KKR Real Estate Finance Trust Inc
For the period ended Jun 30, 2024. Filed Jul 22, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Jul 22, 2024
KREF$5.66-0.9%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-04-23.
0001631596-24-000017
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-07-22.
0001631596-24-000028
Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 205 previous paragraphs and 209 current paragraphs.
134 unchanged; 56 reworded; 18 added; 9 removed; 6 previous and 1 current paragraphs rearranged.
Tables are not compared: 20 previous and 19 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (18)
Current report
(B) Includes a combined $98.5 million write-off on two defaulted senior loans upon deeds-in-lieu of foreclosure and a $37.5 million write-off on a mezzanine loan that was deemed uncollectible during the three months ended June 30, 2024.
Current report
(C) Includes $615 thousand loss on the sale of certain real estate owned assets during the three months ended June 30, 2024.
Current report
(A) Excludes: (i) Real Estate Assets, (ii) CMBS B-Pieces and (iii) fully written off loans.
Current report
(D) Represents a removal of $150.0 million of non-consolidated senior interests as our retained mezzanine loan was written-off during the three months ended June 30, 2024.
Current report
(C) Excludes fully written off loans.
Current report
$28.0 million.
Current report
(K) Represents real estate assets held through a Tenant-in-Common ("TIC") agreement between us and a KKR affiliate. We hold a 74.6% economic interest in the real estate assets and share decision-making
Current report
with the KKR affiliate under the TIC agreement.
Current report
(A) Excludes fully written off loans.
Current report
In June 2024, we modified a risk-rated 5 mezzanine office loan located in Boston, MA, with an outstanding principal balance of $37.5 million. The terms of the modification included, among others, a restructure of the mezzanine loan into (i) a $12.5 million senior mezzanine note and (ii) a $25.0 million junior mezzanine note which is subordinate to a new $10.0 million sponsor interest. The senior and junior mezzanine notes earn a PIK interest rate of S+7.0% and have a maximum maturity of February 2028. Both mezzanine notes were deemed uncollectible and written off in June 2024.
Current report
Real Estate Assets
Current report
In June 2024, we sold a portion of the portfolio for a gross sales price of $41.0 million and recognized a realized loss of $0.6 million after buyer credits and closing costs. Concurrently, we provided financing to the buyer through a senior loan with an outstanding principal balance of $30.1 million ($83.7 million total commitment) as of June 30, 2024. The senior loan earns a coupon rate of S+4.3% and has a maximum maturity of June 2029, assuming all extension options are exercised. The senior loan is presented within “Commercial real estate loans, held-for-investment, net” on the Condensed Consolidated Balance Sheets.
Current report
Mountain View Office —In 2021, we co-originated with a KKR affiliate a $362.8 million senior loan secured by an office property in Mountain View, CA. Our interest was 68.9% of the loan or $250.0 million. In June 2024, we and the KKR affiliate took title to the office property through a deed-in-lieu of foreclosure and we accounted for the property on a consolidated basis. The transaction was accounted for as an asset acquisition under ASC 805. Accordingly, we recorded the property and its net assets on the Condensed Consolidated Balance Sheets with an estimated fair value of $174.7 million, which included $175.0 million of REO held for investment and ($0.3) million of net working capital. As a result, we recognized a $79.9 million loan write-off for the difference between our interest in the amortized cost of the foreclosed loan and our share of the fair value of the REO’s net assets and closing costs. The KKR affiliate's interest in the property was 31.1%, or $54.3 million as of June 30, 2024, and was presented within "Noncontrolling interests in equity of consolidated joint ventures" on the Condensed Consolidated Balance Sheets.
Current report
Seattle Life Science (Equity Method Investment) — In 2021, we co-originated with a KKR affiliate a $188.0 million senior loan secured by a life science property in Seattle, WA. Our interest was 74.6% of the loan or $140.3 million. In June 2024, we received a $14.3 million partial repayment, then along with the KKR affiliate took title to the life science property through a deed-in-lieu of foreclosure under a Tenant-in-Common ("TIC") agreement. Under the TIC agreement, we and the KKR affiliate held an economic interest of 74.6% and 25.4%, respectively, and shared decision-making. Under ASC 970-810, we accounted for the TIC agreement as an undivided interest in the property and recorded an $82.0 million "Equity method investment, real estate asset" in the Condensed Consolidated Balance Sheets. As a result, we recognized a $18.6 million loan write-off for the difference between the amortized cost of the foreclosed loan and our share of the fair value of the property’s net assets and closing costs.
Current report
Total other income decreased by $0.4 million during the three months ended June 30, 2024, as compared to the preceding period. This decrease was primarily due to a $0.6 million loss on sale of REO investments.
