KKR Real Estate Finance Trust (KREF) - 2021 Q1 - Quarterly Report

Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated financial statements and comprehensive notes are presented for the quarter ended March 31, 2021 Condensed Consolidated Balance Sheets (Unaudited) This section provides KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated balance sheets as of March 31, 2021, and December 31, 2020 | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Total Assets | 5,272,880 | 4,965,612 | | Total Liabilities | 4,219,502 | 3,920,206 | | Total KKR Real Estate Finance Trust Inc. stockholders' equity | 1,050,816 | 1,043,554 | | Commercial real estate loans, held-for-investment, net | 4,968,447 | 4,784,733 | Condensed Consolidated Statements of Income (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated statements of income for the three months ended March 31, 2021 and 2020 | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Net Income (Loss) | 30,092 | (34,572) | | Net Income (Loss) Attributable to Common Stockholders | 29,184 | (35,164) | | Basic EPS | 0.52 | (0.61) | | Diluted EPS | 0.52 | (0.61) | | Total net interest income | 37,383 | 31,997 | | Provision for (reversal of) credit losses, net | (1,588) | 55,274 | Condensed Consolidated Statements of Changes in Equity (Unaudited) This section details KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated statements of changes in equity for the period ended March 31, 2021 | Metric | December 31, 2020 ($k) | March 31, 2021 ($k) | | :-------------------------------------- | :--------------------- | :-------------------- | | Total KKR Real Estate Finance Trust Inc. stockholders' equity (beginning) | 1,043,554 | 1,043,554 | | Net income (loss) | 29,894 | 29,894 | | Common dividends declared ($0.43 per share) | (23,916) | (23,916) | | Total KKR Real Estate Finance Trust Inc. stockholders' equity (ending) | 1,050,816 | 1,050,816 | Condensed Consolidated Statements of Cash Flows (Unaudited) This section outlines KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 | Cash Flow Activity | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Net cash provided by (used in) operating activities | 30,268 | 27,376 | | Net cash provided by (used in) investing activities | (201,230) | (154,593) | | Net cash provided by (used in) financing activities | 269,477 | 429,465 | | Net Increase (Decrease) in Cash, Cash Equivalents | 98,515 | 302,248 | | Cash, Cash Equivalents at End of Period | 209,347 | 369,867 | Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed notes supporting the unaudited condensed consolidated financial statements, covering business, policies, and specific financial instruments Note 1. Business and Organization This note describes KREF's business as a mortgage REIT, its management structure, and KKR's beneficial ownership - KREF operates as a mortgage REIT, primarily 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[28] - As of March 31, 2021, KKR beneficially owned 20,000,000 shares of KREF's common stock[29] Note 2. Summary of Significant Accounting Policies This note outlines KREF's significant accounting policies, including GAAP compliance, CECL model adoption, and COVID-19 impact - The financial statements are prepared in accordance with GAAP for interim financial information[32] - KREF adopted ASU No 2016-13 (CECL model) on January 1, 2020, replacing the incurred loss methodology with an expected loss model for credit losses[62] - The COVID-19 pandemic continues to adversely impact global commercial activity, financial markets, and KREF's operating partners, borrowers, and properties, creating significant uncertainty for future financial performance[33][34][35] Note 3. Commercial Real Estate Loans This note details KREF's commercial real estate loan portfolio, including outstanding principal, credit loss allowance, and risk ratings | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Total outstanding principal of loans held-for-investment | 5,051,520 | 4,869,696 | | Allowance for credit losses | 58,473 | 59,801 | | Provision for (reversal of) credit losses, net (Q1 2021) | (1,328) | N/A | - The average risk rating of KREF's portfolio was 3.1 (Average Risk) as of March 31, 2021, consistent with December 31, 2020[120] | Risk Rating | Number of Loans (Mar 31, 2021) | Total Loan Exposure ($k) (Mar 31, 2021) | Exposure % (Mar 31, 2021) | | :---------- | :----------------------------- | :-------------------------------------- | :------------------------ | | 1 | — | — | — % | | 2 | 1 | 194,400 | 3.7 % | | 3 | 36 | 4,539,577 | 85.7 % | | 4 | 4 | 445,395 | 8.4 % | | 5 | 2 | 115,071 | 2.2 % | | Total | 43 | 5,294,443 | 100.0 % | | Collateral Property Type (Mar 31, 2021) | Percentage of Loans' Principal Amounts | | :-------------------------------------- | :------------------------------------- | | Multifamily | 52.1 % | | Office | 32.1 % | | Condo (Residential) | 6.0 % | | Hospitality | 4.1 % | | Retail | 2.3 % | | Industrial | 1.9 % | | Student Housing | 1.5 % | | Total | 100.0 % | Note 4. Debt Obligations This note provides an overview of KREF's debt obligations, including secured financing, CLO, term loan, and convertible notes | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Secured financing agreements, net (Carrying Value) | 2,876,743 | 2,574,747 | | Collateralized loan obligation, net | 807,000 | 810,000 | | Secured term loan, net | 287,720 | 288,028 | | Convertible notes, net | 140,806 | 140,465 | | Loan participations sold, net | 66,237 | 66,232 | | Year | Nonrecourse ($k) | Recourse ($k) | Total ($k) | | :--- | :--------------- | :------------ | :--------- | | 2021 | 703,373 | 101,191 | 804,564 | | 2022 | 1,099,221 | 294,245 | 1,393,466 | | 2023 | 402,192 | 58,542 | 460,734 | | 2024 | 181,896 | 40,430 | 222,326 | | Thereafter | — | — | — | | Total | 2,386,682 | 494,408 | 2,881,090 | - KREF was in compliance with all financial debt covenants as of March 31, 2021, and December 31, 2020[139] Note 5. Collateralized Loan Obligation This note details KREF's consolidated collateralized loan obligation, including collateral assets, financing, and net interest income | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | CLO collateral assets (Outstanding Principal) | 997,000 | 1,000,000 | | CLO financing provided (Outstanding Principal) | 807,000 | 810,000 | | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Net interest income | 7,089 | 3,068 | - The CLO's two-year reinvestment period ended in December 2020[141] Note 6. Secured Term Loan, Net This note describes KREF's secured term loan, including principal, carrying amount, interest cost, and covenant compliance | Metric | March 31, 2021 ($k) | | :-------------------------------------- | :-------------------- | | Principal amount | 299,250 | | Carrying amount | 287,720 | - The total cost of the secured term loan is LIBOR plus 5.3% per annum[147] - KREF was in compliance with all covenants related to the secured term loan as of March 31, 2021, and December 31, 2020[148] Note 7. Convertible Notes, Net This note outlines KREF's convertible notes, including principal, net book value, total interest expense, and annual cost | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Principal | 143,750 | 143,750 | | Net book value | 140,806 | 140,465 | | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Total interest expense | 2,543 | 2,547 | - The total cost of the May 2018 Convertible Notes issuance is 6.92% per annum[152] Note 8. Loan Participations Sold This note details KREF's vertical loan participation, including outstanding principal and related interest income and expense | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Vertical loan participation (Outstanding Principal) | 66,248 | 66,248 | - KREF recorded $0.7 million of interest income and $0.7 million of interest expense related to the vertical loan participation sold for both the three months ended March 31, 2021, and 2020[157] Note 9. Variable Interest Entities This note discusses KREF's involvement with variable interest entities, including a consolidated CLO and equity method investments - KREF is the primary beneficiary of a consolidated collateralized loan obligation (CLO) that closed in November 2018[160] - As of March 31, 2021, KREF held a 3.5% interest in RECOP I, an unconsolidated VIE, at its fair value of $33.3 million[162] - KREF's Taxable REIT Subsidiary (TRS) holds 4.7% of the Manager's outstanding limited liability company interests, accounted for using the equity method[163] Note 10. Equity This note provides details on KREF's equity, including common shares outstanding, KKR ownership, and share repurchase program | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------------- | :------------- | :---------------- | | Common shares outstanding | 55,619,428 | 55,619,428 | | KKR beneficial ownership of common stock | 20,000,000 | 21,234,528 | | KKR beneficial ownership percentage | 36.0 % | 38.2 % | | Dividends declared per common share | $0.43 | $0.43 | - KREF did not repurchase any common stock during the three months ended March 31, 2021[171] - As of March 31, 2021, KREF had $100.0 million of availability to repurchase shares under its share repurchase program[410] Note 11. Stock-based Compensation This note outlines KREF's stock-based compensation expense, unrecognized expense, and unvested restricted stock units | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Stock-based compensation expense | 1,994 | 1,607 | - As of March 31, 2021, there was $11.4 million of total unrecognized stock-based compensation expense, expected to be recognized over a weighted average period of 1.1 years[183] - Unvested Restricted Stock Units (RSUs) outstanding as of March 31, 2021, totaled 787,942[181] Note 12. Commitments and Contingencies This note details KREF's future funding requirements, commitments to RECOP I, legal proceedings, and COVID-19 uncertainties - As of March 31, 2021, KREF had future funding requirements of $454.2 million related to its commercial real estate