(91,766) | $0 | $0 | | Total activity | $(480,574) | $(331,652) | $222,474 | $(439,503) | Loan Portfolio Statistics (September 30, 2025, in thousands) | Metric | Total | Floating Rate Loans | Fixed Rate Loans | | :------------------------------------ | :---------- | :------------------ | :--------------- | | Number of loans | 52 | 52 | 0 | | Principal balance | $5,310,411 | $5,236,011 | $74,400 | | Amortized cost | $5,296,610 | $5,222,210 | $74,400 | | Unfunded loan commitments | $426,348 | $421,348 | $5,000 | | Weighted average cash coupon | 7.4% | S + 3.3% | * | | Weighted average all-in yield | 7.8% | S + 3.6% | * | | Weighted average maximum maturity (years) | 1.7 | 1.7 | 0.8 | | Weighted average LTV | 65% | 65% | n.a. | Portfolio Surveillance and Credit Quality This section describes KREF's process for monitoring portfolio credit quality, including risk ratings and specific loan modifications - KREF's Manager actively monitors portfolio credit quality quarterly, evaluating property performance, comparable asset valuations, sponsor financial strength, and macroeconomic trends to assess default risk[277][280] - Loans are assigned a risk rating from 1 (Very Low Risk) to 5 (Impaired/Loss Likely); as of September 30, 2025, the average risk rating was 3.1, consistent with December 31, 2024[280][281] Loan Portfolio Risk Ratings (in thousands) | Risk Rating | Sep 30, 2025 Number of Loans | Sep 30, 2025 Carrying Value | Sep 30, 2025 Outstanding Principal | Dec 31, 2024 Number of Loans | Dec 31, 2024 Carrying Value | Dec 31, 2024 Outstanding Principal | | :---------- | :----------------------------- | :-------------------------- | :-------------------------------- | :----------------------------- | :-------------------------- | :-------------------------------- | | 1 | 0 | $0 | $0 | 0 | $0 | $0 | | 2 | 3 | $465,393 | $465,264 | 0 | $0 | $0 | | 3 | 44 | $4,175,536 | $4,185,101 | 47 | $5,393,333 | $5,400,698 | | 4 | 3 | $301,488 | $301,565 | 2 | $193,687 | $193,727 | | 5 | 2 | $354,193 | $358,481 | 2 | $301,602 | $305,738 | | Total | 52 | $5,296,610 | $5,310,411 | 51 | $5,888,622 | $5,900,163 | | Allowance for credit losses | | $(157,344) | | | $(117,103) | | - KREF modified a risk-rated 5 mezzanine office loan in Boston, MA, and a senior life science loan in San Carlos, CA, resulting in write-offs of certain subordinated notes[284][285] Total Financing This section outlines KREF's financing structure, including non-mark-to-market sources, master repurchase agreements, and changes in borrowing capacity - As of September 30, 2025, 77% of KREF's total financing came from Non-Mark-to-Market Financing Sources (term loan facility, term lending agreements, CLOs, secured term loan, warehouse facility, asset specific financing, and corporate Revolver), with the remaining 23% from master repurchase agreements subject only to credit marks[288] Financing Agreements Summary (in thousands) | Financing Type | Sep 30, 2025 Outstanding Principal | Dec 31, 2024 Outstanding Principal | | :-------------------------- | :--------------------------------------- | :-------------------------------- | | Master Repurchase Agreements | $1,090,710 | $1,704,665 | | Collateralized Loan Obligations | $1,324,479 | $1,766,231 | | Term Lending Agreements | $730,633 | $789,647 | | Term Loan Facility | $527,166 | $553,966 | | Warehouse Facility | $0 | $0 | | Asset Specific Financing | $358,268 | $343,216 | | Revolver | $0 | $80,000 | | Secured Term Loan | $648,375 | $339,500 | | Total leverage | $4,679,631 | $4,910,626 | - KREF's master repurchase agreements are subject to 'credit mark-to-market' features, which may require additional collateral or margin calls if underlying collateral value decreases, though KREF has not received any to date[293] - The corporate Revolver was upsized to $700.0 million in September 2025 and the secured term loan was upsized to $650.0 million in September 2025 with a reduced spread[298][300] Real Estate Assets, Held For Investment This section details KREF's Real Estate Owned (REO) properties held for investment, including acquisitions and joint venture interests - KREF took title to a Portland retail property in December 2021, contributing a portion to a joint venture where KREF holds a 90% interest and a priority of distributions up to $79.7 million[308] - In June 2024, KREF and a KKR affiliate acquired a Mountain View office property through a deed-in-lieu of foreclosure, with KREF holding a 68.9% interest[309] - In August 2025, KREF acquired a Raleigh multifamily property through an assignment-in-lieu of foreclosure[310] Real Estate Assets, Held For Sale This section identifies KREF's Real Estate Owned (REO) properties