KKR Real Estate Finance Trust (KREF) - 2021 Q3 - Quarterly Report

Part I - Financial Information Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents KKR Real Estate Finance Trust Inc.'s unaudited condensed consolidated financial statements as of September 30, 2021, and for the three and nine months then ended Condensed Consolidated Balance Sheets Total assets increased to $5.75 billion from $4.97 billion at year-end 2020, driven by commercial real estate loans, with total equity reaching $1.23 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $307,731 | $110,832 | | Commercial real estate loans, held-for-investment, net | $5,383,927 | $4,784,733 | | Total Assets | $5,753,498 | $4,965,612 | | Liabilities | | | | Secured financing agreements, net | $2,960,833 | $2,574,747 | | Collateralized loan obligations, net | $1,086,900 | $810,000 | | Total Liabilities | $4,516,321 | $3,920,206 | | Equity | | | | Total KKR Real Estate Finance Trust Inc. stockholders' equity | $1,234,588 | $1,043,554 | Condensed Consolidated Statements of Income Net income attributable to common stockholders for Q3 2021 was $32.0 million ($0.57 diluted EPS), with nine-month net income reaching $90.4 million, up from $24.8 million in 2020 Key Income Statement Data (in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Total net interest income | $45,488 | $38,857 | $123,062 | $107,510 | | Provision for (reversal of) credit losses, net | $1,165 | $(126) | $(982) | $53,782 | | Net Income Attributable to Common Stockholders | $31,989 | $31,351 | $90,437 | $24,777 | | Diluted EPS | $0.57 | $0.56 | $1.62 | $0.44 | Condensed Consolidated Statements of Changes in Equity Total stockholders' equity increased to $1.23 billion from $1.04 billion at year-end 2020, driven by net income and $172.5 million from preferred stock issuance - In the first nine months of 2021, the company issued 6,900,000 shares of Series A cumulative redeemable preferred stock, raising $172.5 million before offering costs[23] - Common dividends declared totaled $71.8 million ($1.29 per share) for the nine months ended September 30, 2021, consistent with the prior year period[20][23] Condensed Consolidated Statements of Cash Flows Cash and cash equivalents increased by $198.5 million for the nine months ended September 30, 2021, with $96.9 million from operations and $674.8 million from financing activities Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $96,858 | $91,418 | | Net cash (used in) provided by investing activities | $(573,185) | $4,141 | | Net cash provided by financing activities | $674,811 | $138,197 | | Net Increase in Cash | $198,484 | $233,756 | - Significant financing activities in the first nine months of 2021 included $2.1 billion in proceeds from secured financing, $1.1 billion from a new CLO issuance, and $167.1 million from a preferred stock issuance[28] Notes to Condensed Consolidated Financial Statements (Unaudited) This section details accounting policies and financial data, covering the commercial real estate loan portfolio, debt obligations, equity structure, related party transactions, and fair value measurements Note 1. Business and Organization KREF is a mortgage REIT focused on originating and acquiring transitional senior loans secured by commercial real estate, externally managed by a KKR affiliate - KREF's primary business is originating and acquiring transitional senior loans secured by commercial real estate assets[31] - As of September 30, 2021, KKR beneficially owned 25.6% of KREF's outstanding common stock[34] Note 3. Commercial Real Estate Loans The commercial real estate loan portfolio grew to $5.38 billion, comprising 52 predominantly senior loans with an improved average risk rating of 3.0 and 91.2% rated 'Average Risk' or better Loan Portfolio by Type (September 30, 2021) | Loan Type | Outstanding Principal | Carrying Value | Loan Count | | :--- | :--- | :--- | :--- | | Senior loans | $5,370,827 | $5,282,882 | 47 | | Mezzanine and other loans | $107,217 | $101,045 | 5 | | Total | $5,478,044 | $5,383,927 | 52 | Loan Portfolio by Risk Rating (September 30, 2021) | Risk Rating | Number of Loans | Net Book Value | Total Loan Exposure % | | :--- | :--- | :--- | :--- | | 1 - Very Low Risk | 0 | $0 | 0.0% | | 2 - Low Risk | 3 | $517,168 | 8.9% | | 3 - Average Risk | 43 | $4,415,030 | 82.3% | | 4 - High Risk | 4 | $381,608 | 6.8% | | 5 - Impaired/Loss Likely | 2 | $70,121 | 2.0% | - The allowance for credit losses decreased to $58.8 million from $59.8 million at year-end 2020, with a net reversal of credit losses of $1.0 million recorded in the first nine months