loans[190] - KREF had a remaining commitment of $4.3 million to RECOP I as of March 31, 2021[191] - KREF was not involved in any material legal proceedings as of March 31, 2021[188] - The magnitude and duration of the COVID-19 pandemic and its impact on KREF's operations and liquidity remain uncertain[192] Note 13. Related Party Transactions This note describes KREF's related party transactions, including management fees, incentive compensation, and expense reimbursements | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Management fees to affiliate | 4,290 | 4,299 | | Incentive compensation to affiliate | 2,192 | 1,606 | | Expense reimbursements and other | 352 | 299 | | Total affiliate expenses | 6,834 | 6,204 | | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Due to affiliates | 4,516 | 6,243 | - KREF paid various structuring and placement agent fees to KKR Capital Markets (KCM), an affiliate, for financing facilities and loan syndications[203][205][206][207][208][210][211][212] Note 14. Fair Value of Financial Instruments This note presents the fair value of KREF's financial instruments, including loans, investments, and various debt obligations | Financial Instrument | Fair Value (March 31, 2021, $k) | | :-------------------------------------- | :------------------------------ | | Commercial real estate loans, held-for-investment, net | 4,953,599 | | Equity method investments | 33,624 | | Secured financing agreements, net | 2,881,090 | | Collateralized loan obligation, net | 807,571 | | Secured term loan, net | 301,120 | | Convertible notes, net | 147,811 | | Loan participations sold, net | 66,237 | - Commercial real estate loans are generally valued using a discounted cash flow model (Level 3 input)[223] Note 15. Income Taxes This note explains KREF's REIT tax election and its impact on federal income tax, along with current income tax provision - KREF has elected to be taxed as a REIT, generally not subject to U.S. federal income tax on distributed income if at least 90% of its REIT taxable income is distributed[225] | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Current income tax provision (benefit) | 0 | 100 | Note 16. Subsequent Events This note details significant events occurring after March 31, 2021, including new loan originations and preferred stock issuance | Loan Type | Month Originated | Committed Principal Amount ($k) | Initial Principal Funded ($k) | | :-------------------------------------- | :--------------- | :------------------------------ | :---------------------------- | | Senior Loan, Irving, TX (Multifamily) | April 2021 | 117,600 | 105,000 | | Senior Loan, Phoenix, AZ (Single Family Rental) | April 2021 | 72,105 | 10,127 | | Total/Weighted Average | | 189,705 | 115,127 | - In April 2021, KREF issued 6,900,000 shares of 6.5% Series A Cumulative Redeemable Preferred Stock, receiving $167.1 million in net proceeds[232] - In April 2021, KREF paid $23.9 million in common stock dividends ($0.43 per share) for the first quarter of 2021[233] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses KREF's financial condition, operations, investment strategy, portfolio performance, and COVID-19 impact for Q1 2021 Overview This section outlines KREF's investment strategy, external management by KKR, and objective of capital preservation and returns - KREF's investment strategy focuses on originating or acquiring transitional senior loans collateralized by institutional-quality CRE assets in liquid markets[236] - KREF is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR & Co Inc[237] - The investment objective is capital preservation and generating attractive risk-adjusted returns for stockholders, primarily through dividends[236] Key Financial Measures and Indicators This section presents KREF's key financial measures, including EPS, dividends, distributable earnings, and book value per share | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------------- | :------------- | :---------------- | | Net income per share, basic | $0.52 | $0.52 | | Dividends declared per share | $0.43 | $0.43 | | Distributable Earnings per Diluted Weighted Average Share | $0.55 | $0.48 | | Book value per share of common stock | $18.89 | $18.76 | Our Portfolio This section details KREF's diversified investment portfolio, its performing loan status, floating rate interest, and loan activity - KREF's diversified investment portfolio totaled $5,330.2 million as of March 31, 2021[251] - The loan portfolio was 97.8% performing as of March 31, 2021, with 99.9% of loans earning a floating rate of interest[252][253] - Approximately 69% of the portfolio was subject to a LIBOR floor of at least 1.00%, with a weighted average floor of 1.43%[253] | Loan Activity | Three Months Ended March 31, 2021 ($k) | | :-------------------------------------- | :------------------------------------- | | Loan originations | 534,500 | | Loan fundings | 575,826 | | Loan repayments/syndications | (244,348) | Portfolio Surveillance and Credit Quality This section