Business Context and Reporting Period
KKR Real Estate Finance Trust Inc. (KREF) filed a Form 8-K on July 13, 2020, announcing preliminary, unaudited results for the three months ended June 30, 2020. The filing was made in connection with a potential debt financing facility. The Company is an emerging growth company and a real estate finance trust focused on providing senior and mezzanine loans to real estate owners.
Key Financial Metrics
- Net Income: Estimated at $0.50 to $0.52 per basic and diluted share.
- Core Earnings: Estimated at $0.43 to $0.45 per basic and diluted share (Non-GAAP).
- Dividends: Declared $0.43 per share of common and special voting preferred stock, payable July 15, 2020.
- Book Value: Estimated between $1,029.4 million and $1,030.2 million ($18.55 to $18.57 per share).
- Liquidity: Total liquidity of $431.1 million, comprising $127.3 million in cash, $285.0 million in undrawn corporate revolver capacity, and $18.8 million in undrawn secured financing commitments.
- Portfolio Size: Fully funded portfolio of $5.3 billion.
- Leverage: Debt-to-equity ratio estimated at 2.1x; total leverage ratio at 4.0x.
- Share Repurchases: Repurchased 389,086 shares for $5.8 million in Q2; year-to-date total of 2,037,637 shares for $25.0 million.
Material Changes vs. Prior Period
- Book Value: Increased slightly from $18.45 per share as of March 31, 2020, to an estimated $18.55 to $18.57 per share as of June 30, 2020.
- Debt-to-Equity: Decreased marginally from 2.2x to 2.1x.
- Portfolio Risk: Average risk rating increased slightly from 3.0 to 3.1 (both "Average Risk"). The percentage of loans risk-rated 3 or lower decreased from 86% to 84%.
- Financing Activity: Net borrowed $67.7 million on secured facilities and repaid $285.0 million on the corporate revolver. Extended the master repurchase agreement maturity with Goldman Sachs to October 2021.
- Credit Losses: Recorded a $4.7 million write-off on a $5.5 million mezzanine loan. Benefited from a $0.02 per share decrease in the unrealized Current Expected Credit Losses (CECL) provision.
Outlook, Risks, and Unusual Items
- Unusual Items: The quarter included a $4.7 million write-off on a mezzanine loan and a benefit from a decrease in the CECL provision.
- Performance: The Company collected 99.8% of interest payments due during Q2 and July 2020.
- Portfolio Composition: Multifamily and office loans comprised 81% of the portfolio; hospitality and retail comprised 8%. 98% of the portfolio is subject to a LIBOR floor of at least 0.95%.
- Forward-Looking Statements: The filing contains forward-looking statements regarding future performance and financing. Actual results may vary due to market conditions and other factors.
- Disclaimer: These are preliminary estimates subject to final closing procedures. The independent auditor has not audited or reviewed these estimates. Final results are expected on or about August 3, 2020.
Investor Verification Checklist
- Verify the final audited Q2 2020 financial results when released on or about August 3, 2020, to confirm the preliminary net income and Core Earnings estimates.
- Confirm the status of the potential debt financing facility mentioned as the context for this filing.
- Monitor the trend in the portfolio's average risk rating and the percentage of loans rated 3 or lower, given the slight deterioration in Q2.
- Review the final reconciliation of Core Earnings to GAAP Net Income to validate the treatment of the mezzanine loan write-off and CECL adjustments.
- Assess the impact of the $285.0 million repayment on the corporate revolver on future liquidity and borrowing capacity.