of 2021[129] Note 4. Debt Obligations KREF had $2.97 billion in outstanding principal under secured financing agreements and was in compliance with all financial debt covenants as of September 30, 2021 Secured Financing Agreements Summary (September 30, 2021) | Facility Type | Maximum Facility Size | Outstanding Principal | | :--- | :--- | :--- | | Master Repurchase Agreements | $1,840,000 | $846,972 | | Term Lending Agreements | $1,213,378 | $1,008,327 | | Warehouse Facility | $500,000 | $0 | | Asset Specific Financing | $300,000 | $60,000 | | Revolving Credit Agreement | $335,000 | $150,000 | - The company is subject to financial covenants including an interest income to interest expense ratio of 1.5 to 1.0, a minimum consolidated tangible net worth, a cash liquidity covenant, and a total indebtedness covenant of 83.3% of Total Assets; KREF was in compliance with all covenants as of September 30, 2021[145] Note 5. Collateralized Loan Obligations In August 2021, KREF issued a new $1.1 billion managed CLO (KREF 2021-FL2) for non-mark-to-market financing and fully repaid its KREF 2018-FL1 CLO notes - In August 2021, KREF issued a new CLO, KREF 2021-FL2, with $1.1 billion in financing provided against a $1.3 billion pool of collateral assets[147][148] - The company fully repaid its outstanding CLO notes under KREF 2018-FL1 in August 2021[146] Note 10. Equity In April 2021, KREF issued 6.9 million shares of 6.50% Series A Preferred Stock, raising $167.1 million, with $100.0 million remaining in its share repurchase program - Issued 6,900,000 shares of 6.50% Series A Cumulative Redeemable Preferred Stock in April 2021, receiving net proceeds of $167.1 million[185] - The share repurchase program has $100.0 million of remaining capacity as of September 30, 2021; no shares were repurchased during the first nine months of 2021[177][178] 2021 Common Stock Dividends Declared | Declaration Date | Per Share | Total Amount | | :--- | :--- | :--- | | March 15, 2021 | $0.43 | $23,916 | | June 15, 2021 | $0.43 | $23,924 | | September 15, 2021 | $0.43 | $23,924 | Note 12. Commitments and Contingencies KREF had $1.22 billion in future funding commitments for commercial real estate loans and a $4.3 million commitment to the RECOP I aggregator vehicle, with no material legal proceedings - KREF has future funding requirements of $1.22 billion related to its investments in commercial real estate loans, primarily for construction, capital improvements, and leasing[198] - A remaining commitment of $4.3 million exists for the investment in an aggregator vehicle alongside RECOP I[199] Note 13. Related Party Transactions KREF pays management and incentive fees to its KKR affiliate, totaling $14.1 million and $6.8 million respectively for the first nine months of 2021, and also engages KKR Capital Markets for various services Expenses to Affiliate (in thousands) | Expense | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Management fees | $4,964 | $14,089 | | Incentive compensation | $2,215 | $6,810 | | Expense reimbursements and other | $362 | $1,161 | - In 2021, KREF paid its affiliate KCM fees for services including a $1.6 million underwriting discount for the Series A Preferred Stock issuance, a $2.6 million structuring fee for the KREF Lending IX Facility, and a $0.9 million fee for the KREF 2021-FL2 CLO issuance[220][221][222] Note 16. Subsequent Events Post-quarter end, KREF originated three new senior loans totaling $333.3 million and redeemed its Special Non-Voting Preferred Stock, expecting $2.6 million book value accretion in Q4 2021 - Originated three new loans post-quarter end with total commitments of $333.3 million[240] - On October 1, 2021, the company redeemed its Special Non-Voting Preferred Stock (SNVPS), which is expected to result in a book value accretion of $2.6 million, or $0.05 per common share, in Q4 2021[244] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses investment strategy, portfolio performance, and financing, highlighting strong origination, stable loan portfolio, and non-mark-to-market financing, alongside analysis of operational results, liquidity, and capital resources Key Financial Measures and Indicators Key performance metrics include diluted EPS of $0.57 and Distributable Earnings per diluted share of $0.62 for Q3 2021, with book value per common share rising to $19.09 Q3 2021 Key Metrics per Share | Metric | Q3 2021 | Q2 2021 | | :--- | :--- | :--- | | Net income per share, diluted | $0.57 | $0.52 | | Distributable Earnings per Diluted Share | $0.62 | $0.54 | | Dividends declared per share | $0.43 | $0.43 | - Book