Current report
(A) Loan principal repayments held by a servicer at quarter-end were received in July 2024.
Current report
Commencing in the second quarter of 2024, we have estimated CECL reserves using the Weighted-Average Remaining Maturity, or WARM method, which has been identified as a loss-rate method for estimating CECL reserves by the Financial Accounting Standards Board (“FASB”). In estimating a CECL reserve using the WARM method, we reference historical loan loss data across a comparable data set and apply such loss rate to each loan over its expected remaining term, taking into consideration expected economic conditions over the relevant timeframe. In certain instances, we might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral and availability of relevant historical market loan loss data.
Current report
To arrive at a CECL reserve using the WARM method, we considered various factors including (i) historical loss experience in the commercial real estate lending market, (ii) timing of expected repayments and expected loan future funding, (iii) and our current and future view of the macroeconomic environment for a reasonable and supportable forecast period. We derive a historical loss rate predominately based on a commercial mortgage-backed securities (“CMBS”) database with historical losses from 1998 through 2024 provided by a third party. We focus on the most relevant subset of CMBS data that is determined to be the most comparable to our own portfolio. The historical loss rate is further adjusted to consider expected macroeconomic conditions over reasonable and supportable forecast periods, such as considering commercial real estate price indices, unemployment rates and market liquidity. There is significant uncertainty related to future macroeconomic conditions. Therefore, we also consider other loan specific credit quality factors such as the risk rating of the loan, a near-term maturity, nature of construction loans, and economic conditions specific to the property type of the underlying collateral.
Removed paragraphs (9)
Previous report
(A)Excludes: (i) REO (ii) CMBS B-Piece investments held through an equity method investment and (iii) fully written off risk-rated 5 loans.
Previous report
For Senior Loan 11, the total whole loan is $375.0 million, co-originated and co-funded by us and a KKR affiliate. Our interest is 50% of the loan or $187.5 million, of which $150.0 million in senior notes were syndicated to a third party. Post syndication, we retained a mezzanine loan with a commitment of $37.5 million, fully funded as of March 31, 2024, at an interest rate of S+7.96%.
Previous report
(A) Excludes fully written off risk-rated 5 loans.
Previous report
Real Estate Owned and Joint Venture
Previous report
Net interest income decreased by $7.3 million during the three months ended March 31, 2024, as compared to the preceding three-month period. This decrease was primarily due to the suspension of interest income accrual on loans accounted for under
Previous report
Total other income increased by $3.4 million during the three months ended March 31, 2024, as compared to the preceding period. This increase was primarily due to a $2.5 million increase in revenue from REO operations, inclusive of net income from the REO assets we acquired in December 2023.
Previous report
We have implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for our commercial real estate loan portfolio. The CECL forecasting methods we use include (i) a probability of default and loss given default method using an underlying third-party CMBS/CRE loan database with historical loan losses from 1998 through 2023, and (ii) a probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. We might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.
Previous report
We estimate the CECL allowance for our loan portfolio, including unfunded loan commitments, at the individual loan level. Significant inputs to our forecasting methods include (i) key loan-specific inputs such as vintage year, loan-term, underlying property type, geographic location, most recent appraisal, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and our internal loan risk rating and (iii) a macro-economic forecast.
Previous report
These estimates may change in future periods based on available future macro-economic data and might result in a material change in our future estimates of expected credit losses for its loan portfolio. We consider the individual loan internal risk rating as the key credit quality indicator in assessing the CECL allowance. We perform a review, at least quarterly, of our loan portfolio at the individual loan level to determine the internal risk rating for each of our loans by assessing the risk factors of each loan, including, without limitation, LTV, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. Considering these factors, we rate our loans based on a five-point scale, "1" though "5", from less risk to greater risk.
Reworded paragraphs (56)
Previous wording
The year ended December 31, 2023 and period ended March 31, 2024 were impacted by significant volatility in global markets, largely driven by rising inflation, rising interest rates, slowing economic growth, geopolitical uncertainty and instability in the banking sector following multiple bank failures. Central banks have responded to rapidly rising inflation with monetary policy tightening actions that are likely to create headwinds to economic growth. The Federal Reserve has raised interest rates eleven times since January 2022, and has signaled that further interest rate increases may be forthcoming. Although our business model is such that rising interest rates will generally correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers. Higher interest rates imposed by the Federal Reserve to address inflation may adversely impact real estate asset values and increase our interest expense, which expense may not be fully offset by any resulting increase in interest income, and may lead to decreased prepayments from our borrowers and an increase in the number of our borrowers who exercise extension options.
