KKR Real Estate Finance Trust (KREF) - 2023 Q3 - Quarterly Report

Part I - Financial Information This section presents KKR Real Estate Finance Trust Inc.'s unaudited financial statements and management's discussion and analysis Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated financial statements, including the balance sheets, statements of income, changes in equity, and cash flows, along with detailed notes explaining significant accounting policies, loan portfolio specifics, debt obligations, equity, and related party transactions for the periods ended September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited balance sheets as of September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (Amounts in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $108,038 | $239,791 | | Commercial real estate loans, net | $7,309,459 | $7,387,164 | | Total Assets | $7,625,442 | $7,802,321 | | Liabilities | | | | Secured financing agreements, net | $3,827,399 | $3,748,691 | | Collateralized loan obligations, net | $1,941,114 | $1,935,592 | | Convertible notes, net | — | $143,237 | | Total Liabilities | $6,172,145 | $6,230,885 | | Equity | | | | Total KKR Real Estate Finance Trust Inc. Stockholders' Equity | $1,453,724 | $1,571,538 | | Total Equity | $1,453,297 | $1,571,436 | | Total Liabilities and Equity | $7,625,442 | $7,802,321 | - Cash and cash equivalents decreased significantly from $239.8 million at December 31, 2022, to $108.0 million at September 30, 2023. Total Assets decreased by approximately $176.9 million, while Total Liabilities decreased by approximately $58.7 million, primarily due to the repayment of convertible notes. Total Equity decreased by approximately $118.1 million[16] Condensed Consolidated Statements of Income (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited income statements for the three and nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Income (Amounts in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income | $163,229 | $114,627 | $475,388 | $278,460 | | Interest expense | $118,617 | $67,311 | $340,270 | $144,503 | | Total net interest income | $44,612 | $47,316 | $135,118 | $133,957 | | Total other income | $5,443 | $3,846 | $17,025 | $14,381 | | Total operating expenses | $23,056 | $94,077 | $170,176 | $130,846 | | Net Income (Loss) Attributable to Common Stockholders | $21,401 | $(48,421) | $(35,181) | $769 | | Basic EPS | $0.31 | $(0.70) | $(0.51) | $0.01 | | Diluted EPS | $0.31 | $(0.70) | $(0.51) | $0.01 | | Dividends Declared per Share of Common Stock | $0.43 | $0.43 | $1.29 | $1.29 | - For the three months ended September 30, 2023, Net Income Attributable to Common Stockholders was $21.4 million, a significant improvement from a loss of $(48.4) million in the prior year period. This was primarily driven by a substantial decrease in the provision for credit losses (from $80.6 million to $8.8 million) and higher interest income, partially offset by increased interest expense[19] - For the nine months ended September 30, 2023, the company reported a Net Loss Attributable to Common Stockholders of $(35.2) million, compared to a net income of $0.8 million in the prior year. This was mainly due to a higher provision for credit losses ($125.6 million vs. $91.2 million) and significantly increased interest expense, despite a substantial rise in interest income[19] Condensed Consolidated Statements of Changes in Equity (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited statements of changes in equity for the nine months ended September 30, 2023 Changes in Equity (Amounts in thousands) | Metric | Balance at Dec 31, 2022 | Balance at Sep 30, 2023 | | :------------------------------------- | :---------------------- | :---------------------- | | Total KKR Real Estate Finance Trust Inc. Stockholders' Equity | $1,571,538 | $1,453,724 | | Total Equity | $1,571,436 | $1,453,297 | Key Changes (Nine Months Ended Sep 30, 2023): * Net income (loss): $(25,077) (Q1), $(20,028) (Q2), $27,141 (Q3) * Common dividends declared: $(29,711) (Q1), $(29,716) (Q2), $(29,716) (Q3) * Series A preferred dividends declared: $(5,326) (Q1), $(5,326) (Q2), $(5,326) (Q3) * Stock-based compensation, net: $2,152 (Q1), $2,174 (Q2), $2,184 (Q3) - Total KKR Real Estate Finance Trust Inc. Stockholders' Equity decreased from $1,571.5 million at December 31, 2022, to $1,453.7 million at September 30, 2023, primarily due to net losses in the first two quarters of 2023 and consistent dividend declarations, partially offset by stock-based compensation[21] Condensed Consolidated Statements of Cash Flows (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited cash flow statements for the nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (Amounts in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $118,874 | $103,953 | | Net cash provided by (used in) investing activities | $(62,986) | $(970,596) | | Net cash provided by (used in) financing activities | $(184,881) | $783,510 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $(128,993) | $(83,133) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $121,628 | $190,637 | - Operating cash flows increased to $118.9 million in the nine months ended September 30, 2023, from $104.0 million in the prior year. Investing activities shifted from a significant outflow of $(970.6) million in 2022 to a smaller outflow of $(63.0) million in 2023, mainly due to reduced loan originations and fundings. Financing activities saw a substantial change from a net inflow of $783.5 million in 2022 to a net outflow of $(184.9) million in 2023, driven by lower proceeds from borrowings and stock issuances, and repayment of convertible notes[27] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed notes to