KKR Real Estate Finance Trust Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 8, 2022. KREF is an externally managed mortgage REIT focused mainly on transitional senior commercial real estate loans. Figures below are U.S. dollars unless stated otherwise.
Financial and operating performance
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $280.0 million | $269.2 million |
| Interest expense | $114.4 million | $127.3 million |
| Net interest income | $165.5 million | $141.9 million |
| Net income attributable to common stockholders | $125.6 million; $2.21 diluted EPS | $53.6 million; $0.96 diluted EPS |
| Distributable Earnings (non-GAAP) | $92.4 million; $1.63 per diluted share | $109.3 million; $1.95 per diluted share |
| Common dividends declared | $1.72 per share | $1.72 per share |
| Common book value | $1,188.9 million; $19.37 per share | $1,043.6 million; $18.76 per share |
- Net interest income rose 16.7%, as interest income increased and interest expense fell. Management cited $11.3 million in net accelerated deferred loan fees and prepayment-fee income in 2021, compared with $1.8 million in 2020.
- Operating cash flow was $124.8 million, versus $115.1 million in 2020. Investing cash flow was negative $1.541 billion, reflecting $3.905 billion of loan fundings against repayments and loan sales or syndications. Financing cash flow was positive $1.579 billion. Cash and cash equivalents ended the year at $271.5 million.
- At year-end, the loan portfolio had $6.677 billion of principal and $6.294 billion net carrying value after allowance. Total investment portfolio was $6.792 billion, including $78.6 million of real estate owned (REO) and $35.7 million invested in CMBS B-Pieces through an equity-method investment.
- Loan exposure was 100% floating rate, with a weighted-average LTV of 68% and weighted-average all-in yield of 4.4%. Multifamily and office represented 74% of loan exposure; hospitality represented 7%. All investments were in the United States.
- Portfolio financing was approximately $5.367 billion, including non-consolidated senior interests. Non-mark-to-market sources represented 71% of portfolio financing. Debt-to-equity was 2.3x and total leverage was 3.7x, versus 1.9x and 3.6x, respectively, in 2020.
- Reported available liquidity sources totaled $528.9 million: $271.5 million cash, $200.0 million undrawn corporate revolver, and $57.4 million of available borrowings under other facilities. KREF also reported $235.3 million of unencumbered senior loans, subject to lender approval for financing.
Material changes and unusual items
- Loan originations reached a record $4.843 billion across 37 floating-rate loans, versus $917.9 million in 2020. Fundings were $3.958 billion; net fundings were $1.828 billion.
- GAAP net income attributable to common stockholders increased 134.6%. Distributable Earnings declined 15.5%, reflecting $32.9 million of realized loan write-offs, including $32.1 million relating to a defaulted retail loan and $0.9 million for an impaired mezzanine loan.
- In December 2021, KREF took title to the collateral of a defaulted Portland retail loan. The loan had a $109.6 million principal balance and $69.3 million carrying value immediately before foreclosure; KREF recorded REO at $78.6 million and recognized an $8.2 million GAAP benefit from reversal of credit-loss allowance. Management’s Distributable Earnings measure included a $32.1 million realized loss.
- The allowance for credit losses on loans declined to $22.2 million from $59.8 million; including unfunded commitments, the year-end allowance was $23.7 million. The 2021 net reversal of credit-loss provision was $4.1 million, compared with a $50.3 million provision in 2020.
- KREF issued $167.1 million net of 6.5% Series A preferred stock and $120.4 million net from a common-stock offering in 2021. The common offering was reported as $0.22 per share accretive to book value. KKR and affiliates’ ownership fell to 23.2% from 38.2% at year-end 2020.
- Non-mark-to-market financing expanded through a $1.3 billion managed CLO, a $500 million term lending agreement and the repricing and upsizing of the secured term loan to $350 million, due September 2027. The CLO provided $1.1 billion of financing at a stated weighted-average cost of L+1.30% before transaction costs.
Outlook, risks and contingencies
- No specific earnings, portfolio-growth or dividend guidance is provided. Management said it expects originations to remain heavily weighted toward floating-rate senior loans and believes existing liquidity will meet anticipated needs, subject to current conditions.
- Management declared common dividends of $0.43 per share each quarter in 2021. The board determines future distributions; the filing gives no assurance that the rate will be maintained.
- LIBOR cessation after June 30, 2023 is a key exposure: at year-end, all loans and all financing arrangements other than convertible notes were LIBOR-indexed. KREF warned that transition basis differences, spread adjustments or mismatched timing could increase costs or adversely affect results. It had no SOFR-indexed assets or liabilities at year-end.
- Interest-rate sensitivity is affected by loan floors: approximately 54% of the loan portfolio had a LIBOR floor of at least 0.25%, with a 0.74% weighted-average floor. Management estimated a 25-basis-point and 50-basis-point LIBOR increase would reduce expected 12-month cash flows by about $4.1 million and $6.8 million, respectively; a 10-basis-point or greater decrease was estimated to increase them by about $4.3 million.
- Key risks include borrower defaults and collateral-value declines; transitional-loan execution and refinancing risk; COVID-19 effects on occupancy, rents, costs and borrower plans; inflation and labor or supply-chain pressures; leverage, funding access, refinancing and repurchase-facility margin calls; and illiquidity or valuation uncertainty.
- At year-end, KREF had $1.368 billion in future loan-funding commitments, principally for construction, property improvements and leasing costs. It was in compliance with financing covenants and reported no material legal proceedings.
- Subsequent events: KREF issued an additional $151.2 million net of Series A preferred stock in January 2022, originated loans with $652.6 million of commitments through February 2022, and priced a $1.0 billion managed multifamily CLO expected to close in February 2022. These transactions were announced or priced, and the CLO remained subject to closing conditions.
Important facts for investors to verify
- Reconcile GAAP earnings with Distributable Earnings, particularly the treatment of realized loan losses, credit-loss reversals and the foreclosed retail asset.
- Review collateral valuation, recovery prospects, operating needs and potential further investment for the Portland REO, as well as the remaining impaired mezzanine exposure and loan risk-rating disclosures.
- Assess liquidity against $1.368 billion of unfunded loan commitments, debt maturities, recourse and covenant terms, collateral haircuts, and the timing and availability of undrawn facilities.
- Monitor progress on LIBOR-to-SOFR contract amendments and any mismatch between asset and funding rate transitions.
- Evaluate dividend coverage using both GAAP results and the company-defined non-GAAP measure; confirm the subsequent-period dividend and preferred-stock obligations.
- Consider the impact of KKR’s 23.2% voting interest, related-party fees and financing arrangements, and the manager’s investment-allocation and incentive-fee structure.