KKR Real Estate Finance Trust Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comparisons are with Q1 2018 unless otherwise noted; balance-sheet comparisons are with December 31, 2018. KREF is an externally managed mortgage REIT focused primarily on originating and acquiring commercial real estate loans. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $64.8 | $31.7 in Q1 2018 |
| Interest expense | $34.8 | $10.7 in Q1 2018 |
| Net interest income | $29.9 | $21.0 in Q1 2018 |
| Net income attributable to common stockholders | $24.7; $0.43 per diluted share | $23.3; $0.44 per diluted share in Q1 2018 |
| Core Earnings / Net Core Earnings (non-GAAP) | $26.3 / $25.3; $0.46 / $0.44 per diluted share | $23.6 / $22.2 in Q4 2018 |
| Total assets / stockholders’ equity | $5,094 / $1,129 | $5,232 / $1,132 at December 31, 2018 |
| Cash and cash equivalents | $228.4, including $42.0 held in the CLO | $86.5 at December 31, 2018 |
| Secured financing agreements, net | $1,862.7 | $1,951.0 at December 31, 2018 |
| CLO / convertible notes, net | $801.2 / $138.0 | $800.3 / $137.7 at December 31, 2018 |
| Operating / investing / financing cash flows | $25.6 / $236.5 / $(120.2) | $18.1 / $(382.3) / $283.8 in Q1 2018 |
| Common dividend declared per share | $0.43 | $0.40 in Q1 2018; $0.43 in Q4 2018 |
Net interest income rose 42.4%, while common-stockholder income increased 6.1%. Diluted EPS declined from $0.44 to $0.43. Book value per share was $19.67 versus $19.66 at year-end. Management reported debt-to-equity of 1.0x and total leverage of 2.3x, down from 1.1x and 2.6x, respectively; these ratios use the company’s stated definitions and differ in included debt.
Portfolio, liquidity, and material changes
- Held-for-investment commercial mortgage loans had $3,704 of principal exposure and $3,684 of carrying value across 33 loans. Approximately 99.9% of loan principal was floating rate; weighted-average cash coupon was 5.9%, all-in yield 6.3%, and maximum weighted-average maturity 3.6 years.
- Loan exposure fell during the quarter: originations were $214, fundings $326, and repayments $648, producing net fundings of $(323). Loan count declined from 41 at year-end to 33, principally reflecting repayments and portfolio activity.
- All loans were internally rated 1–3, with no loans rated high-risk or impaired/loss likely; average risk rating improved to 2.8 from 2.9. No loans were past due or on nonaccrual, and management reported no portfolio impairments.
- Available liquidity was reported at $288.2, comprising cash and available facility capacity. The Revolver was fully drawn at $140 at quarter-end. KREF was in compliance with its financial covenants.
- After quarter-end, KREF increased Revolver capacity to $235, borrowed $187.1 and repaid $140 under financing facilities, originated a Philadelphia office loan with a maximum face amount of $182.6, received approximately $67 in loan repayments, and funded approximately $11.4 of previously closed loans.
Management commentary, outlook, and risks
- Management attributed higher net interest income primarily to a larger loan portfolio and higher LIBOR, partly offset by higher financing costs. Interest income and interest expense both increased substantially as the portfolio and borrowings expanded.
- Other income fell to $1.9 from $9.2, mainly because the prior-year period included a $5.4 unrealized gain on consolidated CMBS VIEs and higher CMBS interest income. The 2019 period included a $0.2 unrealized loss on direct CMBS B-Pieces; CMBS VIE net-asset change was $0.3 versus $8.5 in Q1 2018.
- Management expects future investment activity to focus primarily on floating-rate senior loans. It reported that a 50-basis-point increase or decrease in short-term rates would change estimated 2019 cash flows by approximately $3.9, based on quarter-end net floating-rate exposure. This is sensitivity analysis, not earnings guidance.
- KREF stated that it expects to distribute 100% of net taxable income for the foreseeable future while retaining sufficient capital for ongoing needs. No quantified earnings or full-year operating guidance was provided.
- Key risks include borrower defaults and property-value declines, interest-rate and credit-spread movements, refinancing and funding access, and repurchase-agreement collateral marks that can trigger margin calls. Repurchase financing is not fully term-matched to loan assets; weighted-average haircut was 29.3% at quarter-end. Approximately 63% of portfolio financing was non-mark-to-market.
- Future funding commitments for commercial mortgage loans were $357.1, largely for construction, property improvements, tenant improvements, and leasing costs. KREF also had an $8.6 remaining RECOP investment commitment. The filing reported no material litigation and no material changes to previously disclosed principal risk factors.
- The company had no loan-loss provision recorded and expects adoption of the current expected credit loss standard in Q1 2020 to result in earlier and potentially greater loan-loss provisions. Valuations for significant instruments rely on Level 3 inputs and management estimates.
Investor verification priorities
- Reconcile the decline in GAAP diluted EPS despite higher net interest income, including the CMBS fair-value comparison and preferred-stock redemption-value adjustment.
- Review the $357.1 of unfunded loan commitments against available liquidity, facility availability, and the fully drawn quarter-end Revolver.
- Assess refinancing, counterparty, and margin-call exposure under repurchase facilities, including collateral haircuts and maturity alignment.
- Examine loan and property concentration: New York represented 32.4% of loan face amount and office 42.0%; confirm current collateral performance and borrower funding conditions.
- Compare non-GAAP Core Earnings and Net Core Earnings with GAAP earnings and the $0.43 dividend, noting management’s stated definitions and incentive-fee implications.
- Verify the post-quarter financing and loan transactions, as well as the increase in Revolver capacity to $235, in subsequent filings.