describes KREF's active portfolio management, credit quality assessment, risk ratings, and loan modification details - KREF's Manager actively manages the portfolio, assessing credit quality quarterly and assigning risk ratings from 1 (very low risk) to 5 (impaired/loss likely)[272][275][279] - The average risk rating of the loan portfolio remained stable at 3.1 (Average Risk) as of March 31, 2021, compared to December 31, 2020[283] - One hotel loan was modified in Q1 2021, including a $10.0 million principal paydown, resulting in an upgrade of its risk rating from 4 to 3[281] - One senior retail loan was modified in Q4 2020, extending maturity and deferring interest, and was placed on non-accrual status with a risk rating of 5[282] CMBS B-Piece Investments This section explains KREF's monitoring of CMBS B-Piece investments through surveillance calls and independent valuation firms - KREF's Manager monitors CMBS B-Piece investments through monthly surveillance calls with the special servicer and independent valuation firms[287][288] - Current CMBS exposure is held through RECOP I, an equity method investment[289] Portfolio Financing This section details KREF's portfolio financing, including non-mark-to-market sources, repurchase agreements, and various debt types - Non-Mark-to-Market Financing Sources accounted for 76% of KREF's total secured financing (excluding the corporate revolver) as of March 31, 2021[291] - The remaining 24% of secured borrowings are comprised of three master repurchase agreements, subject only to credit marks[291] | Financing Type | Outstanding Principal Balance (March 31, 2021, $k) | Outstanding Principal Balance (December 31, 2020, $k) | | :-------------------------------------- | :--------------------------------------------- | :---------------------------------------------- | | Master repurchase agreements | 1,017,633 | 673,120 | | Term loan financing | 903,457 | 948,204 | | Term lending agreement | 900,000 | 900,000 | | Collateralized loan obligations | 807,000 | 810,000 | | Secured term loan | 299,250 | 300,000 | | Asset specific financing | 60,000 | 60,000 | | Non-consolidated senior interests | 309,171 | 158,672 | | Total portfolio financing | 4,296,511 | 3,849,996 | - The CLO (KREF 2018-FL1) provides match-term, non-mark-to-market, and non-recourse financing, with its two-year reinvestment period ending in December 2020[308] - The secured term loan had $299.3 million outstanding as of March 31, 2021, is partially amortizing, matures in September 2027, and is secured by corporate-level guarantees[318][319] - KREF issued $143.75 million of 6.125% Convertible Notes in May 2018, maturing on May 15, 2023[320] Results of Operations This section analyzes KREF's results of operations, focusing on net income, net interest income, and provision for credit losses | Metric | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | Change ($k) | Change (%) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | :---------- | :--------- | | Net Income (Loss) Attributable to Common Stockholders | 29,184 | (35,164) | 64,348 | 183.0 % | | Total net interest income | 37,383 | 31,997 | 5,386 | 16.8 % | | Provision for (reversal of) credit losses, net | (1,588) | 55,274 | (56,862) | (102.9) % | | Basic EPS | 0.52 | (0.61) | 1.13 | 185.2 % | - Net interest income increased by $5.4 million (16.8%) year-over-year, primarily due to an $11.7 million (29.9%) decrease in interest expense from lower LIBOR, partially offset by a $6.3 million (8.9%) decrease in interest income[333] - Total operating expenses decreased by $56.5 million (87.1%) year-over-year, mainly due to a $56.9 million decrease in provision for credit losses[336] - Quarter-over-quarter (Q1 2021 vs Q4 2020), net interest income increased by $3.0 million, driven by a $1.6 million increase in interest income (due to higher loan portfolio balance) and a $1.5 million decrease in interest expense (due to fully amortized CLO deferred financing costs)[341][342][343] COVID-19 Impact This section discusses the ongoing adverse impact of the COVID-19 pandemic on KREF's operations, financial markets, and real estate - The COVID-19 pandemic continues to significantly disrupt financial markets, business shutdowns, and the U.S and global economies, adversely impacting KREF's operating partners, borrowers, and properties[347] - The magnitude and duration of the pandemic's impact on KREF's business, financial performance, and operating results remain highly uncertain and cannot be reasonably estimated[348] - Potential future declines in rental rates, increased concessions, and borrower defaults could negatively impact real estate values and KREF's ability to make distributions or meet financing obligations[347][375] Liquidity and Capital Resources This section details KREF's liquidity and capital resources, including cash, available borrowings, and leverage ratios | Metric | March 31, 2021 ($k) | December 31, 2020 ($k) | | :-------------------------------------- | :-------------------- | :--------------------- | | Cash