KKR Real Estate Finance Trust Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. KREF is an externally managed commercial real estate finance REIT focused mainly on transitional senior loans secured by U.S. properties.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Interest income | $269.2 million | $274.3 million |
| Interest expense | $127.3 million | $158.9 million |
| Net interest income | $141.9 million | $115.5 million |
| Total net revenue | $143.2 million | $121.5 million |
| Net income attributable to common stockholders | $53.6 million; $0.96 diluted EPS | $90.5 million; $1.57 diluted EPS |
| Distributable Earnings (non-GAAP) | $109.3 million; $1.95 per diluted share | $96.3 million; $1.67 per diluted share |
| Dividends declared per common share | $1.72 | $1.72 |
Fourth-quarter 2020 net income attributable to common stockholders was $28.8 million, or $0.52 per diluted share; Distributable Earnings were $26.5 million, or $0.48 per diluted share. The quarterly dividend was $0.43 per share.
At year-end, the loan portfolio had approximately $5.0 billion of total exposure, was 97.7% performing, and had a 67% weighted-average LTV. Loans were 99.9% floating-rate by principal exposure; the reported portfolio-wide weighted-average all-in yield was 5.2%. Multifamily and office represented 81% of the loan portfolio; hospitality and retail represented 9%.
Cash and cash equivalents were $110.8 million. Operating cash flow was $115.1 million, versus $91.7 million in 2019; cash increased by $43.2 million during 2020. Reported liquidity sources totaled $481.8 million, including cash, an undrawn $335.0 million revolving facility, and loan repayment proceeds receivable. KREF also reported $274.7 million of unencumbered senior loans, subject to lender approval for financing.
Total assets were $5.0 billion and stockholders’ equity was $1.04 billion. Book value per share fell to $18.76 from $19.52. Portfolio financing outstanding was $3.85 billion; total leverage was 3.6x, compared with 3.4x in 2019. Non-mark-to-market sources represented 83% of portfolio financing. KREF reported compliance with its financing covenants at year-end.
Material changes versus prior year
- Net interest income rose 22.9%, although interest income declined 1.9%; lower funding expense, including lower LIBOR costs while loan floors supported asset income, was the main driver.
- GAAP net income attributable to common stockholders fell 40.8%. The principal unusual expense was a $50.3 million net credit-loss provision following adoption of CECL, alongside a $15.0 million opening-equity adjustment on adoption. The year-end loan allowance was $59.8 million, plus $0.9 million for unfunded commitments; a $4.7 million write-off was recorded on a $5.5 million mezzanine loan.
- Loan originations declined to $917.9 million from $3.11 billion. Repayments and syndications exceeded fundings, resulting in net loan fundings of negative $81.4 million.
- KREF issued a $300 million secured term loan and established a $500 million warehouse facility, increased its revolving credit capacity to $335 million, and reduced master-repurchase borrowing outstanding. The warehouse and revolver were undrawn at year-end.
- KREF repurchased 2.04 million shares for approximately $25.0 million at an average $12.27 per share. It declared the same $1.72 annual dividend per share as in 2019.
Outlook, risks, and unusual items
- Management gave no quantified earnings or portfolio guidance. It expected future investment activity to remain focused mainly on floating-rate transitional senior loans and said the ultimate financial impact of COVID-19 could not be reasonably estimated.
- COVID-19-related property and borrower stress led to loan modifications, including reserve reallocations, sponsor contributions, partial interest deferrals capitalized as PIK, and covenant or performance-test relief. Three modified loans with $317.7 million of principal had temporary PIK provisions; $4.2 million of PIK interest was added to principal during 2020.
- A $109.6 million senior retail loan was on non-accrual from October 2020, rated risk category 5, and modified to extend maturity to March 2021, with an option through April. The modification included deferred interest and a deed-in-lieu-of-foreclosure provision. Two loans totaling $115.1 million were placed on non-accrual during the year. Two loans, representing 2.3% of total loan exposure, were risk-rated 5 at year-end.
- Management highlighted risks from borrower defaults, property-value and occupancy declines, concentrated real estate exposures, refinancing and liquidity needs, financing covenants and potential collateral marks. LIBOR transition is also material: nearly all loans and financing arrangements were LIBOR-linked, although contractual fallback provisions existed.
- Interest-rate sensitivity was asymmetric due to loan floors: management estimated a 14-basis-point or greater LIBOR decline would increase expected 12-month cash flows by about $4.9 million, while 25- or 50-basis-point increases would reduce them by about $8.3 million or $16.1 million, respectively.
- Other considerations include KKR’s control and related-party conflicts, the external management arrangement and fees, REIT qualification and Investment Company Act exclusions. No material legal proceedings were reported. The auditor issued an unqualified opinion and identified CECL loan-loss estimation as a critical audit matter.
Important facts for investors to verify
- How the $60.7 million total CECL reserve and the two non-accrual loans evolve, especially the retail loan’s resolution and recovery value.
- Whether borrower modifications, PIK interest and collections translate into cash repayment; annual interest collections were 99.4%, and January 2021 collections were 97.1%.
- Near-term financing maturities, covenant headroom, collateral requirements and actual availability of reported liquidity, including the unencumbered loans and undrawn facilities.
- Dividend coverage and sustainability: GAAP EPS was below the $1.72 dividend, while Distributable Earnings were above it; Distributable Earnings is a non-GAAP measure and is not equivalent to cash flow or taxable income.
- Effects of LIBOR replacement, interest-rate changes and any mismatch in the timing of benchmark adjustments between loans and borrowings.
- Portfolio concentration and collateral assumptions, CECL model inputs, KKR-related fees and conflicts, and the impact of COVID-19 on property-level cash flows.