KKR Real Estate Finance Trust Inc. — Q3 2018 Form 10-Q
Business context and reporting period. The company is an externally managed mortgage REIT focused primarily on originating and acquiring commercial real estate loans. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $51.9 million | $24.4 million | $124.0 million | $54.8 million |
| Interest expense | $23.3 million | $5.4 million | $52.8 million | $12.6 million |
| Net interest income | $28.6 million | $19.0 million | $71.1 million | $42.2 million |
| Net income attributable to common stockholders | $20.8 million | $17.3 million | $67.9 million | $41.8 million |
| Diluted EPS | $0.37 | $0.32 | $1.25 | $0.98 |
| Common dividends declared per share | $0.43 | $0.37 | $1.26 | $1.25 |
- Portfolio and credit: 35 commercial mortgage loans with $3.3 billion carrying value; weighted-average loan-to-value was 68%. Approximately 98% of investments earned floating rates. All loans were rated average risk or better; none was past due or on nonaccrual, and no loan-loss provision was recorded.
- Liquidity and cash flow: Cash and cash equivalents were $192.8 million, up from $103.1 million at year-end. Available liquidity, including undrawn facilities and principal payments receivable, was reported as $366.8 million. For the nine months, operating cash flow was $57.4 million, investing cash outflow was $1.272 billion, and financing cash inflow was $1.304 billion; cash increased by $89.3 million.
- Debt and leverage: Secured financing agreements, net, were $2.116 billion; convertible notes, net, were $137.3 million; loan participations sold, net, were $83.4 million. Separate non-recourse VIE liabilities were $1.087 billion. Reported debt-to-equity and total leverage ratios were 1.3x and 1.9x, respectively, versus 0.8x and 1.0x at year-end. The company reported compliance with financing covenants.
- Equity and book value: Stockholders’ equity was $1.146 billion and book value per share was $19.76, compared with $1.059 billion and $19.73 at year-end. The company raised $98.3 million net in an August common-stock offering and repurchased $13.6 million of shares during the nine months.
Material changes versus comparable periods
- Q3 net interest income rose 50% year over year, as portfolio growth increased interest income; higher financing costs also drove a substantial increase in interest expense.
- Nine-month common-stockholder income increased 63%. Results included a $13.0 million realized gain from the April sale of controlling interests in four CMBS trusts; this was not a Q3 gain.
- Operating expenses increased, including $3.3 million of incentive compensation to the Manager in Q3 and the nine-month period. The filing attributes $2.4 million of the incentive fee to the CMBS sale gain.
- Commercial mortgage loans held for investment grew to $3.262 billion from $1.889 billion. Total assets fell to $4.612 billion from $7.395 billion, principally reflecting the April CMBS trust sale and deconsolidation; VIE assets and related liabilities declined materially.
Outlook, commentary, risks and unusual items
- Management expects future investment activity to focus primarily on floating-rate senior loans and anticipates CMBS B-Pieces will become a smaller share of the portfolio over time. No specific earnings or dividend guidance is provided.
- Management expects to distribute 100% of net taxable income for the foreseeable future, subject to retaining capital for ongoing needs. Q3 GAAP diluted EPS of $0.37 was below the $0.43 dividend declared; supplemental Net Core Earnings were $0.38 per diluted share and Core Earnings were $0.44. These non-GAAP measures are company-defined and should not be treated as substitutes for GAAP earnings.
- The company expects a $2.3 million noncash increase in the redemption value of special non-voting preferred stock in Q4 2018, reducing reported common-stockholder income and book value per share; management expected the redemption value to normalize in the first half of 2019.
- Key risks include borrower/property credit deterioration, real estate market declines, interest-rate and credit-spread movements, refinancing and funding availability, and collateral valuation or margin calls under repurchase facilities. A 50-basis-point rate movement was estimated to change 2018 cash flows by approximately $3.8 million in the corresponding direction, based on period-end exposure.
- Unfunded loan commitments were $369.9 million, primarily for property and leasing-related costs. The filing reports no material litigation. Subsequent to quarter-end, the Term Loan Facility capacity increased to $1.0 billion; the company also originated two loans totaling $119 million initially funded in October.
Important facts for investors to verify
- How recurring loan earnings and dividend coverage compare after excluding the one-time CMBS sale gain and related incentive compensation.
- Whether portfolio growth and the higher leverage ratios remain supported by available liquidity, covenant headroom, and financing capacity.
- Performance and collateral valuations for the growing loan book, including the $369.9 million of future funding commitments and any subsequent credit-rating changes.
- The assumptions behind Level 3 fair values and the effects of interest-rate, credit-spread, and repurchase-facility margin risks.
- The timing and accounting effect of the expected Q4 preferred-stock redemption-value adjustment and the subsequent increase in Term Loan Facility borrowings.