and cash equivalents | 209,347 | 110,832 | | Available borrowings under revolving credit agreements | 335,000 | 335,000 | | Available borrowings under master repurchase agreements | 26,805 | 19,319 | | Total available liquidity | 571,152 | 481,801 | - Non-Mark-to-Market Financing Sources accounted for 76% of KREF's total secured financing (excluding the corporate Revolver) as of March 31, 2021[350] - In April 2021, KREF issued 6,900,000 shares of Series A Preferred Stock, generating $167.1 million in net proceeds, further expanding capitalization sources[350][358] | Metric | March 31, 2021 | December 31, 2020 | | :-------------------------------------- | :------------- | :---------------- | | Debt-to-equity ratio | 2.1x | 1.9x | | Total leverage ratio | 3.7x | 3.6x | | Cash Flow Activity | Three Months Ended March 31, 2021 ($k) | Three Months Ended March 31, 2020 ($k) | | :-------------------------------------- | :------------------------------------- | :------------------------------------- | | Net Increase in Cash, Cash Equivalents, and Restricted Cash | 98,515 | 302,248 | Contractual Obligations and Commitments This section outlines KREF's contractual obligations and future funding commitments for commercial real estate loans | Obligation Type | Total ($k) (March 31, 2021) | Less than 1 year ($k) | 1 to 3 years ($k) | 3 to 5 years ($k) | Thereafter ($k) | | :-------------------------------------- | :---------------------------- | :-------------------- | :---------------- | :---------------- | :-------------- | | Recourse Obligations | 3,043,494 | 1,409,790 | 1,280,858 | 45,172 | 307,674 | | Non-Recourse Obligations | 1,788,911 | 522,435 | 435,400 | 24,076 | 807,000 | | Total | 4,832,405 | 1,932,225 | 1,716,258 | 69,248 | 1,114,674 | - Future funding obligations for commercial real estate loans totaled $454.2 million, primarily for construction projects and capital improvements[368] Recent Market Conditions This section addresses the adverse impact of COVID-19 on commercial real estate markets and KREF's operations and performance - The COVID-19 pandemic continues to adversely impact commercial real estate markets, KREF's operating partners, borrowers, and the economy as a whole[372] - The magnitude and duration of the COVID-19 pandemic and its impact on KREF's operations and financial performance remain highly uncertain[374] - Potential for future declines in rental rates, increased concessions, and borrower defaults could negatively impact real estate values and KREF's ability to make distributions or meet financing obligations[375] Subsequent Events This section refers to Note 16 for details on events occurring after the reporting period - Refer to Note 16 to the condensed consolidated financial statements for details on events occurring subsequent to March 31, 2021[376] Critical Accounting Policies and Use of Estimates This section confirms no material changes to KREF's critical accounting policies and use of estimates - There have been no material changes to KREF's Critical Accounting Policies and Use of Estimates as described in its Annual Report on Form 10-K[377] Allowance for Credit Losses This section explains KREF's adoption of the CECL model for estimating expected credit losses on its loan portfolio - KREF adopted ASU No 2016-13 (CECL model) on January 1, 2020, to estimate expected credit losses for its commercial real estate loan portfolio[378] - CECL forecasting methods include probability of default and loss given default, and probability-weighted expected cash flow, utilizing loan-specific inputs, internal risk ratings, and macro-economic forecasts[379][380][381] - The individual loan internal risk rating is the primary credit quality indicator underlying the CECL assessment, with ratings from 1 (Very Low Risk) to 5 (Impaired/Loss Likely)[383][387] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details KREF's exposure to market risks, including credit, interest rate, LIBOR transition, prepayment, financing, and real estate Credit Risk This section discusses KREF's exposure to credit risk, including default risk, and the impact of the COVID-19 pandemic - KREF's investments are subject to credit risk, including default risk, which is monitored by the Manager through regular contact with sponsors and collateral performance review[392] - The COVID-19 pandemic has adversely impacted commercial real estate markets, potentially impairing borrowers' ability to pay principal and interest[393] - Despite belief that principal amounts are adequately protected by collateral value and CECL reserves, there is a risk of not realizing the entire principal value of certain investments[394] Credit Yield Risk This section explains how increasing credit-sensitive instrument supply and reduced demand can lead to higher yields and lower prices - Increasing supply of credit-sensitive financial instruments and reduced demand can cause the market to require a higher yield, resulting in lower prices for KREF's financial