classified as held for sale, including sales and acquisition details - As of September 30, 2025, the Philadelphia, PA Office and West Hollywood, CA Condo properties were classified as held for sale, suspending depreciation and amortization[311][142] - KREF sold a portion of the Philadelphia office portfolio in June 2024, providing seller financing, and another portion in May 2025 for $25.3 million, recognizing a $0.5 million gain[313][314] - KREF acquired a West Hollywood multifamily property in April 2025 through an assignment-in-lieu of foreclosure[314] Real Estate Asset, Equity Method Investment This section describes KREF's equity method investment in a Seattle life science property acquired through a Tenant-in-Common (TIC) agreement - In June 2024, KREF and a KKR affiliate acquired a Seattle life science property through a deed-in-lieu of foreclosure under a Tenant-in-Common (TIC) agreement, with KREF holding a 74.6% economic interest and accounting for it as an equity method investment[315] Results of Operations This section analyzes KREF's financial performance, comparing results across different reporting periods for key income and expense items Three Months Ended September 30, 2025 Compared to Three Months Ended June 30, 2025 This section compares KREF's financial results for the three months ended September 30, 2025, against the prior quarter, highlighting changes in net interest income and operating expenses Changes in Results of Operations (QoQ, in thousands) | Metric | Sep 30, 2025 | Jun 30, 2025 | Change (Dollars) | Change (Percentage) | | :------------------------------------------------- | :----------- | :----------- | :--------------- | :------------------ | | Interest income | $108,019 | $112,272 | $(4,253) | (4)% | | Interest expense | $82,685 | $82,101 | $584 | 1% | | Total net interest income | $25,334 | $30,171 | $(4,837) | (16)% | | Total other income | $6,080 | $5,700 | $380 | 7% | | Total operating expenses | $18,642 | $66,444 | $(47,802) | (72)% | | Net Income (Loss) Attributable to Common Stockholders | $8,079 | $(35,425) | $43,504 | 123% | | Net Income (Loss) Per Share of Common Stock (Basic and Diluted) | $0.12 | $(0.53) | $0.65 | 123% | - Net interest income decreased by $4.8 million due to loans on nonaccrual status and a decline in overall portfolio size[318] - Total operating expenses decreased by $47.8 million, primarily driven by a $48.9 million change in the provision for credit losses[320] Nine Months Ended September 30, 2025 Compared to Nine Months Ended September 30, 2024 This section compares KREF's financial results for the nine months ended September 30, 2025, against the same period in the prior year, focusing on changes in net interest income and other income Changes in Results of Operations (YoY, in thousands) | Metric | Sep 30, 2025 | Sep 30, 2024 | Change (Dollars) | Change (Percentage) | | :------------------------------------------------- | :----------- | :----------- | :--------------- | :------------------ | | Interest income | $334,258 | $441,019 | $(106,761) | (24)% | | Interest expense | $247,412 | $324,437 | $(77,025) | (24)% | | Total net interest income | $86,846 | $116,582 | $(29,736) | (26)% | | Total other income | $15,655 | $24,850 | $(9,195) | (37)% | | Total operating expenses | $126,051 | $126,458 | $(407) | (0)% | | Net Income (Loss) Attributable to Common Stockholders | $(37,896) | $(1,507) | $(36,389) | (2,415)% | | Net Income (Loss) Per Share of Common Stock (Basic and Diluted) | $(0.56) | $(0.02) | $(0.54) | (2,700)% | - Net interest income decreased by $29.7 million, primarily due to a reduced loan portfolio size and lower index rates[323] - Total other income decreased by $9.2 million, mainly due to a $7.6 million decrease in REO operations revenue and a $3.0 million operating loss from an equity method investment, partially offset by a $1.2 million gain on REO sales[324] Liquidity and Capital Resources This section discusses KREF's liquidity sources, capital structure, and contractual obligations, assessing its ability to meet financial commitments - KREF's primary liquidity sources include $204.1 million in cash, $700.0 million available on its corporate Revolver, $28.9 million in available borrowings, and $300.6 million in total unencumbered assets as of September 30, 2025[327][335] - KREF believes its current liquidity will be sufficient to meet anticipated financing, operating, and other expenditures in the short- and long-term[328] Debt-to-Equity and Total Leverage Ratios | Ratio | September 30, 2025 | December 31, 2024 | | :------------------ | :----------------- | :----------------- | | Debt-to-equity ratio | 1.8x | 1.6x | | Total leverage ratio | 3.6x | 3.6x | Cash Flows (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2025 | 2024 | | :------------------------------------------------- | :--------- | :--------- | | Cash Flows From Operating Activities | $55,548 | $114,241 | | Cash Flows From Investing Activities | $399,764 | $708,640 | | Cash Flows From Financing Activities | $(354,723) | $(860,051) | | Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash | $100,589 | $(37,170) | Contractual Obligations and Commitments (September 30, 2025, in thousands) | Obligation Type | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | Thereafter | | :-------------------------- | :---------- | :--------------- | :----------- | :----------- | :--------- | | Total secured financing agreements | $2,706,776 | $275,627 | $1,929,352 | $453,157 | $48,640 | | Collateralized Loan Obligations | $1,324,479 | $0 | $0 | $0 | $1,324,479 | | Secured Term Loan | $648,375 | $6,500 | $13,000 | $13,000 | $615,875 | | Interest payable | $985,862 | $276,206 | $376,329 | $271,537 | $61,790 | | Future funding obligations | $426,348 | $312,181 | $106,429 | $7,738 | $0 | | CMBS investments | $4,324 | $4,324 | $0 | $0 | $0 | | Total | $6,096,164 | $874,838 | $2,425,110 | $745,432 | $2,050,784 | Critical Accounting Policies and Use of Estimates This section highlights KREF's critical accounting policies and the significant management estimates involved, particularly for credit losses and asset impairment - KREF's financial statements rely on management estimates and assumptions, particularly for allowance for credit losses, asset impairment, and fair value, with actual results potentially differing materially[350] - The Current Expected Credit Loss (CECL) model requires estimating expected credit losses based on historical experience, current conditions, and forward-looking forecasts, primarily using the Weighted-Average Remaining Maturity (WARM) method[351][352] - For collateral-dependent loans, expected losses are measured based on the difference between the collateral's fair value and the loan's amortized cost, with significant judgment involved in determining financial difficulty and collectability[354] Recent Accounting Pronouncements This section discusses new accounting standards relevant to KREF, specifically ASU No. 2024-03, and its future impact on expense disclosures - ASU No. 2024-03, effective for KREF in 2027, mandates disaggregated disclosures of certain expense categories in financial statement notes[356] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines KREF's exposure to various market risks, including credit risk, credit yield risk, interest rate risk, prepayment risk, financing risk, and real estate risk, and how these factors could impact its financial performance and investment values Credit Risk This section discusses KREF's exposure to credit risk, including default risk on investments and the impact of macroeconomic factors on collateral values - KREF's investments are subject to credit risk, including default, which depends on sponsors' ability to operate collateral properties to generate sufficient cash flows for debt service[358] - Inflation, rising interest rates, and increasing costs may negatively impact real estate collateral values and borrowers' ability to perform loan obligations, exacerbated by global tariff policies and trade tensions[359] Credit Yield Risk This section addresses the risk that increasing supply and reduced demand for credit-sensitive instruments could lead to higher required yields and lower asset prices - Increasing supply and reduced demand for credit-sensitive financial instruments can lead to higher required yields and lower prices for KREF's holdings[360] Interest Rate Risk This section analyzes KREF's sensitivity to interest rate fluctuations, detailing the impact of rising or declining rates on net income and potential loan defaults - Rising interest rates generally increase KREF's net income, while declining rates decrease it, though rate floors on loans may partially offset declines[361][363] - A 50 basis point decrease in index rates would reduce expected cash flows by approximately $0.7 million ($0.01 per common share) for the next three months, while a 50 basis point increase would raise them by $0.7 million ($0.01 per common share)[364] - Significant interest rate increases could lead to non-performance or default on floating-rate assets if collateral cash flows are insufficient for debt service[362] Prepayment Risk This section describes the risk of principal repayment earlier than anticipated, which can affect investment returns and potentially lead to asset sales at a loss - Prepayment risk involves principal repayment earlier than anticipated, potentially reducing returns on investments, as premiums are amortized faster, while discounts are accreted faster[365] - Higher interest rates may decrease prepayment speeds and increase borrower extension options, potentially extending beyond KREF's financing terms and forcing asset sales at a loss[366] Financing Risk This section discusses the risk that weakness or volatility in financial markets could reduce available financing, increase costs, or trigger market-to-market adjustments - Weakness or volatility in financial, CRE, or mortgage markets could adversely affect lenders, potentially reducing available financing, increasing costs, or leading to market-to-market adjustments[367] Real Estate Risk This section addresses the volatility of commercial real estate market values and how economic conditions and other factors can negatively impact collateral values and lead to losses - Commercial real estate market values are volatile and can be negatively affected by economic conditions, local real estate dynamics, industry slowdowns, construction quality, demographics, and regulatory changes[368] - Decreases in property values reduce collateral value and potential repayment proceeds, which could lead to losses for KREF[368] Item 4. Controls and Procedures This section details KREF's disclosure controls and procedures, confirming their effectiveness as of September 30, 2025, and reporting no material changes in internal control over financial reporting during the quarter - As of September 30, 2025, KREF's disclosure controls and procedures were evaluated and deemed effective by management, including the CEO and CFO, to ensure timely and accurate financial reporting[369][370] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2025[371] Part II - Other Information This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to the legal proceedings disclosures in Note 14 of the condensed consolidated financial statements, indicating no material legal actions against KREF as of September 30, 2025 - KREF was not involved in any material legal proceedings regarding claims or legal actions as of September 30, 2025[216][372] Item 1A. Risk Factors This section directs readers to the comprehensive risk factors detailed in KREF's Annual Report on Form 10-K, noting that there have been no material changes to these risks since the last filing - There have been no material changes to the risk factors previously disclosed in KREF's Annual Report on Form 10-K[373] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details KREF's share repurchase program, including the number of shares repurchased and the remaining capacity under the program as of September 30, 2025 - KREF's share repurchase program allows for repurchases up to an aggregate of $100.0 million of common stock, with $50.0 million under a pre-set trading plan and $50.0 million for open market or privately negotiated transactions[374] Issuer Purchases of Equity Securities (Three Months Ended Sep 30, 2025) | Period | Total shares purchased | Average price paid per share (USD) | Amounts paid for shares purchased as part of publicly announced program (in thousands) | | :----------------- | :--------------------- | :--------------------------------- | :--------------------------------------------------------------------------------- | | July 1 - July 31, 2025 | 0 | $0 | $0 | | August 1 - August 31, 2025 | 0 | $0 | $0 | | September 1 - Sep 30, 2025 | 448,877 | $9.41 | $4,222 | | Total/Average | 448,877 | $9.41 | $4,222 | - As of September 30, 2025, KREF had $56.0 million of remaining capacity to repurchase shares under the program[375] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[376] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to KREF - Mine safety disclosures are not applicable[377] Item 5. Other Information This section states that there is no other information to report - No other information is reported[378] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including amendments to credit agreements, lender joinder agreements, and certifications - Exhibits include Amendment No. 1 to Term Loan Credit Agreement (September 8, 2025) and Lender Joinder Agreements (April 19, 2022, and September 10, 2025) related to KREF Holdings X LLC[380] - Certificates from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included[380] Signatures This section contains the authorized signatures for the Form 10-Q report, confirming its submission - The report is signed by Matthew A. Salem, Chief Executive Officer, and Kendra L. Decious, Chief Financial Officer and Treasurer, on October 21, 2025[385]