Current wording
The year ended December 31, 2023 and period ended June 30, 2024 were impacted by significant volatility in global markets, largely driven by rising inflation, rising interest rates, slowing economic growth, geopolitical uncertainty and instability in the banking sector following multiple bank failures. Central banks have responded to rapidly rising inflation with monetary policy tightening actions that are likely to create headwinds to economic growth. The Federal Reserve has raised interest rates eleven times since January 2022. Although our business model is such that rising interest rates will generally correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers. Higher interest rates imposed by the Federal Reserve to address inflation may adversely impact real estate asset values and increase our interest expense, which expense may not be fully offset by any resulting increase in interest income, and may lead to decreased prepayments from our borrowers and an increase in the number of our borrowers who exercise extension options.
Previous wording
We also use Distributable Earnings (before incentive compensation payable to our Manager) to determine the management and incentive compensation we pay our Manager. For its services to KREF, our Manager is entitled to a quarterly management fee equal to the greater of $62,500 or 0.375% of weighted average adjusted equity and quarterly incentive compensation equal to 20.0% of the excess of (a) the trailing 12-month Distributable Earnings (before incentive compensation payable to our Manager) over (b) 7.0% of the trailing 12-month weighted average adjusted equity(1) (“Hurdle Rate”), less incentive compensation KREF already paid to the Manager with respect to the first three calendar quarters of such trailing 12-month period. The quarterly incentive compensation is calculated and paid in arrears with a three-month lag.
Current wording
We also use Distributable Earnings (before incentive compensation payable to our Manager) to determine the management and incentive compensation we pay our Manager. For its services to KREF, our Manager is entitled to a quarterly management fee equal to the greater of $62,500 or 0.375% of weighted average adjusted equity and quarterly incentive compensation equal to 20.0% of the excess of (a) the trailing 12-month Distributable Earnings (before incentive compensation payable to our Manager) over (b) 7.0% of the trailing 12-month weighted average adjusted equity (“Hurdle Rate”), less incentive compensation KREF already paid to the Manager with respect to the first three calendar quarters of such trailing 12-month period. For purposes of calculating incentive compensation under our Management Agreement, adjusted equity excludes: (i) the effects of equity issued that provides for fixed distributions or other debt characteristics and (ii) the unrealized provision for (reversal of) credit losses. The quarterly incentive compensation is calculated and paid in arrears with a three-month lag.
Previous wording
Book value as of March 31, 2024 included the impact of an estimated CECL credit loss allowance of $245.8 million, or ($3.54) per share. See Note 2 — Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this Form 10-Q for detailed discussion of allowance for credit losses.
Current wording
Book value as of June 30, 2024 included the impact of an estimated CECL credit loss allowance of $114.5 million, or ($1.65) per share. See Note 2 — Summary of Significant Accounting Policies, to our condensed consolidated financial statements included in this Form 10-Q for detailed discussion of allowance for credit losses.
Previous wording
We have established a$7,522.2 million portfolio of diversified investments, consisting primarily of senior commercial real estate loans as of March 31, 2024.
Current wording
We have established a $6,946.7 million portfolio of diversified investments, consisting primarily of senior commercial real estate loans as of June 30, 2024.
Previous wording
During the three months ended March 31, 2024, we collected 96.6% of interest payments due on our loan portfolio. As of March 31, 2024, the average risk rating of our loan portfolio was 3.2, weighted by total loan exposure. As of March 31, 2024, the average loan commitment in our portfolio was $120.2 million and multifamily and industrial loans comprised 58% of our loan portfolio.
Current wording
During the six months ended June 30, 2024, we collected 95.7% of interest payments due on our loan portfolio. As of June 30, 2024, the average risk rating of our loan portfolio was 3.1, weighted by total loan exposure. As of June 30, 2024, the average loan commitment in our portfolio was $117.2 million and multifamily and industrial loans comprised 60% of our loan portfolio.
Previous wording
In addition, as a result of taking title to the collateral of defaulted senior loans, we owned REO assets with a net carrying value of $160.7 million, comprised of the fair value of the acquired properties and capitalized redevelopment costs, as of March 31, 2024. These properties are reflected on our Condensed Consolidated Balance Sheet.
Current wording
In addition, as a result of taking title to the collateral of defaulted senior loans, we owned Real Estate Assets with a net investment amount of $335.5 million, comprised of the fair value of the acquired properties and capitalized redevelopment costs, as of June 30, 2024. These properties are reflected on our Condensed Consolidated Balance Sheets.
Previous wording
(D) "Other" property type includes Self-Storage (2%), Student Housing (2%) and Single Family Rental (1%).