instruments[395] Interest Rate Risk This section outlines KREF's interest rate risk, including the impact of LIBOR floors and potential changes in cash flows - KREF's net income generally increases with rising interest rates and decreases with declining rates[396] - As of March 31, 2021, 69% of KREF's loan portfolio was subject to a LIBOR floor of at least 1.00%, with a weighted average floor of 1.43%[397] - A 25 basis point increase in LIBOR would decrease expected cash flows by approximately $8.5 million ($0.15 per common share) for the twelve months following March 31, 2021[397] LIBOR Transition This section addresses the impending LIBOR cessation, KREF's exposure, and the uncertainty of its financial impact - Most USD LIBOR tenors are expected to cease publication by June 30, 2023[398] - As of March 31, 2021, 99.9% of KREF's loans and 100.0% of its outstanding financing arrangements (excluding convertible notes) are indexed to LIBOR[399] - All arrangements provide procedures for determining an alternative base rate, but the impact of the LIBOR transition on KREF's financial condition and results of operations is uncertain[399] Prepayment Risk This section defines prepayment risk as early principal repayment, potentially reducing returns or requiring reinvestment at lower yields - Prepayment risk involves principal being repaid earlier than anticipated, potentially reducing expected returns by accelerating premium amortization or requiring reinvestment at lower yields[400] Financing Risk This section discusses financing risk, where market weakness could reduce available financing or increase costs for KREF's assets - KREF finances its assets using various leverage sources, and market weakness or volatility could adversely affect lenders, reducing available financing or increasing costs[401] Real Estate Risk This section highlights real estate risk, where asset values are subject to volatility from economic and local conditions, leading to losses - Commercial real estate asset values are subject to volatility due to national/local economic conditions, local real estate conditions, and other factors, which could lead to collateral value declines and losses[402] Item 4. Controls and Procedures KREF's management evaluated disclosure controls and procedures, confirming their effectiveness and no material changes to internal controls Evaluation of Disclosure Controls and Procedures This section confirms KREF's management, including CEO and CFO, concluded disclosure controls were effective as of March 31, 2021 - KREF's management, including the CEO and CFO, concluded that its disclosure controls and procedures were effective as of March 31, 2021[404] Changes in Internal Control over Financial Reporting This section states no material changes occurred in KREF's internal control over financial reporting during the quarter - No material changes occurred in KREF's internal control over financial reporting during the quarter ended March 31, 2021[405] Part II - Other Information Item 1. Legal Proceedings KREF was not involved in any material legal proceedings as of March 31, 2021, as detailed in Note 12 - KREF was not involved in any material legal proceedings regarding claims or legal actions against it as of March 31, 2021[407][188] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the Annual Report on Form 10-K are reported - There have been no material changes to the risk factors previously disclosed in the Form 10-K[408] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds KREF did not repurchase common stock in Q1 2021, with $100.0 million remaining available under its share repurchase program - KREF did not repurchase any shares of its common stock during the three months ended March 31, 2021[410] - As of March 31, 2021, KREF had $100.0 million of availability to repurchase shares under its program, which has no expiration date[410] - The share repurchase program allows for repurchases when the market price per share is below book value per share[409] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities[411] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to KREF - Mine safety disclosures are not applicable[412] Item 5. Other Information No other information is disclosed in this section - No other information to disclose[413] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, certifications, and XBRL data - Exhibits include Articles Supplementary for 6.5% Series A Cumulative Redeemable Preferred Stock[416] - Certificates of the Chief Executive Officer and Chief Financial Officer are included pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[416] - Inline XBRL Instance Document and Taxonomy Extension Documents are provided[416] Signatures This section contains the official signatures of KREF's CEO and CFO, certifying the report on April 26, 2021 - The report was signed by Matthew A Salem, Chief Executive Officer, and Mostafa Nagaty, Chief Financial Officer and Treasurer[420] - The signing date for the report was April 26, 2021[420]