KKR Real Estate Finance Trust Inc. — Q1 2023 10-Q
Business context and reporting period. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring floating-rate transitional commercial real estate loans. This unaudited report covers the three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023.
Financial and operating highlights
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Interest income | $152.5 million | $73.2 million in Q1 2022 |
| Interest expense | $106.0 million | $32.5 million in Q1 2022 |
| Net interest income | $46.6 million | $40.8 million in Q1 2022; down $5.4 million from Q4 2022 |
| Net income (loss) attributable to common stockholders | $(30.8) million; $(0.45) per share | $29.8 million; $0.47 per share in Q1 2022 |
| Distributable Earnings, a non-GAAP measure | $33.1 million; $0.48 per diluted share | $12.4 million; $0.18 per diluted share in Q4 2022 |
| Common dividend declared | $0.43 per share | Unchanged from Q1 2022 and Q4 2022 |
| Cash flows | Operating $41.6 million; investing $(113.1) million; financing $87.1 million | Cash, cash equivalents and restricted cash increased $15.7 million |
Portfolio and credit. CRE loan principal was $7.65 billion across 75 loans, all floating-rate; the weighted-average coupon was 8.2%, average risk rating 3.2, and weighted-average LTV 66% (excluding risk-rated 5 loans). Multifamily represented 45.7% and office 22.8% of loan principal. KREF reported collecting all interest payments due during the quarter, although two risk-rated 5 office loans were on nonaccrual status.
The allowance for credit losses rose to $167.4 million from $107.0 million at year-end 2022; including unfunded commitments, the allowance was $171.6 million. The quarter included a $60.5 million net credit-loss provision, attributed principally to additional reserves for two risk-rated 5 office loans and weakness in the market, particularly office. One Philadelphia office loan was modified and moved from risk rating 5 to 3; a Minneapolis office loan remained risk-rated 5 and was placed on nonaccrual in March.
Balance sheet, debt and liquidity. Total assets were $7.88 billion, total liabilities $6.36 billion and equity $1.51 billion. Net CRE loans were $7.44 billion; real estate owned was $81.1 million. Debt on the balance sheet comprised $3.88 billion of secured financing, $1.94 billion of CLO obligations, $336.5 million of secured term debt and $143.6 million of convertible notes. Debt-to-equity was 2.2x and total leverage was 4.0x, up from 2.0x and 3.8x, respectively, at December 31, 2022.
Cash and cash equivalents were $254.1 million. Reported primary liquidity sources totaled $892.2 million, including $610 million of undrawn revolver capacity; KREF also reported $99.6 million of unencumbered senior loans available for financing, subject to lender approval. KREF was in compliance with financing covenants. Future loan funding commitments totaled $1.34 billion. Book value per common share was $17.16, down from $18.00 at year-end; the company attributed $2.48 per share of March book value to the estimated CECL allowance.
Changes, outlook and key risks
- Year over year, net interest income increased 14%, but interest expense more than tripled as market rates and average financing balances rose. The larger credit provision drove the swing from Q1 2022 common-stockholder income to a Q1 2023 loss.
- Management said higher rates generally support income from its floating-rate assets, but may also increase borrowing costs, pressure property values and borrowers, delay repayments, and lead borrowers to exercise extensions. No specific earnings or dividend guidance was provided.
- Of total financing, 76% was described as non-mark-to-market; the remaining 24%, primarily repurchase facilities, was subject to credit marks. Credit marks could reduce borrowing availability or require collateral or repayment if collateral values deteriorate. KREF reported no margin calls to date.
- The $143.75 million 6.125% convertible notes were scheduled to mature May 15, 2023, shortly after quarter-end. The filing does not provide a post-quarter settlement outcome.
- Other material exposures include office-sector weakness, refinancing and maturity risk, interest-rate and LIBOR-to-SOFR transition risk, potential bank and counterparty disruption, and the substantial future loan-funding commitments. Substantially all cash deposits exceeded insured limits, though the company said it diversified deposits among financial institutions.
- KREF held one retail REO property in Portland, Oregon, with a net carrying value of $81.1 million. It reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How the credit performance, collateral valuations and expected recovery of the Philadelphia and Minneapolis office loans evolve, and whether further reserves or realized losses are recorded.
- How KREF funds the May 2023 convertible-note maturity and meets near-term debt maturities, loan commitments and any collateral-related liquidity needs.
- Whether Distributable Earnings remain sufficient to cover the $0.43 quarterly common dividend; this non-GAAP measure is not a substitute for GAAP earnings.
- Whether the $1.34 billion of future funding commitments, loan repayment timing and available financing capacity change materially.
- How the LIBOR transition, interest-rate changes, office-market conditions and credit marks affect net interest income, collateral values and leverage.