KKR Real Estate Finance Trust Inc.'s unaudited financial statements, explaining policies and financial details Note 1. Business and Organization This note describes KKR Real Estate Finance Trust Inc.'s business, organizational structure, and investment focus as a mortgage REIT - KKR Real Estate Finance Trust Inc. (KREF) is a Maryland corporation formed in 2014, operating as a mortgage REIT focused on originating and acquiring transitional senior loans secured by commercial real estate (CRE) assets. KREF maintains REIT qualification for U.S. federal income tax purposes and is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR & Co. Inc[31][32][33] - As of September 30, 2023, KKR beneficially owned 14.5% of KREF's outstanding common stock. KREF operates within a single reporting segment, assessing performance based on its leveraged and unleveraged commercial real estate loan portfolio[34] Note 2. Summary of Significant Accounting Policies This note outlines KKR Real Estate Finance Trust Inc.'s key accounting policies, including consolidation, credit loss recognition, and fair value measurements - KREF's unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information. Key accounting policies include consolidation of entities where KREF has control or is the primary beneficiary of Variable Interest Entities (VIEs), such as Collateralized Loan Obligations (CLOs) and a Real Estate Owned (REO) joint venture[36][40][41][44][46] - The company recognizes and measures the allowance for credit losses under the Current Expected Credit Loss (CECL) model, which incorporates historical experience, current conditions, and forward-looking information. This applies to financial assets at amortized cost and off-balance sheet credit exposures like unfunded loan commitments[68][69] - The macroeconomic environment, including rising interest rates by the Federal Reserve, continues to impact commercial real estate values and demand, potentially increasing KREF's interest expense and affecting borrower prepayment and extension options. KREF uses Level 3 inputs for fair value measurements of illiquid commercial real estate loans, relying on discounted cash flow models and independent valuation firms[38][56] Note 3. Commercial Real Estate Loans This note details KKR Real Estate Finance Trust Inc.'s commercial real estate loan portfolio, including loan types, credit loss allowance, and risk ratings Commercial Real Estate Loans, Held-for-Investment (Amounts in thousands) | Loan Type | Sep 30, 2023 Outstanding Principal | Sep 30, 2023 Carrying Value | Dec 31, 2022 Outstanding Principal | Dec 31, 2022 Carrying Value | | :-------------------------- | :------------------------------- | :-------------------------- | :------------------------------- | :-------------------------- | | Senior loans | $7,520,591 | $7,266,050 | $7,463,459 | $7,288,635 | | Mezzanine loans | $44,470 | $43,409 | $98,933 | $98,529 | | Total/Weighted Average | $7,565,061 | $7,309,459 | $7,562,392 | $7,387,164 | | Weighted Average Floating Rate Coupon (Sep 30, 2023) | 8.7% | | 7.8% | | | Weighted Average Life (Years) (Sep 30, 2023) | 2.8 | | 3.3 | | Allowance for Credit Losses (Amounts in thousands) | Category | Balance at Dec 31, 2022 | Provision for (reversal of) credit losses, net (9M 2023) | Write-off charged (9M 2023) | Balance at Sep 30, 2023 | | :-------------------------- | :---------------------- | :------------------------------------------------------- | :-------------------------- | :---------------------- | | Commercial Real Estate Loans | $106,974 | $127,018 | $(15,000) | $218,992 | | Unfunded Loan Commitments | $4,138 | $(1,402) | — | $2,736 | | Total | $111,112 | $125,616 | $(15,000) | $221,728 | - The allowance for credit losses increased significantly from $111.1 million at December 31, 2022, to $221.7 million at September 30, 2023, primarily due to a $125.6 million CECL provision driven by additional reserves on risk-rated 5 senior office loans and macroeconomic conditions. Three risk-rated 5 senior office loans were identified as collateral dependent, with expected losses based on collateral fair value using capitalization rates between 6.6% and 8.7% and discount rates between 9.0% and 10.1%[138][139][140][141][142] - The average risk rating of KREF's loan portfolio remained consistent at 3.2 as of September 30, 2023, weighted by total loan exposure. The portfolio is concentrated in Multifamily (42.3%) and Office (23.5%) properties, with California (16.9%) and Texas (14.9%) as top geographies[134][144] Note 4. Real Estate Owned This note provides information on KKR Real Estate Finance Trust Inc.'s Real Estate Owned (REO) assets and their operational performance REO Assets and Liabilities (Amounts in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Real estate owned, net | $81,618 | $80,231 | | Total REO Assets | $86,474 | $83,125 | | Total REO Liabilities | $5,776 | $3,714 | REO Operations Income (Loss) (Amounts in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Revenue from real estate owned operations | $1,795 | $2,093 | $6,025 | $6,554 | | Expenses from real estate owned operations | $(2,819) | $(2,598) | $(8,233) | $(7,520) | | Total Income (Loss) | $(981) | $(461) | $(499) | $417 | - KREF's sole Real Estate Owned (REO) property, a retail asset in Portland, OR, had a net carrying value of $81.6 million as of September 30, 2023. The REO is held within a joint venture where KREF holds a 90% interest and has priority of distributions up to $76.4 million. The REO operations generated a net loss of $(0.98) million for the three months ended September 30, 2023, and $(0.50) million for the nine months ended September 30, 2023[147][148][151][202] Note 5. Debt Obligations This note describes KKR Real