Current wording
(D) "Other" property type includes Self-Storage (2%), Student Housing (2%), Single Family Rental (1%) and Mixed Use (<1%).
Previous wording
(C) Includes a $58.7 million write-off on a defaulted senior loan upon deed-in-lieu of foreclosure during the three months ended December 31, 2023, and a $15.0 million write-off of a subordinated loan during the three months ended September 30, 2023.
Current wording
(C) Includes a combined $98.5 million write-off on two defaulted senior loans upon deed-in-lieu of foreclosure and a $37.5 million write-off on a mezzanine loan during the three months ended June 30, 2024. Includes a $58.7 million write-off on a defaulted senior loan upon deed-in-lieu of foreclosure during the three months ended December 31, 2023, and a $15.0 million write-off of a subordinated loan during the three months ended September 30, 2023.
Previous wording
(B) Represents mezzanine loans with commitments of $79.4 million and $5.0 million, respectively, accompanying two senior loans. $79.0 million of loan principal was funded, of which $74.4 million was placed on nonaccrual status, as of March 31, 2024. The remaining $4.6 million funded principal earned a fixed interest rate of 10.0% as of March 31, 2024. Refer to Note 3 to our condensed consolidated financial statements for additional information.
Current wording
(B) Represents mezzanine loans with commitments of $79.4 million and $7.2 million, respectively, accompanying two senior loans. $80.4 million of loan principal was funded, of which $74.4 million was placed on nonaccrual status, as of June 30, 2024. The remaining $6.0 million funded principal earned a fixed interest rate of 10.0% as of June 30, 2024. Refer to Note 3 to our condensed consolidated financial statements for additional information.
Previous wording
(D)In addition to cash coupon, all-in yield includes the amortization of deferred origination fees, loan origination costs and purchase discounts. The calculations of weighted average cash coupon and all-in yield excludes loans accounted for under the cost recovery method.
Current wording
(E)In addition to cash coupon, all-in yield includes the amortization of deferred origination fees, loan origination costs and purchase discounts. The calculations of weighted average cash coupon and all-in yield excludes loans accounted for under the cost recovery method.
Previous wording
(A) Our total portfolio represents the current principal amount on senior and mezzanine loans, net equity in RECOP I, which holds CMBS B-Piece investments, and net carrying value of our REO investments. Excludes loans that were fully written off.
Current wording
(A) Our total portfolio represents the current principal amount or investment amount on senior and mezzanine loans, real estate assets and other assets. Excludes loans that were fully written off.
Previous wording
For Senior Loan 9, the total whole loan is $199.4 million, including (i) a fully funded senior mortgage loan of $120.0 million, at an interest rate of S+2.25% and (ii) a mezzanine note with a commitment of $79.4 million, of which $74.4 million was funded as of March 31, 2024, at a fixed interest rate of 4.5%. The mezzanine note interest is payment-in-kind (“PIK Interest”), which is capitalized, compounded, and added to the outstanding principal balance of the respective loans.
Current wording
For Senior Loan 8, the total whole loan is $199.4 million, including (i) a fully funded senior mortgage loan of $120.0 million, at an interest rate of S+2.25% and (ii) a mezzanine note with a commitment of $79.4 million, of which $74.4 million was funded as of June 30, 2024, at a fixed interest rate of 4.5%. The mezzanine note interest is payment-in-kind (“PIK Interest”), which is capitalized, compounded, and added to the outstanding principal balance of the respective loan.
Previous wording
For Senior Loan 30, the total whole loan is $107.0 million, including (i) a fully funded senior mortgage loan of $102.0 million, at an interest rate of S+3.06%, (ii) a senior mezzanine note with $3.9 million funded as of March 31, 2024, at a fixed interest rate of 10.0% and (iii) a fully funded junior mezzanine note of $0.8 million, at a fixed interest rate 10.0% with certain profit share provisions, as defined in the loan agreement.
Current wording
For Senior Loan 26, the total whole loan is $109.2 million, including (i) a fully funded senior mortgage loan of $102.0 million, at an interest rate of S+3.06%, (ii) a senior mezzanine note with $5.3 million funded as of June 30, 2024, at a fixed interest rate of 10.0% and (iii) a fully funded junior mezzanine note of $0.8 million, at a fixed interest rate of 10.0% with certain profit share provisions, as defined in the loan agreement.
Previous wording
For Senior Loan 63, the total whole loan is $146.2 million, co-originated and co-funded by us and a KKR affiliate. Our interest is 31% of the loan or $45.8 million, of which $38.6 million in senior notes were syndicated to third party lenders. Post syndication, we retained a mezzanine loan with a commitment of $7.2 million, fully funded as of March 31, 2024, at an interest rate of S+13.02%.
