KKR Real Estate Finance Trust Inc. — Q1 2021 10-Q
Reporting period: Three months ended March 31, 2021. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring transitional commercial real estate loans. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial and portfolio highlights
| Metric | Q1 2021 / March 31, 2021 | Comparable period or prior year-end |
|---|---|---|
| Interest income | $64.8 million | $71.1 million in Q1 2020 |
| Net interest income | $37.4 million | $32.0 million in Q1 2020 |
| Net income attributable to common stockholders | $29.2 million; $0.52 per diluted share | Loss of $35.2 million; $(0.61) per diluted share in Q1 2020 |
| Distributable Earnings, a non-GAAP measure | $30.4 million; $0.55 per diluted share | $26.5 million; $0.48 per diluted share in Q4 2020 |
| Common dividend declared | $0.43 per share | $0.43 in Q1 2020 and Q4 2020 |
| Cash and cash equivalents | $209.3 million | $110.8 million at December 31, 2020 |
| CRE loans, held-for-investment, net | $4.97 billion | $4.78 billion at December 31, 2020 |
| Stockholders’ equity / book value per common share | $1.05 billion / $18.89 | $1.04 billion / $18.76 at December 31, 2020 |
| Debt-to-equity / total leverage ratio | 2.1x / 3.7x | 1.9x / 3.6x at December 31, 2020 |
Operating cash flow was $30.3 million, investing cash flow was negative $201.2 million and financing cash flow was positive $269.5 million. Cash increased by $98.5 million during the quarter. KREF reported $4.22 billion of total liabilities; debt obligations include secured financings, a CLO, a secured term loan, convertible notes and loan participations sold.
Changes and management commentary
- Compared with Q1 2020, net interest income rose 16.8%, although interest income fell 8.9%; lower financing expense, largely reflecting lower LIBOR, more than offset the decline in loan income. Management also cited the benefit of loan LIBOR floors.
- Common-stockholder income improved from a substantial year-earlier loss. The principal driver was the credit-loss line: Q1 2021 included a $1.6 million reversal, versus a $55.3 million provision in Q1 2020. Management attributed the reversal to a somewhat more stable macroeconomic outlook and the prior-year provision to COVID-19-related deterioration in outlook and reserves on higher-risk loans.
- Against Q4 2020, net interest income increased 8.8% to $37.4 million, primarily as the loan portfolio expanded and CLO financing-cost amortization ended. Common-stockholder income was broadly steady at $29.2 million versus $28.8 million.
- The loan portfolio had $5.29 billion of total exposure, including interests not consolidated on the balance sheet. It was 99.9% floating-rate by principal; weighted-average cash coupon was 4.8%, all-in yield 5.1%, and LTV 68%. Multifamily and office represented 85% of the portfolio.
- Management reported 97.8% of the loan portfolio performing and collection of 97.1% of interest payments due during the quarter. Average internal risk rating was 3.1, unchanged from year-end; 89% of exposure was rated 3 or better. Two loans totaling $115.1 million were on nonaccrual, including a $109.6 million retail loan rated 5 and under restructuring discussions.
- Quarter-end liquidity sources totaled $571.2 million: $209.3 million of cash, $335.0 million of undrawn revolver capacity and $26.8 million of additional borrowing capacity against existing collateral. The company also had $454.2 million of future loan funding commitments. It was in compliance with debt covenants.
Outlook, risks and notable items
- No quantitative earnings or portfolio guidance is provided. Management said COVID-19’s ultimate effects remained difficult to estimate and could affect borrowers, property cash flows, collateral values, financing sources, liquidity and distributions. Hospitality and retail were identified as particularly exposed sectors.
- Management highlighted risks from credit losses, property-value declines, financing availability and cost, potential margin calls on repurchase facilities, loan prepayments and the transition away from LIBOR. Almost all loans and financing arrangements were LIBOR-linked; alternative-rate terms exist, but the ultimate effects of transition were uncertain.
- In April 2021, after quarter-end, KREF issued 6.9 million shares of 6.5% Series A preferred stock and received $167.1 million in net proceeds. It also originated two loans with $189.7 million of committed principal and $115.1 million initially funded.
- The $0.43 common dividend declared for Q1 was paid April 15, 2021. KREF stated it expects to distribute at least 90% of REIT taxable income, while noting that taxable income is not the same as GAAP income or Distributable Earnings.
- No material legal proceedings were reported; management concluded disclosure controls were effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether improvement in earnings and credit reserves reflects sustained loan performance, rather than primarily the unusually large prior-year COVID-related provision comparison.
- Performance, restructuring status and collateral recovery prospects for the two nonaccrual loans, particularly the $109.6 million retail exposure.
- Ability to fund $454.2 million of loan commitments while meeting debt maturities, financing covenants and dividend requirements; review the timing and availability of stated liquidity sources.
- Effects of higher rates, LIBOR transition, refinancing or extension of secured facilities, and potential collateral marks or margin calls.
- How the April preferred-stock issuance affects leverage, financing costs and common-stockholder returns, and whether the $0.43 common dividend remains supported by future earnings and cash flows.