KKR Real Estate Finance Trust (US:KREF)2024-04-23 20:58Part I - Financial Information This section presents the company's unaudited condensed consolidated financial statements, management's discussion and analysis, and disclosures on market risk and internal controls Item 1. Condensed Consolidated Financial Statements (Unaudited) The company reported a reduced net loss in Q1 2024, driven by a lower provision for credit losses, while total assets and equity saw slight decreases Condensed Consolidated Balance Sheets Total assets decreased to $7.26 billion as of March 31, 2024, primarily due to reduced commercial real estate loans, with a corresponding decline in liabilities and a slight decrease in total equity Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $7,256,695 | $7,547,618 | | Commercial real estate loans, held-for-investment, net | $6,869,622 | $7,133,078 | | Cash and cash equivalents | $106,517 | $135,898 | | Total Liabilities | $5,876,605 | $6,143,436 | | Secured financing agreements, net | $3,521,796 | $3,782,419 | | Collateralized loan obligations, net | $1,942,569 | $1,942,171 | | Total Equity | $1,380,090 | $1,404,182 | Condensed Consolidated Statements of Income For Q1 2024, the company reported a net loss of $8.7 million, a significant improvement from the prior year, mainly due to a reduced provision for credit losses despite lower net interest income Condensed Consolidated Statement of Income Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Total net interest income | $39,144 | $46,554 | | Provision for credit losses, net | $33,266 | $60,467 | | Total operating expenses | $50,147 | $76,249 | | Net Income (Loss) | $(3,429) | $(25,254) | | Net Income (Loss) Attributable to Common Stockholders | $(8,739) | $(30,810) | | Basic and Diluted Net Income (Loss) Per Share | $(0.13) | $(0.45) | | Dividends Declared per Share of Common Stock | $0.25 | $0.43 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $34.5 million in Q1 2024, with investing activities providing $236.8 million, while financing activities resulted in a $300.8 million outflow, leading to a net cash decrease of $29.5 million Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $34,488 | $41,635 | | Net cash provided by (used in) investing activities | $236,756 | $(113,080) | | Net cash provided by (used in) financing activities | $(300,770) | $87,143 | | Net Increase (Decrease) in Cash | $(29,526) | $15,698 | Notes to Condensed Consolidated Financial Statements (Unaudited) The notes detail accounting policies, the $7.1 billion commercial real estate loan portfolio, increased allowance for credit losses, and $5.8 billion in debt obligations, confirming covenant compliance - The company is a mortgage REIT focused on originating and acquiring transitional senior loans secured by commercial real estate (CRE) assets and is externally managed by KKR Real Estate Finance Manager LLC2931 - The allowance for credit losses is measured under the Current Expected Credit Loss (CECL) model, using methods like probability of default/loss given default and probability-weighted expected cash flow, incorporating macroeconomic forecasts6566 - As of March 31, 2024, the company had future funding commitments of $725.0 million related to its commercial real estate loans and a remaining commitment of $4.3 million to the RECOP I aggregator vehicle220221 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the impact of macroeconomic factors on its $7.5 billion loan portfolio, reporting Q1 2024 Distributable Earnings of $0.39 per share and maintaining strong liquidity with 78% non-mark-to-market financing - The company's investment strategy is to originate or acquire transitional senior loans collateralized by institutional-quality CRE assets, with an objective of capital preservation and generating attractive risk-adjusted returns256 - As of March 31, 2024, the loan portfolio was $7.5 billion, with 99% of loans earning a floating rate. Multifamily and industrial loans comprised 58% of the portfolio272273275 - The company's financing is comprised of 78% Non-Mark-to-Market sources, which are not subject to credit or capital markets mark-to-market provisions, reducing exposure to market volatility304345 Key Financial Indicators per Share | Indicator | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Net Income (Loss) per Share | $(0.13) | $(0.27) | | Dividends Declared per Share | $0.25 | $0.43 | | Distributable Earnings per Share | $0.39 | $(0.37) | | Book Value per Share | $15.18 | $15.52 | Our Portfolio As of March 31, 2024, the company's $7.5 billion investment portfolio consisted primarily of senior commercial