KKR Real Estate Finance Trust Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring commercial real estate loans.
Financial performance and position
| Metric | Q1 2020 | Comparable period |
|---|---|---|
| Interest income | $71.1 million | $64.8 million, Q1 2019 |
| Interest expense | $39.1 million | $34.8 million, Q1 2019 |
| Net interest income | $32.0 million | $29.9 million, Q1 2019 |
| Net income (loss) attributable to common stockholders | $(35.2) million; $(0.61) per diluted share | $24.7 million; $0.43 per diluted share, Q1 2019 |
| Core Earnings, non-GAAP | $25.3 million; $0.44 per diluted share | $25.5 million; $0.44 per diluted share, Q4 2019 |
| Cash from operating activities | $27.4 million | $25.6 million, Q1 2019 |
| Cash and cash equivalents | $369.9 million | $67.6 million at December 31, 2019 |
| Book value per common share | $18.45 | $19.52 at December 31, 2019 |
| Common dividend declared | $0.43 per share | $0.43 per share, Q1 2019 |
Net interest income rose 7% year over year as the average loan portfolio grew; higher funding costs partly offset the increase. The GAAP loss primarily reflects a $55.3 million credit-loss provision and a $1.9 million loss from equity-method investments. The quarter’s cash flows were $154.6 million used in investing activities and $429.5 million provided by financing activities.
At March 31, commercial mortgage loans had $5.09 billion amortized cost and $5.02 billion carrying value after a $66.0 million allowance. Total assets were $5.46 billion and total liabilities were $4.42 billion. Debt included $3.37 billion of secured financing, $805.0 million of CLO obligations, $139.4 million of convertible notes and $65.0 million of loan participations sold. Debt-to-equity and total leverage ratios were 2.2x and 4.0x, respectively, versus 1.9x and 3.5x at year-end.
Available cash and borrowing capacity totaled approximately $450.0 million, including $369.9 million of cash and $80.1 million of available facility capacity. The company drew its $335 million revolving facility in March to increase liquidity. KREF reported compliance with its financing covenants at quarter-end.
Material changes and portfolio
- Effective January 1, 2020, KREF adopted the CECL expected-credit-loss standard. The opening retained-earnings adjustment was $15.0 million; a further $55.3 million provision was recorded in Q1. Total allowance for funded loans and unfunded commitments was $70.3 million at March 31.
- The provision reflected a sharply weaker economic outlook associated with COVID-19. The average internal loan risk rating rose to 3.0 from 2.9 at year-end; 14.4% of exposure was rated risk level 4, compared with none at year-end. No loans were reported past due or on nonaccrual at March 31.
- The portfolio comprised 40 loans with $5.12 billion face amount; 99.9% of loan exposure was floating rate. Multifamily represented 56.2% and office 28.2% of collateral property types. Weighted-average LTV was 66%.
- Secured financing increased from $2.88 billion net at year-end. KREF entered a $500 million HSBC warehouse facility in March and increased its revolving facility capacity to $335 million; the revolver was fully drawn at quarter-end.
- KREF repurchased 1.65 million shares during Q1 for $19.2 million at an average $11.64 per share. After quarter-end, it reported $25.0 million of year-to-date repurchases through April 28.
Outlook, risks and other items
Management said COVID-19 was expected to negatively affect business, financial performance and results in Q2 and later periods of 2020, and that material deterioration in revenue, cash flow or profitability was possible. The full impact was not estimable. Risks include borrower and tenant distress, lower property values and cash flows, defaults and principal losses, financing-market disruption, potential collateral or margin requirements, and difficulty refinancing or redeploying repayments.
Management’s CECL estimate used a shorter two-quarter economic forecast followed by reversion to historical mean losses over two additional quarters; estimates could change materially as economic information develops. KREF stated it currently expected to distribute at least 90% of 2020 REIT taxable income but would continue evaluating capital and liquidity needs. No specific earnings or dividend guidance was provided.
Other commitments include $592.8 million of future loan fundings, generally subject to conditions, and a remaining $4.3 million RECOP I commitment. Subsequent to quarter-end, KREF funded approximately $27 million of existing loans, received approximately $42 million in loan repayments, and reported a net $25.4 million repayment under financing agreements. It paid the declared $0.43-per-share dividend in April.
Important facts for investors to verify
- How borrower, tenant and collateral performance evolves, especially for the 14.4% of exposure rated risk level 4 and the office, hospitality and retail exposures.
- Whether CECL assumptions and the $70.3 million total allowance remain appropriate as forecasts and loan conditions change.
- Liquidity after the revolver draw, near-term debt maturities, facility availability and any collateral calls; also monitor the $592.8 million of loan funding commitments.
- The sustainability of the $0.43 quarterly dividend relative to future taxable income, cash needs and the REIT distribution requirement.
- How non-GAAP Core Earnings compare with GAAP results and the company’s stated Core Earnings methodology, including its treatment of credit provisions and unrealized items.