KKR Real Estate Finance Trust Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring transitional commercial real estate loans, predominantly floating-rate senior loans.
Key financial metrics
| Metric | Q2 / June 30, 2021 | Comparison |
|---|---|---|
| Interest income | $67.1 million | $67.2 million in Q2 2020; $64.8 million in Q1 2021 |
| Net interest income | $40.2 million | $36.7 million in Q2 2020; up 7.5% from Q1 2021 |
| Net income | $31.1 million | $28.9 million in Q2 2020 |
| Net income attributable to common stockholders | $29.3 million; $0.53 basic and $0.52 diluted EPS | $28.6 million and $0.52 per share in Q2 2020 |
| Six-month net income attributable to common stockholders | $58.4 million; $1.05 per share | Loss of $6.6 million; loss of $0.12 per share in first half 2020 |
| Common dividend declared | $0.43 per share for Q2 | Unchanged from Q2 2020 and Q1 2021 |
| Common book value per share | $18.91 | $18.76 at December 31, 2020 |
| Cash and cash equivalents | $119.2 million | $110.8 million at December 31, 2020 |
| Loan portfolio | $5.25 billion carrying value; $5.58 billion total loan exposure | Carrying value was $4.78 billion at December 31, 2020 |
| Debt and leverage | $4.26 billion of balance-sheet debt obligations; debt-to-equity 1.9x and total leverage 3.3x | Leverage was 3.6x at December 31, 2020 |
| Credit allowance | $58.0 million on loans; $58.6 million including unfunded commitments | Loan allowance was $59.8 million at year-end 2020 |
Performance, liquidity and material changes
- For the first half, net interest income rose 13.0% to $77.6 million year over year. Interest expense fell 22.0% to $54.3 million, more than offsetting a 4.6% decline in interest income.
- The first-half credit-loss line was a $2.1 million net reversal, compared with a $53.9 million provision in first-half 2020. Management attributed the reversal mainly to a more stable macroeconomic outlook, partly offset by reserves for higher-risk loans.
- Six-month operating cash flow was $58.1 million; investing cash outflow was $604.7 million, reflecting $1.12 billion of loan originations and fundings against $514.5 million of repayments and loan sale or syndication proceeds. Financing cash inflow was $554.9 million; cash increased $8.3 million.
- Reported liquidity sources totaled $633.5 million: $119.2 million cash, $335.0 million available on the revolver, $138.8 million of additional repo borrowing capacity based on pledged collateral, and $40.5 million of loan repayments receivable from the servicer.
- In April, KREF 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 for dividends and liquidation.
- The portfolio was 97.9% performing; 90.4% of loan exposure was rated 3 or better. Two loans totaling $115.1 million were on nonaccrual and risk-rated 5. The average portfolio risk rating was 3.1.
Outlook, risks and unusual items
- No formal earnings or portfolio guidance was provided. Management said it expected future investment activity to remain weighted toward floating-rate senior loans.
- COVID-19 effects on borrowers, property cash flows, valuations and the broader economy remained uncertain. Hospitality and retail borrowers had experienced pressure and could seek deferrals, forbearance or other modifications.
- Nearly all loans and financing arrangements were LIBOR-indexed. Management disclosed that LIBOR floors supported current loan income and estimated that a 25-basis-point or 50-basis-point increase in LIBOR would reduce expected cash flows by approximately $8.9 million or $17.0 million, respectively, over the following 12 months; a decline of 10 basis points or more was estimated to increase cash flows by $3.6 million. The LIBOR phaseout and replacement-rate effects were uncertain.
- Repurchase facilities can require additional collateral or repayment if collateral-specific credit values decline. KREF reported no margin calls to date and was in compliance with debt covenants at June 30, 2021. Contractual debt maturities, before any extensions, included $759.4 million in 2021 and $1.40 billion in 2022.
- Future loan funding commitments were $847.7 million, primarily for construction, improvements and leasing costs. The $109.6 million troubled retail loan remained on nonaccrual and in restructuring discussions; it had a deed-in-lieu provision and no remaining unfunded commitment.
- After quarter-end, KREF originated two loans with $345 million of committed principal. It also priced a proposed $1.30 billion managed CLO, expected to close in August subject to customary conditions. The filing identified no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Progress and potential recovery on the two nonaccrual loans, particularly the $109.6 million retail loan, and whether reported portfolio performance remains stable.
- Whether the $847.7 million of unfunded loan commitments can be met while maintaining liquidity and managing leverage.
- Actual closing terms and funding impact of the proposed $1.30 billion CLO, along with the availability and cost of other financing.
- Sensitivity of earnings and cash flows to LIBOR changes, LIBOR transition terms, and any resulting changes in loan and funding spreads.
- Coverage and sustainability of common dividends relative to distributable earnings; Q2 distributable earnings were $30.4 million, or $0.54 per diluted share, versus the $0.43 dividend.