real estate loans, with an average risk rating of 3.2, and loan repayments exceeding new fundings Loan Portfolio Risk Rating (by Total Loan Exposure) | Risk Rating | % of Portfolio (Mar 31, 2024) | % of Portfolio (Dec 31, 2023) | | :--- | :--- | :--- | | 1 (Very Low Risk) | 0% | 0% | | 2 (Low Risk) | 1% | 1% | | 3 (Medium Risk) | 84% | 86% | | 4 (High Risk) | 5% | 6% | | 5 (Impaired/Loss Likely) | 10% | 7% | Collateral Property Type Diversification | Property Type | % of Portfolio (Mar 31, 2024) | | :--- | :--- | | Multifamily | 43.4% | | Office | 20.7% | | Industrial | 15.1% | | Life Science | 11.0% | | Hospitality | 5.1% | | Other | 4.7% | - The average risk rating of the loan portfolio was 3.2 as of March 31, 2024, weighted by total loan exposure, consistent with the prior quarter295 Results of Operations Net interest income decreased quarter-over-quarter and year-over-year due to non-accrual loans, while total operating expenses significantly declined in both periods, primarily driven by a lower provision for credit losses - Q1 2024 vs Q4 2023: Net interest income decreased by $7.3 million (16%) primarily due to the suspension of interest income accrual on loans accounted for under the cost recovery method333334 - Q1 2024 vs Q4 2023: Total operating expenses decreased by $13.4 million (21%), mainly due to a $16.2 million lower provision for credit losses333337 - Q1 2024 vs Q1 2023: Total operating expenses decreased by $26.1 million (34%), primarily due to a $27.2 million lower provision for credit losses and a $1.8 million decrease in incentive compensation339343 Liquidity and Capital Resources As of March 31, 2024, the company had $620.1 million in total liquidity, a debt-to-equity ratio of 2.1x, and believes its current liquidity is sufficient to meet all financial obligations Sources of Liquidity (in thousands) | Source | March 31, 2024 | | :--- | :--- | | Cash and cash equivalents | $106,517 | | Available borrowings under revolving credit agreement | $450,000 | | Available borrowings under other financing | $63,552 | | Total | $620,069 | Leverage Ratios | Ratio | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Debt-to-equity ratio | 2.1x | 2.3x | | Total leverage ratio | 4.1x | 4.2x | - The company had $108.4 million of unencumbered senior loans that can be pledged to financing facilities as an additional source of liquidity346355 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to credit, interest rate, prepayment, financing, and real estate risks, with a 100 basis point change in index rates impacting net cash flows by approximately $2.1 million, and 78% of financing being non-mark-to-market - The company's net income is sensitive to interest rate changes. A 100 basis point decrease in index rates would decrease expected cash flows by approximately $2.1 million ($0.03 per share) for a three-month period, while a 100 basis point increase would increase cash flows by the same amount385 - The company faces credit risk from potential borrower defaults, exacerbated by inflation and rising interest rates which can negatively impact underlying real estate collateral values378379 - Financing risk is managed by using various forms of leverage, including repurchase facilities and collateralized loan obligations. Weakness in financial markets could adversely affect lenders and increase financing costs388 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2024, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective at a reasonable assurance level392 - No changes occurred during the quarter ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting393 Part II - Other Information This section covers legal proceedings, risk factors, unregistered sales of equity securities, defaults, mine safety disclosures, other information, and a list of exhibits Item 1. Legal Proceedings The company is not involved in any material legal proceedings - As of March 31, 2024, KREF was not involved in any material legal proceedings218394 Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors previously disclosed in the Form 10-K395 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during Q1 2024, retaining $100.0 million in remaining capacity under its share repurchase program - The company did not repurchase any of its common stock during the three months ended March 31, 2024397 - As of March 31, 2024, the company had $100.0 million of remaining capacity under its share repurchase program397 Item 3. Defaults Upon Senior Securities None Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information None Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications and XBRL data files