KKR Real Estate Finance Trust Inc. — Q1 2024 10-Q
Reporting period: Three months ended March 31, 2024. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring transitional commercial real estate loans. Unless otherwise indicated, dollar figures below are in millions.
Financial and portfolio highlights
| Metric | Q1 2024 / March 31, 2024 | Comparison |
|---|---|---|
| Interest income | $151.6 | $152.5 in Q1 2023 |
| Interest expense | $112.5 | $106.0 in Q1 2023 |
| Net interest income | $39.1 | Down 16% from $46.6 in Q1 2023 |
| Net loss attributable to KREF | $3.1 | Net loss of $25.1 in Q1 2023 |
| Net loss attributable to common stockholders / diluted EPS | $8.7 / $(0.13) | $30.8 / $(0.45) in Q1 2023 |
| Provision for credit losses | $33.3 | $60.5 in Q1 2023 |
| Distributable Earnings, a non-GAAP measure | $26.7 / $0.39 per diluted share | Not clearly provided for Q1 2023 in the filing text |
| Common dividend declared | $0.25 per share | $0.43 in Q1 2023 |
| Cash and cash equivalents | $106.5 | $135.9 at December 31, 2023 |
| Loan portfolio | $7,137.3 principal; $6,869.6 net carrying value | $7,369.4 principal; $7,133.1 net carrying value at December 31, 2023 |
| Allowance for credit losses | $243.6 on loans; $245.8 including unfunded commitments | $210.5 on loans at December 31, 2023 |
| Total assets / total equity | $7,256.7 / $1,380.1 | $7,547.6 / $1,404.2 at December 31, 2023 |
| Debt carrying values | $3,521.8 secured financing; $1,942.6 CLOs; $335.0 secured term loan | Combined carrying value was approximately $6,059.9 at December 31, 2023 |
| Book value per common share | $15.18 | $15.52 at December 31, 2023 |
Cash flow, liquidity and leverage
- Operating cash flow was $34.5, versus $41.6 in Q1 2023. Investing cash flow was $236.8, primarily reflecting $334.7 of loan repayments against $95.8 of loan fundings. Financing cash flow was negative $300.8, including $382.1 of debt repayments and $35.1 of dividend payments. Cash, cash equivalents and restricted cash declined $29.5 to $118.8.
- Reported available liquidity was $620.1: $106.5 of cash and $513.6 of available borrowing capacity, including $450.0 available on the Revolver. KREF also reported $108.4 of unencumbered senior loans available to pledge, subject to lender approval.
- Debt-to-equity ratio was 2.1x and total leverage ratio was 4.1x, compared with 2.3x and 4.2x at year-end 2023. KREF reported compliance with financing covenants at March 31.
- Future loan funding commitments were $725.0, primarily for construction, property improvements and leasing costs. The filing states management believes existing liquidity will meet anticipated short- and long-term needs under current conditions.
Material changes and management commentary
- Compared with Q1 2023, net interest income fell $7.4, as higher interest expense and reduced interest accrual on nonaccrual loans outweighed slightly lower interest income. Real estate owned (REO) revenue rose to $5.0 from $2.2, while REO operating expenses increased to $5.5 from $2.8.
- Credit-loss provision declined year over year, but the loan allowance increased from year-end. Management attributed the Q1 2024 provision mainly to added reserves on risk-rated 5 senior loans, predominantly in the office sector, and macroeconomic conditions.
- Loan principal declined by $232.2 during the quarter: repayments of $335.7 exceeded fundings of $103.5. No new loan originations were reported. Average portfolio risk rating was 3.2, unchanged from year-end, but risk-rated 5 exposure increased to 10% of total loan exposure from 7%; risk-rated 4 exposure was 5%.
- Approximately 99% of loans by total exposure were floating-rate. Multifamily represented 43.4% and office 20.7% of loan principal; multifamily and industrial together comprised 58% of the portfolio. KREF collected 96.6% of loan interest payments due during the quarter.
- Four loans were risk-rated 5. Disclosed examples include a $200.9 loan on nonaccrual in Mountain View, a $194.4 Minneapolis office loan with its senior portion on nonaccrual, a $117.1 Seattle life-science loan on nonaccrual, and a $37.5 Boston mezzanine office loan placed on nonaccrual in March. Interest collections on certain nonaccrual loans were applied to reduce loan cost rather than recognized as income.
- KREF held $160.7 of REO, including a Philadelphia office portfolio classified as held for sale. The 2023 deed-in-lieu acquisition of that property resulted in a $58.7 loan write-off. The Portland retail REO continues to be held through a joint venture.
- Management noted that elevated rates can pressure property values and borrower repayment capacity, delay loan prepayments, and encourage maturity extensions. A 50-basis-point change in index rates was estimated to change next-quarter cash flows by approximately $1.0 in either direction; a 100-basis-point change by approximately $2.1.
- No specific earnings or portfolio guidance was provided. The filing cites risks including CRE weakness, borrower defaults, credit-loss estimate uncertainty, financing costs and availability, potential collateral-driven margin calls, and the sensitivity of floating-rate income and funding costs to interest rates.
Important facts for investors to verify
- Whether the risk-rated 5 loans, nonaccrual balances and office-sector collateral values lead to further allowance increases, realized losses or additional foreclosures.
- Whether the $725.0 of future loan commitments can be funded as expected, and how repayments and extensions affect portfolio size and earnings.
- How the $0.25 common dividend compares with recurring cash generation: Q1 Distributable Earnings were $0.39 per share, but this non-GAAP measure excludes the current-period unrealized credit-loss provision and is not GAAP earnings or taxable income.
- Debt refinancing and liquidity exposure, particularly upcoming facility maturities, lender advance rates, collateral marks and the terms available on renewals. KREF reported no repo margin calls to date, but lenders may require additional collateral following loan-specific deterioration.
- Whether changes in interest rates, REO operating costs, or the sale and recovery prospects for the Philadelphia and Portland properties materially affect results and liquidity.