Business Overview

KKR Real Estate Finance Trust Inc. (KREF-PA) is a mortgage real estate investment trust (REIT) that focuses primarily on originating and acquiring transitional senior loans secured by commercial real estate (CRE) assets. The company has demonstrated resilience in the face of a challenging market environment, proactively managing its portfolio and positioning itself for future growth.

KREF was formed and commenced operations on October 2, 2014, and has elected to qualify as a REIT for U.S. federal income tax purposes. The company's investment strategy is to originate or acquire transitional senior loans collateralized by institutional-quality CRE assets that are owned and operated by experienced and well-capitalized sponsors and located in top markets with strong underlying fundamentals. KREF's investment allocation strategy is influenced by prevailing market conditions, including interest rate, economic and credit market conditions.

KREF is externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR & Co. Inc. (KKR), a leading global investment firm with an over 45-year history of leadership, innovation, and investment excellence. The Manager is responsible for managing KREF's investments and day-to-day business and affairs.

Financial Performance

For the fiscal year ended December 31, 2023, KREF reported annual net income of -$30,851,000, annual revenue of $175,221,000, annual operating cash flow of $155,715,000, and annual free cash flow of $155,715,000. In the second quarter of 2024, the company reported GAAP net income of $20,223,000, or $0.29 per share. Distributable earnings, a non-GAAP measure, were negative $108,672,000, or negative $1.57 per share, including realized losses of $136,426,000, or $1.97 per share. Distributable earnings prior to realized losses were $0.40 per share, comfortably covering the $0.25 per share dividend.

KREF's book value per share as of June 30, 2024, was $15.24, representing an increase of $0.06 quarter-over-quarter. The company's CECL allowance decreased to $115 million, or $1.65 per share, from $246 million, or $3.54 per share, in the prior quarter, primarily driven by realized losses.

Portfolio and Asset Management

As of June 30, 2024, KREF's $6.9 billion portfolio consisted primarily of senior commercial real estate loans, with 98.8% of the portfolio earning a floating rate of interest. The average risk rating of the loan portfolio was 3.1, weighted by total loan exposure, compared to 3.2 as of March 31, 2024, and December 31, 2023.

During the second quarter of 2024, KREF received $384 million in loan repayments, with full repayments across four loans, including hospitality, industrial, and multifamily property types. The company funded $121 million in loan principal, resulting in a net reduction of $263 million. Future funding obligations have declined to approximately 9% of the funded portfolio.

KREF's portfolio is well-diversified, with 60% of the loans secured by multifamily and industrial properties, which have demonstrated resilience. The company's multifamily portfolio has performed well, with weighted average rent increases of 3.1% year-over-year. While the life science sector has experienced decreased tenant demand, KREF's exposure is primarily located in the deep markets of Boston and San Francisco, with around half of the loan portfolio in this sector comprising new trophy real estate.

Liquidity and Financing

KREF maintains a robust liquidity position, with $644 million of available liquidity as of June 30, 2024, including $107 million of cash on the balance sheet, $57 million of loan principal repayments held by a servicer, and $435 million of available capacity on the company's corporate revolver. The company has also built a diversified financing structure, with total sources of $8.4 billion and $2.8 billion of undrawn capacity.

Notably, 79% of KREF's secured financing is completely non-mark-to-market, and the remaining balance is marked to credit only. The company has also termed out its debt structure, with no corporate debt or final facility maturities until 2026.

Navigating Challenges and Positioning for Growth

KREF has proactively managed its portfolio during the challenging market environment, leveraging the full breadth of the KKR platform. The company has taken various approaches to working on its watchlist loans, including deed-in-lieu of foreclosure, modifications, and foreclosures, always with the mindset of optimizing shareholder value over the long term.

While the company has faced some near-term noise due to these actions, KREF believes it is now at the edge of the woods and starting to see the proverbial light. The company has reduced its dividend to give it time to create value in its real estate owned (REO) portfolio, and it has maintained ample liquidity throughout, with repayments exceeding funding as anticipated.

Looking ahead, KREF has begun discussions on a return to offense in the second half of 2024. The company is evaluating all options and thinking through relative value to maximize returns for its shareholders. With over 75 years of collective experience across its leadership and asset management team, and access to the broader KKR Real Estate platform, KREF believes it has the tools to continue navigating the challenges of today's market.

Risks and Outlook

While KREF has made significant progress in managing its portfolio, the company acknowledges that it is not out of the woods yet. The economic environment and its impact on the real estate market remain key risks. However, the company's proactive approach, diversified portfolio, and robust liquidity position provide a solid foundation for navigating the challenges ahead.

KREF's guidance suggests that distributable earnings losses will continue to exceed the dividend in the near term, as the company works through the remaining watchlist loans and REO assets. However, the company believes that upon future monetization of the REO portfolio, it can reinvest the capital to generate an additional $0.12 per share in distributable earnings per quarter.

Overall, KREF's resilience, strategic positioning, and access to the broader KKR platform position the company well to capitalize on the evolving market opportunities and deliver long-term value for its shareholders.