value per common share rose to $19.09 at September 30, 2021, from $18.76 at December 31, 2020, despite the dilutive impact of preferred stock offering costs[258] Our Portfolio The loan portfolio totaled $5.8 billion across 52 loans, with 98.0% performing, an average risk rating of 3.0, and $1.5 billion in Q3 2021 originations - The loan portfolio is 98.0% performing with an average risk rating of 3.0 (Average Risk); 91.2% of loans by total exposure were risk-rated 3 or better[262] - Loan originations in Q3 2021 were $1.54 billion, with net fundings of $208.1 million for the quarter[266] - The portfolio's weighted average LTV was 67%, and 99.9% of loans earned a floating rate of interest[263][268] Portfolio Financing KREF's financing strategy emphasizes non-mark-to-market sources, comprising 81% of $4.5 billion in total secured financing, utilizing a diversified mix of agreements and CLOs - 81% of the company's total secured financing (excluding the corporate revolver) is from non-mark-to-market sources, reducing exposure to market volatility[297] Portfolio Financing Breakdown (in thousands) | Financing Type | Outstanding Principal Balance | | :--- | :--- | | Master repurchase agreements (Mark-to-Credit) | $846,972 | | Term loan financing (Non-Mark-to-Market) | $904,087 | | Term lending agreements (Non-Mark-to-Market) | $1,008,327 | | Collateralized loan obligations (Non-Mark-to-Market) | $1,095,250 | | Other Non-Mark-to-Market Sources | $670,457 | | Total | $4,525,093 | Results of Operations Net interest income increased by 13.2% to $45.5 million in Q3 2021, while nine-month net income surged to $90.4 million from $24.8 million in 2020, driven by a $54.8 million favorable swing in credit loss provision - Q3 2021 vs Q2 2021: Net interest income increased by $5.3 million (13.2%) due to a larger loan portfolio and $6.5 million in accelerated deferred loan fees and prepayment income[336][338] - Nine Months 2021 vs 2020: Total operating expenses decreased by $51.0 million, mainly due to a $54.8 million decrease in the provision for credit losses, reflecting a more stable macroeconomic outlook in 2021 compared to the onset of the COVID-19 pandemic in 2020[347][348] Liquidity and Capital Resources Primary liquidity totaled $516.2 million, including $307.7 million cash and $185.0 million available on the corporate revolver, with leverage ratios decreasing to 3.4x total and 1.8x debt-to-equity Leverage Ratios | Ratio | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Debt-to-equity ratio | 1.8x | 1.9x | | Total leverage ratio | 3.4x | 3.6x | - Primary sources of liquidity as of September 30, 2021, included $307.7 million in cash and $185.0 million of available capacity on the corporate revolver[356][363] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company faces credit, interest rate, and financing risks, with 99.9% of its loan portfolio being floating-rate, and is actively managing the transition from LIBOR to alternative reference rates - 99.9% of the company's loans by principal balance earn a floating rate of interest, making net income sensitive to changes in interest rates[397] - A 25 basis point increase in LIBOR would decrease expected cash flows by approximately $6.1 million annually, while a 50 basis point increase would decrease cash flows by $10.1 million[398] - The company is monitoring the transition away from LIBOR, scheduled for June 2023 for most USD settings, and notes that all of its financing arrangements have procedures for determining an alternative base rate[399][400] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[405] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2021[406] Part II - Other Information Item 1. Legal Proceedings The company reports no involvement in any material legal proceedings - As of September 30, 2021, KREF was not involved in any material legal proceedings[196][408] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K were reported - No material changes to the risk factors previously disclosed in the Form 10-K were reported[409] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase common stock in Q3 2021, leaving $100.0 million available under its share repurchase program with no expiration date - The company has a $100.0 million share repurchase program with no expiration date[410] - No shares were repurchased during the three months ended September 30, 2021, leaving the full $100.0 million available under the program[411] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including the KREF 2021-FL2 CLO indenture, a master repurchase agreement amendment, and CEO/CFO certifications