KKR Real Estate Finance Trust Inc. annual report, FY2022

KKR Real Estate Finance Trust Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022. The filing reports full-year results and selected fourth-quarter data; it is not a standalone quarterly filing. KREF is an externally managed commercial real estate finance REIT focused mainly on transitional senior loans.

Financial and operating highlights

Metric	2022	2021
Interest income	$422.0 million	$280.0 million
Interest expense	$236.1 million	$114.4 million
Net interest income	$185.9 million	$165.5 million
Net income attributable to common stockholders	$15.4 million; $0.23 diluted EPS	$125.6 million; $2.21 diluted EPS
Distributable Earnings, a non-GAAP measure	$109.6 million; $1.62 per diluted share	$92.4 million; $1.63 per diluted share
Common dividend declared	$1.72 per share	$1.72 per share
Common book value per share	$18.00	$19.37

Fourth-quarter 2022 net income attributable to common stockholders was $14.6 million ($0.21 per diluted share); Distributable Earnings were $12.4 million ($0.18 per diluted share). No net interest margin percentage is clearly provided in the filing text.

• Net interest income rose 12.3%, as higher index rates and a larger average loan portfolio more than offset sharply higher funding costs. Interest income increased 50.7%, while interest expense increased 106.3%.
• GAAP common earnings fell 87.8%, primarily reflecting a $112.4 million provision for credit losses versus a $4.1 million reversal in 2021, along with higher preferred dividends and related adjustments.
• The year-end CECL allowance was $111.1 million, including $107.0 million against funded loans and $4.1 million for unfunded commitments. The allowance increased $87.4 million during 2022; the filing cites macroeconomic uncertainty, inflation, higher rates, and office-sector weakness.
• Cash from operating activities was $141.1 million; investing activities used $1.177 billion; financing activities provided $1.013 billion. Cash, cash equivalents and restricted cash decreased $23.1 million during the year. Year-end cash and cash equivalents were $239.8 million.
• Total assets were $7.802 billion; total liabilities were $6.231 billion and total equity was $1.571 billion. Portfolio financing outstanding was $6.323 billion. Total leverage was 3.8x, versus 3.7x in 2021; debt-to-equity was 2.0x versus 2.3x.
• Reported liquidity sources totaled $951.8 million: cash, $610.0 million of available revolver capacity, and available repo and term-lending capacity. KREF also reported $179.4 million in unencumbered senior loans, subject to lender approval for financing. Management said liquidity was sufficient for anticipated needs under current conditions.

Portfolio, capital and changes versus 2021

• The investment portfolio totaled $7.916 billion at year-end, including $7.801 billion of outstanding CRE loan principal, an $80.2 million REO asset, and a $35.7 million indirect CMBS B-Piece investment. The loan portfolio had a 66% weighted-average LTV and 3.3-year weighted-average maximum maturity; all loans were floating rate by principal amount in the portfolio statistics.
• KREF originated $2.706 billion and funded $2.469 billion of loans in 2022, compared with $4.843 billion originated and $3.958 billion funded in 2021. Multifamily and industrial properties accounted for 69% of 2022 originations; multifamily and industrial loans together were 57% of the year-end portfolio.
• The weighted-average loan risk rating worsened to 3.2 from 2.9. Risk-rated 4 and 5 exposures were 12.0% of total loan exposure, including 6.3% rated 5. KREF collected all interest payments due on the loan portfolio in 2022, but some distressed loans remained current on interest while carrying high risk ratings or nonaccrual status.
• KREF restructured a defaulted $161.0 million Philadelphia office loan; $25.0 million was written off as uncollectible. The modification closed in January 2023 and restructured the remaining exposure into senior mortgage and junior mezzanine interests. Separately, a $158.8 million Philadelphia office loan was placed on nonaccrual in December 2022, and a $194.4 million Minneapolis office loan received a short-term extension treated as a troubled debt restructuring.
• The allowance increase and office credit deterioration contrast with 2021, when KREF recorded a $4.1 million net credit-loss reversal. The year-end allowance was $22.2 million at the end of 2021.
• Common equity was raised through offerings, with $187.5 million net proceeds before transaction costs; KREF also issued Series A preferred stock for $151.2 million net proceeds. It repurchased 2.085 million common shares for $35.8 million. The Series A preferred stock carries a 6.50% annual dividend rate and a $25 liquidation preference.
• Non-mark-to-market financing represented 77% of secured financing, intended to reduce exposure to market-value margining. KREF closed a $1.0 billion managed multifamily CLO and expanded several financing facilities; the corporate revolver was increased to $610.0 million and extended to March 2027.

Outlook, risks and unusual items

• No specific earnings, portfolio-growth or dividend guidance is provided. Management expects future activity to remain weighted toward originating floating-rate senior loans and says its liquidity is adequate based on current conditions.
• Rising rates may increase income on floating-rate loans, but also raise floating-rate funding costs and borrowers’ debt service. The filing’s sensitivity analysis estimates a 100-basis-point index-rate increase would raise expected cash flows by about $14.0 million, or $0.20 per common share, over the following 12 months; a 100-basis-point decrease would reduce them by about $13.9 million, or $0.20 per share.
• Key risks include commercial real estate valuation declines and refinancing difficulty, especially in office; borrower defaults and extension requests; higher financing costs, counterparty and liquidity risks; repurchase-agreement collateral marks; and the ability to fund $1.540 billion of future loan commitments. Contractual obligations included $1.318 billion of debt maturities in 2023, including the $143.75 million convertible notes due May 2023.
• LIBOR was scheduled to cease or become nonrepresentative after June 30, 2023. At year-end, 44.6% of loans and 39.5% of floating-rate financing were LIBOR-indexed; KREF warned that benchmark transition timing or pricing mismatches could increase costs.
• Common Distributable Earnings of $1.62 per diluted share were below the $1.72 annual common dividend declared. The common dividend remained $0.43 quarterly; management cautions that future distributions are discretionary and depend on earnings, liquidity, covenants and other conditions.
• The Portland retail property acquired through foreclosure generated $9.0 million of revenue and $11.1 million of operating expenses in 2022, a net operating loss of $0.8 million before other income. KREF held a 90% interest in the related joint venture, with priority distributions up to $71.8 million.
• The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective. KREF reported no material legal proceedings as of year-end.

Important facts for investors to verify

• Review the $111.1 million CECL allowance, its sensitivity to property values and economic assumptions, and the exposure and collateral valuations for office loans rated 4 or 5.
• Track outcomes of the Philadelphia and Minneapolis office loan modifications, refinancing prospects, and any further nonaccruals, write-offs or foreclosures.
• Confirm that loan and funding rates continue to reprice in a manner that preserves net interest income as financing costs rise and LIBOR-linked contracts transition.
• Assess available liquidity against debt maturities, covenants, potential collateral calls and $1.540 billion of future funding commitments; verify refinancing or repayment of the May 2023 convertible notes.
• Compare future Distributable Earnings and cash generation with common and preferred dividend requirements, noting that Distributable Earnings is non-GAAP and was below the 2022 common dividend per share.
• Evaluate financing concentration and KKR-related conflicts, including the external manager’s fees, affiliate transactions and allocation of investment opportunities.