KKR Real Estate Finance Trust (US:KREF)2024-02-06 21:41PART I ITEM 1. BUSINESS KREF is a real estate finance company focused on originating transitional senior loans for institutional-quality commercial real estate, externally managed by an affiliate of KKR - KREF is a real estate finance company primarily focused on originating and acquiring transitional senior loans secured by institutional-quality commercial real estate (CRE)18 - The company is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR & Co. Inc., which had $552.8 billion in assets under management as of December 31, 202323 Portfolio Overview as of December 31, 2023 | Metric | Value (USD) | | :--- | :--- | | Total Investment Portfolio | $7.8 billion | | Senior and Mezzanine CRE Loans (Principal) | $7.6 billion | | Net Investment in Real Estate Owned (REO) | $158.6 million | | Investment in CMBS B-Pieces | $35.7 million | | Common Book Value | $1,077.0 million | - The loan portfolio is heavily weighted towards floating-rate instruments, with 99% of loans by total loan exposure earning a floating rate of interest as of December 31, 202343307 - KREF utilizes a diversified financing strategy with a focus on non-mark-to-market sources, which represented 76% of its $4.8 billion in secured financing as of December 31, 2023, reducing exposure to market fluctuations3637 Loan Portfolio Diversification as of December 31, 2023 | Category | Top Allocations | | :--- | :--- | | Property Type | Multifamily (42%), Office (22%), Industrial (14%), Life Science (10%) | | Geographic Location | California (18%), Texas (15%), Massachusetts (10%), Florida (9%) | | Loan to Value (LTV) | Weighted Average LTV of 66% | | Investment Type | Senior Loans (93%), Mezzanine Loans (7%) | ITEM 1A. RISK FACTORS The company faces risks from lending competition, credit and market volatility, leverage, its external manager relationship, and complex legal and regulatory requirements - Lending and Investment Risks: The company operates in a highly competitive market, which may limit its ability to source desirable loans and could negatively affect yields, with investments exposed to economic downturns and interest rate fluctuations565962 - Financing and Hedging Risks: KREF's use of leverage subjects it to increased risk of loss, restrictive covenants, and potential margin calls if collateral values decline, while hedging activities may be imperfect and involve counterparty risk132136145 - Manager and Affiliate Risks: The company's dependence on its external KKR manager creates potential conflicts of interest regarding fees and investment allocations, and termination of the management agreement would be difficult and costly156159165 - Legal and Regulatory Risks: KREF must maintain its exclusion from the Investment Company Act, which limits operations, and navigate changing regulations, state licensing, and public company obligations176177192 - REIT and Tax Risks: Failure to maintain REIT qualification would result in substantial corporate tax liability, and the required 90% income distribution may force asset sales or borrowings at disadvantageous times199201209 - Operational and Structural Risks: The company is exposed to cybersecurity threats through its reliance on KKR's IT systems, and KKR's significant ownership stake and anti-takeover provisions may deter transactions favorable to shareholders232241242 ITEM 1B. UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments261 ITEM 1C. CYBERSECURITY KREF's cybersecurity is managed through KKR's comprehensive program, with oversight from the KREF audit committee and no material incidents reported - KREF is externally managed and participates in KKR's comprehensive cybersecurity program, which is led by KKR's Chief Information Security Officer (CISO)262263 - Governance includes oversight from KKR's technology and information security risk committee and periodic presentations to the KREF audit committee on cybersecurity matters265267 - KKR's risk management strategy includes an incident response plan, continuous infrastructure monitoring, regular audits, and periodic employee training268269 - As of the filing date, the company has not been materially affected by any cybersecurity incidents for the reporting period270 ITEM 2. PROPERTIES The company's principal executive offices are located in New York, and it does not own any real property for its own use - The company's principal executive offices are located at 30 Hudson