Estate Finance Trust Inc.'s various debt obligations, including secured financing agreements and covenant compliance Secured Financing Agreements (Amounts in thousands) | Facility Type | Sep 30, 2023 Outstanding Principal | Dec 31, 2022 Outstanding Principal | Sep 30, 2023 Carrying Value | Dec 31, 2022 Carrying Value | | :-------------------------- | :------------------------------- | :------------------------------- | :-------------------------- | :-------------------------- | | Master Repurchase Agreements | $1,520,508 | $1,436,166 | $1,517,787 | $1,432,330 | | Term Lending Agreements | $1,406,013 | $1,530,105 | $1,402,067 | $1,526,002 | | Asset Specific Financing | $239,136 | $172,873 | $236,192 | $170,212 | | Revolving Credit Agreement | $110,000 | — | $110,000 | — | | Total/Weighted Average | $3,275,657 | $3,117,934 | $3,262,128 | $3,128,544 | | Weighted Average Funding Cost (Sep 30, 2023) | 7.6% | 7.1% | | | - KREF's total secured financing agreements increased to $3.28 billion at September 30, 2023, from $3.12 billion at December 31, 2022. The weighted average funding cost rose to 7.6% from 7.1% over the same period. The company was in compliance with all financial debt covenants as of September 30, 2023, including interest income to interest expense ratio (1.4 to 1.0), consolidated tangible net worth (approx. $1,353.4 million), cash liquidity (greater of $10.0 million or 5.0% of recourse indebtedness), and total indebtedness (83.3% of Total Assets)[156][176] Debt Maturities (Amounts in thousands) | Year | Nonrecourse | Recourse | Total | | :--- | :---------- | :--------- | :------ | | 2023 | $110,300 | $12,500 | $122,800 | | 2024 | $1,376,326 | $315,586 | $1,691,912 | | 2025 | $860,709 | $275,761 | $1,136,470 | | 2026 | $601,484 | $127,783 | $729,267 | | Thereafter | $50,956 | $110,000 | $160,956 | | Total | $2,999,775 | $841,630 | $3,841,405 | Note 6. Collateralized Loan Obligations This note details KKR Real Estate Finance Trust Inc.'s Collateralized Loan Obligations (CLOs) used for financing and their associated collateral assets CLO Collateral Assets and Borrowings (Amounts in thousands) | CLO | Sep 30, 2023 Collateral Assets (Outstanding Principal) | Sep 30, 2023 Financing Provided (Outstanding Principal) | Dec 31, 2022 Collateral Assets (Outstanding Principal) | Dec 31, 2022 Financing Provided (Outstanding Principal) | | :-------------------------- | :----------------------------------------------------- | :---------------------------------------------------- | :----------------------------------------------------- | :---------------------------------------------------- | | KREF 2021-FL2 | $1,300,000 | $1,095,250 | $1,300,000 | $1,095,250 | | KREF 2022-FL3 | $1,000,000 | $847,500 | $1,000,000 | $847,500 | | Total | $2,300,000 | $1,942,750 | $2,300,000 | $1,942,750 | | Weighted Avg. Yield/Cost (Sep 30, 2023) | S + 3.1% | S + 1.8% | L/S + 3.2% | L/S + 1.9% | - KREF utilizes two managed CLOs (KREF 2021-FL2 and KREF 2022-FL3) for match-term, non-mark-to-market, and non-recourse financing of loan participations. As of September 30, 2023, these CLOs financed $2.3 billion in collateral assets with $1.94 billion in outstanding financing. All CLO collateral loan assets are now indexed to Term SOFR, shifting from a mix of Term SOFR and LIBOR in 2022[179][180][182] CLO Net Interest Income (Amounts in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income | $48,753 | $31,403 | $134,741 | $72,289 | | Interest expense | $35,378 | $20,325 | $100,463 | $41,152 | | Net interest income | $13,375 | $11,078 | $34,278 | $31,137 | Note 7. Secured Term Loan, Net This note provides details on KKR Real Estate Finance Trust Inc.'s secured term loan, including its principal, carrying value, and interest rate Secured Term Loan (Amounts in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Principal | $343,875 | $346,500 | | Carrying value | $335,680 | $336,828 | | Total Cost (Sep 30, 2023) | SOFR + 4.1% | LIBOR + 3.5% | | Maturity | Sep 1, 2027 | Sep 1, 2027 | - KREF's secured term loan, with a principal of $343.9 million as of September 30, 2023, transitioned from LIBOR to Term SOFR in June 2023, now bearing interest at Adjusted Term SOFR plus a 4.1% margin. The company remains in compliance with all associated covenants, including a minimum consolidated tangible net worth of $650.0 million and a maximum Total Debt to Total Assets ratio of 83.3%[192][193] Note 8. Convertible Notes, Net This note outlines the status of KKR Real Estate Finance Trust Inc.'s convertible notes, including their repayment and associated interest expense Convertible Notes (Amounts in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Principal | — | $143,750 | | Carrying value | — | $143,237 | - The entire $143.75 million principal balance of the Convertible Notes matured and was repaid in cash on May 15, 2023. As of September 30, 2023, there were no Convertible Notes outstanding[196] Convertible Notes Interest Expense (Amounts in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total interest expense | — | $2,550 | $3,789 | $7,641 | Note 9. Variable Interest Entities This note explains KKR Real Estate Finance Trust Inc.'s involvement with Variable Interest Entities (VIEs), including CLOs and a Real Estate Owned joint venture - KREF consolidates Collateralized Loan Obligations (CLOs) and a Real Estate Owned (REO) Joint Venture as Variable Interest Entities (VIEs) where it is deemed the primary beneficiary due to control over significant activities and the obligation/right to absorb losses/benefits. The REO JV held $71.9 million in assets as of September 30, 2023, with KREF having priority distributions up to $76.4 million[200][201][202] - KREF also holds a 3.5% interest in RECOP I, an unconsolidated