KKR Real Estate Finance Trust (US:KREF)2022-02-08 21:39Capital Structure and Investment Portfolio - KREF's total committed capital base reached $838.1 million, fully drawn prior to its IPO, which generated net proceeds of $225.9 million on May 5, 2017[19]. - As of December 31, 2021, KREF's aggregate investment portfolio totaled $6,791.5 million, primarily comprised of $6,677.2 million in senior and mezzanine loans[31]. - The average committed loan size, net of amounts committed by KKR affiliates, was $130.9 million for the year ended December 31, 2021, compared to $91.8 million for 2020[32]. - KREF's common book value as of December 31, 2021, was $1,188.9 million, net of a $23.7 million CECL allowance[32]. - KREF's portfolio is entirely located in the United States as of December 31, 2021[31]. - The total outstanding portfolio financing was $5.5 billion, with a maximum capacity of $6.9 billion[38]. - Non-Mark-to-Market financing sources accounted for 71% of the total portfolio financing, amounting to $3.8 billion as of December 31, 2021[37]. - The company closed a $1.3 billion managed collateralized loan obligation (CLO) with an 84.25% advance rate and a weighted average cost of capital of L+1.30%[39]. - A $500 million term lending agreement was entered into, providing asset-based financing on a Non-Mark-to-Market basis with a term of up to five years[39]. - The company targets a leverage ratio on senior loans between 3.5 and 4.0-to-1, with a total leverage ratio of 3.7-to-1 as of December 31, 2021[41]. Investment Strategy and Risk Management - KREF focuses on originating and acquiring transitional senior loans secured by institutional-quality commercial real estate properties located in liquid markets[18]. - The company expects future investment activity to be heavily weighted toward floating-rate senior loans, financed through repurchase facilities and non-mark-to-market financing[31]. - KREF's investment strategy includes lending at a substantial discount to intrinsic real estate value, supported by independent assessments[27]. - KREF's investment committee includes experienced professionals with over 25 years of commercial real estate experience, ensuring robust investment strategy execution[25]. - Approximately 98.3% of the total investment portfolio earned a floating rate of interest indexed to one-month LIBOR as of December 31, 2021[42]. - About 54% of the loan portfolio had a LIBOR floor of 0.25% or higher, with a weighted average floor of 0.74%[44]. - The company is monitoring the transition from LIBOR to SOFR, with no assets or liabilities indexed to SOFR as of December 31, 2021[47]. - The company operates in a competitive environment, facing competition from various institutional lenders and financial institutions[49]. - The company is exposed to risks associated with debt-oriented real estate investments, which could be negatively impacted by changes in economic conditions and real estate fundamentals[67]. - The company may experience difficulties in redeploying cash from repayments of existing loans, which could adversely affect financial performance[85]. Economic and Market Conditions - The ongoing COVID-19 pandemic has caused severe disruptions in the U.S. and global economy, impacting the company's performance and results of operations[55]. - The company has observed signs of economic recovery but cannot predict the time required for a widespread sustainable recovery, particularly with the emergence of new COVID-19 variants[56]. - The pandemic has led to increased inflation and labor shortages, negatively affecting borrowers' ability to execute their business plans[57]. - Economic conditions, including the impact of COVID-19, could negatively affect the creditworthiness of borrowers and the value of underlying real estate collateral[68]. - The company cannot predict the degree to which economic conditions will improve or decline, which could materially affect its business and financial condition[69]. - The pandemic may result in more frequent modifications of loans and instances of default or foreclosure on assets underlying the company's loans[62]. - The inability of borrowers' tenants to pay rent could lead to defaults, affecting the company's ability to pay dividends and meet debt obligations[58]. - Economic downturns may lead to defaults on concentrated investments, adversely affecting financial condition and results of operations[95]. Interest Rate and Credit Risk - 98.3% of the total investment portfolio earns a floating rate of interest indexed to one-month USD LIBOR, indicating a high exposure to interest rate fluctuations[70]. - In a declining interest rate environment, interest income generally decreases as LIBOR decreases, which could negatively impact net income[70]. - The company’s net interest income benefits from in-the-money LIBOR floors, but this benefit is expected to decrease as LIBOR increases[70]. - Changes in interest rates and credit spreads may lead to operating losses if interest and related expenses exceed interest and related income[71]. - Increases in interest rates may negatively affect demand for loans and could result in higher borrower default rates[72]. - The transition from LIBOR to SOFR may result in higher interest costs for the company, impacting its operating results[146]. Regulatory and Compliance Risks - The company must maintain less than 40% of total assets in "investment securities" to avoid registration under the Investment Company Act, limiting investment flexibility[183]. - To qualify for exclusions under the Investment Company Act, subsidiaries must hold at least 55% of assets in "qualifying" real estate assets and 80% in real estate-related assets[189]. - The company is subject to periodic reviews by its board of directors, relying on information provided by its manager, which may influence decision-making[180]. - The obligations of being a public company require significant resources, including compliance with the Sarbanes-Oxley Act and SEC regulations, which could strain management and financial resources[203]. - Failure to maintain effective internal controls over financial reporting could lead to a loss of investor confidence and negatively impact stock price[204]. - The company must maintain its qualification as a REIT to avoid substantial tax liabilities, which involves complex compliance requirements[206]. - Regulatory capital requirements could increase financing costs and limit the ability to originate or acquire loans, impacting liquidity[196]. - The potential for increased competition from deregulated financial institutions could affect the company's investment opportunities and yields[197]. Management and Governance - KREF's manager, KKR, reported $470.6 billion in assets under management as of December 31, 2021, providing significant advantages in sourcing and managing investments[23]. - KKR and its affiliates beneficially owned shares providing them with an aggregate 23.2% of the total voting power of the company as of December 31, 2021[172]. - The company pays base management fees regardless of portfolio performance, which may reduce the incentive for the Manager to seek attractive risk-adjusted returns[170]. - The Manager can earn incentive fees based on quarterly earnings, potentially leading to investments in riskier assets to boost short-term net income[171]. - The management agreement with the company's Manager can be terminated with 180 days' notice, which could be costly and difficult to execute[165]. - The current term of the management agreement extends to December 31, 2022, with automatic renewals unless terminated by the Manager[163]. - Conflicts of interest may arise in the allocation of investment opportunities between the company and KKR investment vehicles, potentially affecting the company's share of such opportunities[178]. - The company may co-invest with KKR investment vehicles, which could result in less favorable economic terms for the company compared to other parties[178]. - KKR's information-sharing policies may limit the company's ability to leverage KKR's resources effectively for its investments[179].