Yards, New York, New York, and it does not own any real property for corporate use271 ITEM 3. LEGAL PROCEEDINGS The company was not involved in any material legal proceedings as of the end of the fiscal year - As of December 31, 2023, KREF was not involved in any material legal proceedings676 ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company - Not applicable273 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES KREF's common stock trades on the NYSE, and the dividend for Q1 2024 was reduced to $0.25 per share, with no shares repurchased in 2023 - The company's common stock began trading on the NYSE under the symbol "KREF" on May 5, 2017274 Dividends Declared Per Common Share | Year | Q1 | Q2 | Q3 | Q4 | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | 2023 | $0.43 | $0.43 | $0.43 | $0.43 | $1.72 | | 2022 | $0.43 | $0.43 | $0.43 | $0.43 | $1.72 | - The common stock dividend for the first quarter of 2024 was reduced to $0.25 per share to support dividend coverage from the performing loan portfolio276 - The company has a $100.0 million share repurchase program, under which no shares were repurchased during the year ended December 31, 2023284285 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The company reported a net loss of $(53.9) million in 2023, driven by a significant provision for credit losses, resulting in a book value decline to $15.52 per share 2023 Operating Results Highlights | Metric | Value | | :--- | :--- | | Net Loss Attributable to Common Stockholders | $(53.9) million | | Net Loss per Diluted Share | $(0.78) | | Distributable Earnings | $57.6 million | | Distributable Earnings per Diluted Share | $0.83 | | Dividends Declared per Common Share | $1.72 | - The company took title to a defaulted senior office loan, recognizing a $58.7 million realized loss, which equated to $(0.85) per diluted share292 Book Value Per Share Reconciliation | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Stockholders' Equity | $1,404.8M | $1,571.5M | | Less: Preferred Stock Liquidation Preference | $(327.8)M | $(327.8)M | | Common Stockholders' Equity | $1,077.0M | $1,243.8M | | Total Shares Outstanding | 69,386,568 | 69,095,011 | | Book Value per Share | $15.52 | $18.00 | - The book value as of December 31, 2023, includes the impact of a $212.5 million CECL credit loss allowance, equivalent to $(3.06) per share302 - The loan portfolio's average risk rating was 3.2, with loans rated 4 or 5 (High Risk/Impaired) representing 13% of the total loan exposure305332333 - Net interest income decreased by $4.3 million YoY to $181.6 million, primarily due to the suspension of interest income accrual on nonaccrual loans374375 - Operating expenses increased by $66.3 million YoY, driven mainly by a $62.7 million increase in the provision for credit losses378 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is primarily exposed to credit, interest rate, and real estate market risks, with rising rates generally increasing net income from its floating-rate portfolio - The company's primary market risks include credit risk, interest rate risk, prepayment risk, financing risk, and real estate risk425 - As of December 31, 2023, the company's floating-rate loan portfolio and financing arrangements were all indexed to Term SOFR, completing the transition from LIBOR436 Interest Rate Sensitivity Analysis (as of Dec 31, 2023) | Change in Index Rates | Impact on Quarterly Cash Flow | Impact per Common Share | | :--- | :--- | :--- | | +100 bps | +$2.2 million | +$0.03 | | +50 bps | +$1.1 million | +$0.02 | | -50 bps | -$1.1 million | -$0.02 | | -100 bps | -$2.2 million | -$0.03 | - The company faces financing risk from potential weakness or volatility in financial markets, which could affect lenders' ability or willingness to provide financing439 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section contains the audited consolidated financial statements, which received an unqualified opinion, and detailed notes on the company's financial condition - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the company's financial statements and its internal control over financial reporting as of December 31, 2023446 - Critical Audit Matters identified by the auditor include the estimation of the Allowance for Credit Losses (specifically regarding economic conditions and collateral value determination) and the valuation of Real Estate Owned (REO) assets452453458 Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $7,547,618 | $7,802,321 | | Commercial real estate loans, net | $7,133,078 | $7,387,164 | | Real estate owned assets (total) | $183,108 | $80,231 | | Total Liabilities | $6,143,436 | $6,230,885 | | Secured financing agreements, net | $3,782,419 | $3,748,691 | | Collateralized loan obligations, net | $1,942,171 | $1,935,592 | | Total Equity | $1,404,182 | $1,571,436 | Consolidated Statement of Income Summary (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total net interest income | $181,610 | $185,873 | | Total other income | $21,199 | $19,194 | | Total operating expenses | $233,756 | $167,416 | | Provision for credit losses, net | $175,116 | $112,373 | | Net Income (Loss) | $(31,657) | $37,593 | | Net Income (Loss) Attributable to Common Stockholders | $(53,919) | $15,371 | Note 3. Commercial Real Estate Loans The loan portfolio's carrying value was $7.13 billion, net of a significantly increased $210.5 million allowance for credit losses driven by office sector stress Loan Portfolio Summary | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Outstanding Principal | $7,369.4M | $7,562.4M | | Amortized Cost | $7,343.5M | $7,494.1M | | Allowance for Credit Losses | $(210.5)M | $(107.0)M | | Carrying Value | $7,133.1M | $7,387.2M | | Number of Loans | 69 | 76 | Allowance for Credit Losses Activity (in thousands) | | Commercial Real Estate Loans | Unfunded Loan Commitments | Total | | :--- | :--- | :--- | :--- | | Balance at Dec 31, 2022 | $106,974 | $4,138 | $111,112 | | Provision for credit losses, net | $177,202 | $(2,086) | $175,116 | | Write-offs charged | $(73,706) | — | $(73,706) | | Balance at Dec 31, 2023 | $210,470 | $2,052 | $212,522 | - The portfolio's weighted average risk rating was 3.2, with loans rated 5 (Impaired/Loss Likely) having a total exposure of $512.1 million (7% of total) and a carrying value of $505.4 million as of December 31, 2023576579 Note 5. Debt Obligations KREF maintained $3.78 billion in secured financing with a weighted average cost of 7.6% and was in compliance with all financial covenants Secured Financing Agreements Summary (as of Dec 31, 2023) | Facility Type | Maximum Size | Outstanding Principal | Weighted Avg. Funding Cost | | :--- | :--- | :--- | :--- | | Master Repurchase Agreements | $2,000.0M | $1,477.2M | 7.5% (avg) | | Term Loan Facility | $1,000.0M | $561.4M | 7.3% | | Term Lending Agreements | $1,977.4M | $1,329.4M | 7.6% (avg) | | Revolving Credit Agreement | $610.0M | $160.0M | 7.5% | | Total / Weighted Average | $6,578.0M | $3,794.1M | 7.6% | - The company is subject to financial covenants including a minimum interest coverage ratio of 1.4x and a maximum total indebtedness ratio of 83.3% of total assets, and was in compliance with all covenants as of December 31, 2023615 Note 10. Equity KKR and its affiliates held 14.4% of KREF's common stock, and the company did not repurchase shares or issue stock via its ATM program in 2023 - As of December 31, 2023, KKR and its affiliates beneficially owned 10,000,001 shares, representing 14.4% of KREF's outstanding common stock646 - The company did not repurchase any common stock under its $100.0 million repurchase program during 2023, with the full capacity remaining available649 - No shares were sold under the At-The-Market (ATM) stock offering program in 2023, with $93.2 million remaining available for issuance651 ITEM 9A. CONTROLS AND PROCEDURES Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of year-end 2023 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2023728 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO 2013 framework731 - No material changes to internal control over financial reporting occurred during the quarter ended December 31, 2023732 PART III ITEMS 10-14. Directors, Executive Officers, Corporate Governance, Compensation, Security Ownership, and Accountant Fees Information regarding directors, corporate governance, compensation, and other related matters is incorporated by reference from the company's 2024 proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement, to be filed no later than 120 days after the fiscal year-end739740741742743 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This section provides a comprehensive list of all documents filed as part of the Form 10-K, including financial statements, schedules, and exhibits744 ITEM 16. FORM 10-K SUMMARY The company has not provided a summary for its Form 10-K - None752