VIE, valued at $35.5 million as of September 30, 2023. KREF is not the primary beneficiary of RECOP I and records its share of net asset value and unrealized gains/losses under the equity method[203] Note 10. Equity This note provides details on KKR Real Estate Finance Trust Inc.'s equity, including common shares, share repurchase program, and dividends declared - As of September 30, 2023, KREF had 69,106,061 common shares outstanding. KKR and its affiliates beneficially owned 10,000,001 shares, or 14.5% of KREF's outstanding common stock[211][213] - KREF's share repurchase program, effective February 3, 2023, allows for repurchases of up to $100.0 million of common stock. No repurchases were made during the three and nine months ended September 30, 2023, leaving $100.0 million remaining capacity[214][216] - KREF did not issue or sell any common stock under its At-the-Market (ATM) program during the three and nine months ended September 30, 2023, with $93.2 million remaining available for issuance[217][218] Common Stock Dividends Declared (Amounts in thousands, except per share data) | Declaration Date | Record Date | Payment Date | Per Share | Total | | :--------------- | :---------- | :----------- | :-------- | :---- | | March 17, 2023 | March 31, 2023 | April 14, 2023 | $0.43 | $29,711 | | June 15, 2023 | June 30, 2023 | July 14, 2023 | $0.43 | $29,716 | | September 15, 2023 | September 29, 2023 | October 13, 2023 | $0.43 | $29,716 | | Total 2023 (9M) | | | | $89,143 | | Total 2022 (9M) | | | | $88,977 | Series A Preferred Stock Dividends Declared (Amounts in thousands, except per share data) | Declaration Date | Record Date | Payment Date | Per Share | Total | | :--------------- | :---------- | :----------- | :-------- | :---- | | February 3, 2023 | February 28, 2023 | March 15, 2023 | $0.41 | $5,326 | | April 21, 2023 | May 31, 2023 | June 15, 2023 | $0.41 | $5,326 | | July 21, 2023 | August 31, 2023 | September 15, 2023 | $0.41 | $5,326 | | Total 2023 (9M) | | | | $15,978 | | Total 2022 (9M) | | | | $15,978 | Note 11. Stock-based Compensation This note details KKR Real Estate Finance Trust Inc.'s stock-based compensation expense, unvested Restricted Stock Units, and Deferred Stock Units Stock-based Compensation Expense (Amounts in thousands) | Period | Stock-based Compensation Expense | | :------------------------------ | :------------------------------- | | Three Months Ended Sep 30, 2023 | $2,200 | | Nine Months Ended Sep 30, 2023 | $6,500 | | Three Months Ended Sep 30, 2022 | $2,200 | | Nine Months Ended Sep 30, 2022 | $6,300 | - As of September 30, 2023, KREF had 953,579 unvested Restricted Stock Units (RSUs) outstanding, with a weighted-average grant date fair value of $16.43 per RSU. Total unrecognized stock-based compensation expense was $8.0 million, expected to be recognized over a weighted average period of 0.9 years[227][229] - KREF's board of directors adopted a Deferral Plan in March 2022, allowing participants to defer receipt of common stock upon RSU vesting. As of September 30, 2023, 16,575 Deferred Stock Units (DSUs) were outstanding[232] Note 12. Earnings (Loss) per Share This note presents KKR Real Estate Finance Trust Inc.'s basic and diluted earnings (loss) per share calculations for the reported periods Basic and Diluted EPS (Amounts in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income (loss) attributable to common stockholders, basic and diluted | $21,401 | $(48,421) | $(35,181) | $769 | | Weighted average common shares outstanding, basic and diluted | 69,122,636 | 69,382,730 | 69,111,201 | 67,029,140 | | Basic common share | $0.31 | $(0.70) | $(0.51) | $0.01 | | Diluted common share | $0.31 | $(0.70) | $(0.51) | $0.01 | - For the three months ended September 30, 2023, basic and diluted EPS improved to $0.31 from $(0.70) in the prior year. However, for the nine months ended September 30, 2023, basic and diluted EPS declined to $(0.51) from $0.01 in the prior year. Unvested RSUs and convertible notes were excluded from diluted EPS calculations when their effect was anti-dilutive[239][240] Note 13. Commitments and Contingencies This note outlines KKR Real Estate Finance Trust Inc.'s future funding commitments, remaining commitments, and potential macroeconomic risks - As of September 30, 2023, KREF had future funding commitments of $1,007.6 million related to its commercial real estate loans, primarily for construction projects, capital improvements, and leasing commissions. These commitments are subject to certain conditions[245] - KREF also had a remaining commitment of $4.3 million to RECOP I as of September 30, 2023. The company was not involved in any material legal proceedings[243][246] - The macroeconomic environment, characterized by rising interest rates from the Federal Reserve, poses risks of adversely impacting real estate asset values, increasing interest expense, and potentially decreasing loan prepayments while increasing borrower extension options[247] Note 14. Related Party Transactions This note details KKR Real Estate Finance Trust Inc.'s transactions with related parties, including management fees and incentive compensation - KREF is externally managed by KKR Real Estate Finance Manager LLC (the "Manager") under a three-year agreement with automatic one-year renewals. The Manager receives a quarterly management fee (greater of $62,500 or 0.375% of weighted average adjusted equity) and quarterly incentive compensation (20.0% of excess trailing 12-month distributable earnings over a 7.0% Hurdle Rate)[250][252] Amounts Due to Affiliates (Amounts in thousands) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Management fees | $6,566 | $6,578 | | KCM fees | $1,747 | $2,044 | | Total Due to Affiliates | $8,313 | $8,722 | Affiliate Expenses (Amounts in thousands) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Management fees | $6,566 | $6,589 | $19,648 | $19,102 | | Incentive compensation | $69 | — | $2,491 | — | | Expense reimbursements and other | $1,234 | $904 | $3,680 | $3,412 | | Total | $7,869 | $7,493 | $25,819 | $22,514 | - KREF incurred $25.8 million in total affiliate expenses for the nine months ended September 30, 2023, up from $22.5 million in the prior year, primarily due to a $2.5 million increase in Manager incentive compensation[259] Note 15. Fair Value of Financial Instruments This note describes KKR Real Estate Finance Trust Inc.'s fair value measurements for financial instruments, categorized by a three-level hierarchy Fair Value of Financial Instruments (Amounts in thousands) | Instrument | Sep 30, 2023 Carrying Value | Sep 30, 2023 Fair Value (Total) | Sep 30, 2023 Fair Value (Level 3) | | :------------------------------------- | :-------------------------- | :------------------------------ | :------------------------------ | | Cash and cash equivalents | $108,038 | $108,038 | — | | Commercial real estate loans, held-for-investment, net | $7,309,459 | $7,326,031 | $7,326,031 | | Equity method investments | $35,540 | $35,540 | $35,540 | | Secured financing agreements, net | $3,827,399 | $3,827,399 | $3,827,399 | | Collateralized loan obligations, net | $1,941,114 | $1,888,916 | $1,888,916 | | Secured term loan, net | $335,680 | $345,594 | — | - KREF categorizes the fair value of financial instruments into a three-level hierarchy. Commercial real estate loans and equity method investments are primarily Level 3 assets, valued using discounted cash flow models and other unobservable inputs. The fair value of secured financing agreements approximated their carrying value as of September 30, 2023[52][56][274][282] Level 3 Unobservable Inputs for Commercial Real Estate Loans (Sep 30, 2023) | Input | Weighted Average | Range | | :---------------- | :--------------- | :---------- | | Discount margin | 4.3% | 3.2% - 16.2% | | Discount rate | 9.6% | 9.0% - 10.1% | | Capitalization rate | 7.7% | 6.6% - 8.7% | Note 16. Income Taxes This note explains KKR Real Estate Finance Trust Inc.'s income tax treatment as a REIT and its income tax provision for the reported periods - KREF has elected to be taxed as a REIT, generally avoiding U.S. federal and state income tax on distributed income if at least 90% of its REIT taxable income is distributed. For the nine months ended September 30, 2023, KREF recorded an income tax provision of $0.5 million related to its taxable REIT subsidiaries and state/local taxes, compared to zero in the prior year[284][285] - There were no material deferred tax assets or liabilities or uncertain tax positions as of September 30, 2023, and December 31, 2022[285][103][104] Note 17. Subsequent Events This note discloses significant events that occurred after the reporting period, including common stock dividend payments - In October 2023, KREF paid $29.7 million in common stock dividends, or $0.43 per share, for the third quarter of 2023[288] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides KKR Real Estate Finance Trust Inc.'s management's perspective on the company's financial condition, results of operations, and key performance indicators. It covers the investment strategy, portfolio performance, financing activities, liquidity, and critical accounting policies, highlighting the impact of macroeconomic factors and credit quality on the business Overview This section provides an overview of KKR Real Estate Finance Trust Inc.'s business model, investment objectives, and macroeconomic impacts - KKR Real Estate Finance Trust Inc. (KREF) is a real estate finance company focused on originating and acquiring transitional senior loans secured by institutional-quality commercial real estate (CRE) assets. The company's investment objective is capital preservation and generating attractive risk-adjusted returns primarily through dividends, while maintaining REIT qualification[291] - KREF is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR & Co. Inc., which handles investment selection, financing, and day-to-day operations[292] - The macroeconomic environment, characterized by rising inflation and interest rates, has created volatility. While rising interest rates generally increase KREF's net income, they may adversely affect borrowers, real estate asset values, and increase KREF's interest expense. Remote work trends continue to impact commercial real estate values and demand[293][294][295] Key Financial Measures and Indicators This section presents KKR Real Estate Finance Trust Inc.'s key financial measures, including EPS, distributable earnings, and book value per share Earnings (Loss) Per Share and Dividends Declared (Amounts in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Jun 30, 2023 | | :------------------------------------- | :------------------------------ | :------------------------------ | | Net income (loss) attributable to common stockholders | $21,401 | $(25,772) | | Net income (loss) per share, basic and diluted | $0.31 | $(0.37) | | Dividends declared per share | $0.43 | $0.43 | Distributable Earnings (Amounts in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Jun 30, 2023 | | :------------------------------------- | :------------------------------ | :------------------------------ | | Net Income (Loss) Attributable to Common Stockholders | $21,401 | $(25,772) | | Adjustments (Non-cash equity comp, unrealized gains/losses, credit losses, loan write-off) | $(4,027) | $58,845 | | Distributable Earnings | $17,374 | $33,073 | | Distributable Earnings per Diluted Weighted Average Share | $0.25 | $0.48 | Book Value