Business Context and Reporting Period
Company: KKR Real Estate Finance Trust Inc. (KREF)
Filing Type: Form 8-K (Current Report)
Date of Report: August 16, 2021
Event: Entry into a Material Definitive Agreement involving the closing of a new collateralized loan obligation (CLO) and the termination of a prior CLO.
Key Financial Metrics and Transaction Details
The Company closed a new CLO transaction (KREF 2021-FL2) on August 16, 2021. The transaction structure includes the following note classes and amounts:
| Note Class | Amount ($) | Maturity Date | Initial Interest Rate |
|---|---|---|---|
| Class A (Senior Secured) | 702,000,000 | February 2039 | 1M LIBOR + 1.070% |
| Class A-S (Second Priority) | 165,750,000 | February 2039 | 1M LIBOR + 1.300% |
| Class B (Third Priority) | 65,000,000 | February 2039 | 1M LIBOR + 1.650% |
| Class C (Fourth Priority) | 78,000,000 | February 2039 | 1M LIBOR + 2.000% |
| Class D (Fifth Priority) | 69,875,000 | February 2039 | 1M LIBOR + 2.200% |
| Class E (Sixth Priority) | 14,625,000 | February 2039 | 1M LIBOR + 2.850% |
| Class F (Seventh Priority/Exchangeable) | 65,000,000 | February 2039 | 1M LIBOR + 4.000% |
| Class G (Eighth Priority/Exchangeable) | 45,500,000 | February 2039 | 1M LIBOR + 5.000% |
Weighted Average Interest Rate: Approximately 1M LIBOR + 1.30% for the Offered Notes.
Collateral: One Mortgage Loan and 19 fully-funded pari passu participations in commercial and/or multifamily real estate loans.
Preferred Shares: Issued to the Retention Holder with an aggregate liquidation preference of $1,000 per share to comply with risk retention rules; no stated dividend rate.
Material Changes Versus Prior Period
- Termination of 2018 CLO: On August 17, 2021, the Company redeemed all outstanding notes from its $1.0 billion 2018 CLO (originally completed November 28, 2018). The agreements governing the 2018 CLO were terminated following this redemption.
- Use of Proceeds: Proceeds from the new 2021 CLO were used to purchase the initial collateral portfolio and to redeem the 2018 CLO.
- Reinvestment Period: The Issuer may purchase additional collateral interests during the period from the Closing Date through August 2023.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary: The transaction was announced via press release on August 18, 2021. The Company anticipates the Notes will be paid in advance of the stated maturity date in February 2039 based on the priority of payments in the Indenture.
Risks and Contingencies:
- Recourse Limitations: The Offered Notes are limited recourse obligations of the Issuer and non-recourse obligations of the Co-Issuer. Obligations to pay deficiencies following liquidation of the Collateral will be extinguished.
- Repurchase Obligations: The Seller is required to repurchase Collateral Interests in the event of a material breach of representations and warranties or a "Combined Loan Repurchase Event." This obligation is guaranteed by KKR Real Estate Finance Holdings L.P.
- Note Protection Tests: If specific protection tests are not satisfied, interest received on collateral must be used to pay down principal on senior notes (Classes A through E) rather than paying interest on junior notes (Classes F and G) or dividends on Preferred Shares.
- Exchangeable Notes: Class F and Class G Notes are exchangeable for MASCOT Notes (Principal & Interest and Interest Only notes), allowing holders to adjust their exposure to interest-only risk.
Important Facts for Investor Verification
- Verify the specific composition and credit quality of the initial collateral portfolio (one Mortgage Loan and 19 pari passu participations).
- Confirm the status of the redemption of the 2018 CLO and the termination of its associated agreements.
- Review the full text of the Indenture (Exhibit 4.1) for detailed terms regarding the Note Protection Tests and priority of payments.
- Monitor the Reinvestment Period (ending August 2023) for the acquisition of additional collateral interests.
- Assess the impact of the exchangeable features of Class F and Class G Notes on the capital structure and cash flow distribution.