KKR Real Estate Finance Trust Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021. Unaudited consolidated results. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring transitional commercial real estate loans. Unless noted otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $75.3 | $67.7 | $207.2 | $206.0 |
| Interest expense | $29.8 | $28.8 | $84.2 | $98.5 |
| Net interest income | $45.5 | $38.9 | $123.1 | $107.5 |
| Net income | $35.7 | $31.2 | $96.8 | $25.5 |
| Net income attributable to common stockholders | $32.0 | $31.4 | $90.4 | $24.8 |
| Diluted EPS | $0.57 | $0.56 | $1.62 | $0.44 |
| Common dividend declared per share | $0.43 | $0.43 | $1.29 | $1.29 |
- Quarter-on-quarter, net interest income rose 13.2% to $45.5 million and common-stockholder income rose 9.3% to $32.0 million. Management attributed higher interest income mainly to portfolio growth and $6.5 million of accelerated loan and prepayment fees; higher borrowings also increased interest expense.
- Nine-month net income improved substantially from 2020, principally because credit-loss expense fell by $54.8 million: KREF recorded a $1.0 million net reversal in 2021 versus $53.8 million of provision in 2020. Lower financing costs also supported net interest income.
- Non-GAAP Distributable Earnings were $34.5 million, or $0.62 per diluted share, versus $30.4 million, or $0.54, in Q2 2021. This measure excludes specified noncash and other items and is not a substitute for GAAP earnings.
- No net interest margin figure is provided in the filing text.
Portfolio, balance sheet and liquidity
- Commercial real estate loans held for investment were $5.44 billion amortized cost and $5.38 billion carrying value, net of a $58.8 million credit-loss allowance. Loan exposure, including certain interests not consolidated on the balance sheet, was $5.79 billion.
- The portfolio was 99.9% floating-rate by principal. Weighted-average coupon was 4.4%; weighted-average LTV was 67%. Multifamily and office represented 71% of the loan portfolio.
- Management reported 98.0% of the loan portfolio performing and collection of 97.4% of Q3 interest payments due. Two loans totaling $115.1 million were on nonaccrual; the $109.6 million retail loan was risk-rated 5 and carried a $40.3 million allowance. Average portfolio risk rating was 3.0.
- Cash and cash equivalents were $307.7 million; total assets were $5.75 billion and total liabilities $4.52 billion. Common book value per share was $19.09, compared with $18.76 at December 31, 2020.
- Debt carrying values included $2.96 billion of secured financing, $1.09 billion of CLO obligations, $287.1 million of secured term loan and $141.5 million of convertible notes. Debt-to-equity was 1.8x and total leverage was 3.4x, versus 1.9x and 3.6x at year-end 2020. KREF reported compliance with financing covenants.
- Reported liquidity sources totaled $516.2 million, comprising cash, $185.0 million of revolver availability, $18.1 million of available borrowing against pledged collateral and $5.4 million of loan repayment proceeds receivable. KREF also had $373.7 million of unpledged loans available to finance.
- For the nine months, operating cash flow was $96.9 million, investing cash outflow was $573.2 million and financing cash inflow was $674.8 million; cash, cash equivalents and restricted cash increased $198.5 million. Loan originations and future fundings were $2.25 billion, compared with $1.67 billion of repayments and sale/syndication proceeds.
Material changes, outlook and risks
- Loan carrying value grew from $4.78 billion at December 31, 2020 to $5.38 billion at September 30, 2021. Risk-rated 4 exposure decreased as a share of total exposure, while risk-rated 2 and 3 exposure increased; risk-rated 5 exposure remained 2.0%.
- In August 2021, KREF issued a new $1.10 billion CLO and repaid the prior CLO notes. In April, it issued 6.9 million Series A preferred shares, raising $167.1 million net. The preferred shares carry a 6.50% annual dividend and rank senior to common stock.
- Common dividends remained $0.43 per share quarterly. On October 1, 2021, the SNVPS was redeemed; KREF expected $2.6 million, or $0.05 per common share, of Q4 book-value accretion.
- Future loan funding commitments were $1.225 billion, primarily for construction, improvements and leasing costs. Total contractual obligations, including estimated interest and commitments, were $6.00 billion; timing and actual amounts may vary.
- No formal earnings or dividend guidance is provided. Management cited economic recovery but cautioned that COVID-19 variants, uneven vaccination, supply-chain disruption, labor shortages and inflation could affect borrowers and collateral performance.
- Key risks include borrower defaults and property-value declines; liquidity pressure or collateral margin calls under repurchase facilities; refinancing and maturity risk; changes in funding costs and credit spreads; and the transition from LIBOR. Nearly all loans and financing arrangements (excluding convertible notes) referenced LIBOR. Management was monitoring the transition, but stated its effects were uncertain.
- KREF uses Level 3 valuation inputs for its loans, including discounted cash-flow assumptions; actual losses and fair values may differ from estimates. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the $109.6 million nonaccrual retail loan’s restructuring, collateral recovery and $40.3 million allowance remain appropriate.
- How the $1.225 billion of future funding commitments will be funded and how much is drawn as projects progress.
- Debt maturities, available borrowing capacity, covenant headroom and exposure to lender collateral marks or refinancing conditions.
- Whether portfolio credit performance, interest collections and the CECL allowance support continued dividends; Distributable Earnings are non-GAAP and should be assessed alongside GAAP results and cash flows.
- Effects of LIBOR replacement terms on loan income, financing costs and contractual cash flows.