per Share (Amounts in thousands, except per share data) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------- | :----------- | :----------- | | Common stockholders' equity | $1,125,974 | $1,243,788 | | Total shares outstanding at period end | 69,122,636 | 69,095,011 | | Book value per share | $16.29 | $18.00 | - Book value per share decreased from $18.00 at December 31, 2022, to $16.29 at September 30, 2023, reflecting the impact of an estimated CECL credit loss allowance of $221.7 million, or ($3.21) per share[305] Our Portfolio This section details KKR Real Estate Finance Trust Inc.'s loan portfolio, including its composition, risk ratings, and recent loan activity and modifications - As of September 30, 2023, KREF's portfolio totaled $7,869.9 million, primarily consisting of senior commercial real estate loans. The average risk rating of the loan portfolio was 3.2, consistent with December 31, 2022. Multifamily and industrial loans comprised 55% of the portfolio, and 99% of loans earned a floating rate of interest[307][308][310][341] Quarterly Loan Activity (Amounts in thousands) | Activity | Three Months Ended Sep 30, 2023 | Three Months Ended Jun 30, 2023 | Three Months Ended Mar 31, 2023 | Three Months Ended Dec 31, 2022 | | :---------------- | :------------------------------ | :------------------------------ | :------------------------------ | :------------------------------ | | Loan originations | — | — | — | $370,400 | | Loan fundings | $164,882 | $177,162 | $203,612 | $423,330 | | Loan repayments | $(152,301) | $(339,288) | $(86,928) | $(209,152) | | Net fundings | $12,581 | $(162,126) | $116,684 | $214,178 | | Write-off | $(15,000) | — | — | $(25,000) | | Total activity | $(2,419) | $(162,126) | $116,684 | $189,635 | - KREF completed several loan modifications in 2023, including a risk-rated 5 senior office loan in Philadelphia (restructured after a $25.0 million write-off), a risk-rated 4 senior multifamily loan in West Hollywood, a risk-rated 5 senior office loan in Minneapolis, and a risk-rated 4 senior office loan in Chicago (restructured after a $15.0 million principal repayment and write-off of a subordinated note)[345][346][347][348] Total Financing This section describes KKR Real Estate Finance Trust Inc.'s financing structure, including various debt facilities, outstanding balances, and covenant compliance Total Financing Outstanding Principal Balance (Amounts in thousands) | Financing Type | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Master repurchase agreements | $1,520,508 | $1,436,166 | | Collateralized loan obligations | $1,942,750 | $1,942,750 | | Term lending agreements | $1,406,013 | $1,530,105 | | Term loan facility | $565,748 | $631,557 | | Secured term loan | $343,875 | $346,500 | | Asset specific financing | $239,136 | $172,873 | | Revolver | $110,000 | — | | Non-consolidated senior interests | $187,554 | $263,086 | | Total financing | $6,315,584 | $6,323,037 | - As of September 30, 2023, KREF's total financing was $6.32 billion, with 76% from Non-Mark-to-Market Financing Sources, reducing exposure to market volatility. The remaining 24% from master repurchase agreements are subject only to credit marks, and KREF has not received any margin calls to date[352][353] Available Borrowings under Financing Agreements (Amounts in thousands) | Facility Type | Sep 30, 2023 Available | | :-------------------------- | :--------------------- | | Master Repurchase Agreements | $74,720 | | Term Loan Facility | — | | Term Lending Agreements | $2,976 | | Warehouse Facility | — | | Asset Specific Financing | — | | Revolver | $500,000 | | Total | $577,696 | - KREF was in compliance with all covenants of its financing facilities as of September 30, 2023, including interest income to interest expense ratio (1.4 to 1.0), consolidated tangible net worth (up to $1,353.4 million), cash liquidity (greater of $10.0 million or 5.0% of recourse indebtedness), and total indebtedness (83.3% of Total Assets)[380][381][382] Real Estate Owned and Joint Venture This section provides details on KKR Real Estate Finance Trust Inc.'s Real Estate Owned (REO) asset and its associated joint venture - KREF holds one Real Estate Owned (REO) asset, a retail property in Portland, OR, with a net carrying value of $81.6 million as of September 30, 2023. This asset was acquired in December 2021 through foreclosure and a portion was contributed to a joint venture (REO JV) where KREF holds a 90% interest. KREF has priority of distributions up to $76.4 million from the REO JV[309][385][386] Results of Operations This section analyzes KKR Real Estate Finance Trust Inc.'s financial performance, comparing results for the three and nine months ended September 30, 2023 and 2022 Three Months Ended September 30, 2023 vs. June 30, 2023 (Amounts in thousands, except per share data) | Metric | Sep 30, 2023 | Jun 30, 2023 | Increase (Decrease) | Percentage Change | | :------------------------------------- | :----------- | :----------- | :------------------ | :---------------- | | Interest income | $163,229 | $159,629 | $3,600 | 2% | | Interest expense | $118,617 | $115,677 | $2,940 | 3% | | Total net interest income | $44,612 | $43,952 | $660 | 2% | | Total other income | $5,443 | $6,972 | $(1,529) | (22)% | | Total operating expenses | $23,056 | $70,871 | $(47,815) | (67)% | | Net Income (Loss) Attributable to Common Stockholders | $21,401 | $(25,772) | $47,173 | 183% | | Basic EPS | $0.31 | $(0.37) | $0.68 | 184% | - Net interest income increased by $0.7 million (2%) quarter-over-quarter, primarily due to higher index rates. Total operating expenses decreased significantly by $47.8 million (67%), mainly driven by a $47.5 million net decrease in the provision for credit losses. This led to a substantial improvement in Net Income Attributable to Common Stockholders, from a loss of $(25.8) million to a gain of $21.4 million[388][389][391] Nine Months Ended September 30, 2023 vs. 2022 (Amounts in thousands, except per share data) | Metric | 9M 2023 | 9M 2022 | Increase (Decrease) | Percentage Change | | :------------------------------------- | :----------- | :----------- | :------------------ | :---------------- | | Interest income | $475,388 | $278,460 | $196,928 | 71% | | Interest expense | $340,270 | $144,503 | $195,767 | 135% | | Total net interest income | $135,118 | $133,957 | $1,161 | 1% | | Total other income (loss) | $17,025 | $14,381 | $2,644 | 18% | | Total operating expenses | $170,176 | $130,846 | $39,330 | 30% | | Net Income (Loss) Attributable to Common Stockholders | $(35,181) | $769 | $(35,950) | (4,675)% | | Basic EPS | $(0.51) | $0.01 | $(0.52) | (5,200)% | - Year-over-year, net interest income increased by $1.2 million (1%), driven by higher index rates and an increased loan portfolio, partially offset by the suspension of interest income accrual on nonaccrual loans. Total operating expenses increased by $39.3 million (30%), primarily due to a $34.4 million increase in the provision for credit losses and a $2.5 million increase in Manager incentive compensation. This resulted in a net loss attributable to common stockholders of $(35.2) million for the nine months ended September 30, 2023, compared to a net income of $0.8 million in the prior year[393][395][398] COVID-19 Impact This section discusses the ongoing impact of the COVID-19 pandemic and macroeconomic factors on commercial real estate and KREF's operations - The COVID-19 pandemic continues to impact commercial real estate values and demand due to increased remote working arrangements. Global supply chain disruptions, labor shortages, and inflationary pressures negatively affect borrowers' ability to execute business plans and meet loan obligations. Rising interest rates by the Federal Reserve further impact real estate asset values and KREF's interest expense, potentially decreasing prepayments and increasing extension options[399][400] Liquidity and Capital Resources This section outlines KKR Real Estate Finance Trust Inc.'s liquidity sources, capital structure, and cash flow activities for the reported periods - KREF's primary liquidity sources include $108.0 million in cash, $500.0 million available on its corporate Revolver, $77.7 million in available borrowings under other financing arrangements, and $30.0 million in loan repayment proceeds held by a servicer. Additionally, KREF had $22.9 million of unencumbered senior loans available for financing[401] Debt-to-Equity Ratio and Total Leverage Ratio | Metric | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------- | :----------- | :----------- | | Debt-to-equity ratio | 2.3x | 2.0x | | Total leverage ratio | 4.1x | 3.8x | - The debt-to-equity ratio increased from 2.0x to 2.3x, and the total leverage ratio increased from 3.8x to 4.1x between December 31, 2022, and September 30, 2023, indicating increased reliance on debt financing relative to equity[408][409] Cash Flows (Amounts in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :------------------------------------- | :----------------------------- | :----------------------------- | | Operating Activities | $118,874 | $103,953 | | Investing Activities | $(62,986) | $(970,596) | | Financing Activities | $(184,881) | $783,510 | | Net Increase (Decrease) in Cash | $(128,993) | $(83,133) | - Cash flows from operating activities increased by $14.9 million year-over-year. Investing activities saw a significant reduction in net cash used, from $(970.6) million in 2022 to $(63.0) million in 2023, primarily due to lower loan originations. Financing activities shifted from a net inflow of $783.5 million in 2022 to a net outflow of $(184.9) million in 2023, largely due to convertible note repayments and reduced proceeds from borrowings and stock issuances[413][415][416] Critical Accounting Policies and Use of Estimates This section explains KKR Real Estate Finance Trust Inc.'s critical accounting policies, particularly the allowance for credit losses and fair value estimates - KREF's financial statements rely on estimates and assumptions, particularly for the allowance for credit losses under the Current Expected Credit Loss (CECL) model. This model incorporates historical data, current conditions, and forward-looking macroeconomic forecasts to estimate lifetime credit losses for commercial real estate loans and unfunded commitments[424][425][426][427] - Loan risk ratings (1-5, less to greater risk) are key credit quality indicators, assessed quarterly based on factors like LTV, debt yield, property type, market dynamics, and sponsor financial strength. For collateral-dependent loans, expected losses are measured based on the difference between collateral fair value and amortized cost[428][429] - KREF has not adopted optional expedients for Reference Rate Reform (LIBOR transition) but continues to evaluate them. The adoption of ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures) on January 1, 2023, had no significant impact on the financial statements[432][433] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section outlines KKR Real Estate Finance Trust Inc.'s exposure to various market risks, including credit risk, interest rate risk, prepayment risk, financing risk, and real estate risk. It details how these risks are managed and their potential impact on the company's financial performance Credit Risk This section describes KKR Real Estate Finance Trust Inc.'s exposure to credit risk, including default risk, and its mitigation strategies - KREF's investments are subject to credit risk, including default risk, which depends on sponsors' ability to operate collateral properties to generate sufficient cash flows for debt service. The Manager actively monitors the portfolio, collateral performance, and enforces rights to mitigate this risk[436] Credit Yield Risk This section explains credit yield risk, reflecting market demand for returns on credit-sensitive financial instruments and its impact on KREF's holdings - Credit yield risk reflects the return demanded by the lending market based on default risk. Increased supply and reduced demand for credit-sensitive financial instruments can lead to higher required yields and lower prices for KREF's holdings[437] Interest Rate Risk This section details KKR Real Estate Finance Trust Inc.'s exposure to interest rate fluctuations and the impact of rising or declining rates on its net income - KREF's business model generally benefits from rising interest rates, which increase net income, while declining rates decrease it. Rate floors on the loan portfolio may partially offset the impact of declining rates. As of September 30, 2023, a 50 basis point decrease in index rates would decrease expected cash flows by approximately $4.7 million (or $0.07 per common share) for the next twelve months, while a 50 basis point increase would have the opposite effect[438][440] - All of KREF's floating rate loan portfolio and financing arrangements were indexed to Term SOFR as of September 30, 2023, following the LIBOR transition. Differences between LIBOR and SOFR could result in higher interest costs[443] Prepayment Risk This section discusses prepayment risk, where principal is repaid earlier than expected, potentially affecting KKR Real Estate Finance Trust Inc.'s returns and financing terms - Prepayment risk involves principal being repaid earlier than anticipated, potentially reducing returns. Higher interest rates may decrease prepayment speeds and increase borrower extension options, which could extend beyond KREF's financing terms, potentially forcing asset sales and incurring losses[445][446] Financing Risk This section outlines KKR Real Estate Finance Trust Inc.'s financing risk, including potential adverse effects from market volatility on its various debt facilities - KREF finances assets through various facilities, including repurchase agreements, term lending agreements, and CLOs. Weakness or volatility in financial, CRE, or mortgage markets could adversely affect lenders, leading to reduced or more costly financing, or margin calls[447] Real Estate Risk This section describes the risks associated with the volatility of commercial real estate market values and their impact on KKR Real Estate Finance Trust Inc.'s collateral - The market values of commercial real estate assets are volatile and can be affected by economic conditions, local real estate dynamics, and other factors. Decreases in property values reduce collateral value and potential repayment proceeds, leading to potential losses for KREF[448] Item 4. Controls and Procedures This section details KKR Real Estate Finance Trust Inc.'s disclosure controls and procedures and internal control over financial reporting. As of September 30, 2023, management concluded that disclosure controls and procedures were effective, and no material changes occurred in internal control over financial reporting during the quarter - As of September 30, 2023, KREF's management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[451] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[452] Part II - Other Information This section provides additional information not included in the financial statements, covering legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section refers to the legal proceedings information provided in Note 13 of the condensed consolidated financial statements, indicating that KREF was not involved in any material legal proceedings as of September 30, 2023 - KREF was not involved in any material legal proceedings regarding claims or legal actions against the company as of September 30, 2023[454] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in KREF's Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in KREF's Annual Report on Form 10-K[455] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details KREF's share repurchase program. As of September 30, 2023, KREF had $100.0 million of remaining capacity under its share repurchase program, with no shares repurchased during the three months ended September 30, 2023 - KREF's share repurchase program allows for repurchases of up to an aggregate of $100.0 million of common stock, effective February 3, 2023. No shares were repurchased during the three months ended September 30, 2023[456][457] - As of September 30, 2023, KREF had $100.0 million of remaining capacity to repurchase shares under the program, which has no expiration date and can be suspended, modified, or discontinued at any time[457] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities - None[458] Item 4. Mine Safety Disclosures This section indicates that mine safety disclosures are not applicable to KREF - Not applicable[459] Item 5. Other Information This section states that there is no other information to disclose - None[460] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including various amendments to guaranty and repurchase agreements, certificates from the CEO and CFO, and XBRL-related documents - Exhibits include amendments to guaranty and repurchase agreements (e.g., with Goldman Sachs Bank USA, Morgan Stanley Bank, N.A., Wells Fargo Bank, National Association, MUFG Bank, Ltd.), certificates from the CEO and CFO (pursuant to Sarbanes-Oxley Act), and Inline XBRL documents[461]