Current wording
For Senior Loan 56, the total whole loan is $146.2 million, co-originated and co-funded by us and a KKR affiliate. Our interest is 31% of the loan or $45.8 million, of which $38.6 million in senior notes were syndicated to third party lenders. Post syndication, we retained a mezzanine loan with a commitment of $7.2 million, fully funded as of June 30, 2024, at an interest rate of S+13.02%.
Previous wording
(B) Total Whole Loan represents total commitment of the entire whole loan originated. Committed Principal Amount includes participations by KKR affiliated entities and third parties that are syndicated/sold.
Current wording
(B) Total Whole Loan represents the total commitment of the entire whole loan originated. Committed Principal Amount includes participations by KKR affiliated entities and third parties that are syndicated/sold.
Previous wording
(C) Net equity reflects (i) the amortized cost basis of our loans, net of borrowings; and (ii) the investment amount of CMBS B-Pieces and REO, net of borrowings.
Current wording
(C) Net equity reflects (i) the amortized cost basis of our loans, net of borrowings; (ii) REO, net of borrowings and noncontrolling interests, and (iii) the investment amount of equity method investments.
Previous wording
(D) Weighted average is weighted by the current principal amount for our senior and mezzanine loans and by investment amount of RECOP I CMBS B-Pieces. Risk-rated 5 loans are excluded from the weighted average LTV.
Current wording
(D) Weighted average is weighted by the current principal amount for our senior and mezzanine loans and by the investment amount of CMBS B-Pieces. Risk-rated 5 loans are excluded from the weighted average LTV.
Previous wording
(E)Coupon expressed as spread over Term SOFR.
Current wording
(E) Coupon expressed as spread over Term SOFR.
Previous wording
(G) Loan Per SF / Unit / Key is based on the current principal amount divided by the current SF / Unit / Key. For Senior Loans 2, 3, 6, 18, 23, 26, 36, 48, 49, and 67, Loan Per SF / Unit / Key is calculated as the total commitment amount of the loan divided by the proposed SF / Unit / Key.
Current wording
(G) Loan Per SF / Unit / Key is based on the current principal amount divided by the current SF / Unit / Key. For Senior Loans 2, 3, 5, 16, 20, 22, 44, 60, and 61, Loan Per SF / Unit / Key is calculated as the total commitment amount of the loan divided by the proposed SF / Unit / Key.
Previous wording
(H) For senior loans, LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated; for mezzanine loans, LTV is based on the initial balance of the whole loan divided by the as-is appraised value as of the date the loan was originated; for RECOP I CMBS B-Pieces, LTV is based on the weighted average LTV of the underlying loan pool at issuance. Weighted Average LTV excludes risk-rated 5 loans.
Current wording
(H) For senior loans, LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated; for mezzanine loans, LTV is based on the initial balance of the whole loan divided by the as-is appraised value as of the date the loan was originated; for CMBS B-Pieces, LTV is based on the weighted average LTV of the underlying loan pool at issuance. Weighted Average LTV excludes risk-rated 5 loans.
Previous wording
For senior loans where an appraisal has been obtained post origination, the LTVs subsequently presented are based on the current principal amount dividend by the as-is appraised value as of the new appraisal date. Senior loans with updated LTV include: Senior Loan 17 (64%); Senior Loan 21 (64%); Senior Loan 22 (78%); Senior Loan 24 (66%); Senior Loan 27 (64%);Senior Loan 31 (57%); Senior Loan 32 (75%); Senior Loan 37 (83%); Senior Loan 43 (63%); and Senior Loan 67 (61%).
Current wording
For Senior Loans 2, 3, 5, 16, 20, 22, 44, 60, and 61, LTV is calculated as the total commitment amount of the loan divided by the as-stabilized value as of the date the loan was originated. For senior loans where an appraisal has been obtained post origination, the LTV, presented as follows, is calculated based on the current principal amount divided by the as-is appraised value as of the new appraisal date: Senior Loan 15 (64%); Senior Loan 18 (64%); Senior Loan 19 (78%); Senior Loan 23 (64%); Senior Loan 27 (57%); Senior Loan 28 (75%); Senior Loan 32 (83%); Senior Loan 33 (70%), Senior Loan 38 (63%); and Senior Loan 61 (61%).
Previous wording
(J) For Senior Loan 49, the total whole loan facility is $142.5 million co-originated and co-funded by us and a KKR affiliate. Our interest was 50% of the facility, or $71.2 million. The facility is comprised of
Current wording
(J) For Senior Loan 60, the total whole loan facility is $61.1 million co-originated and co-funded by us and a KKR affiliate. Our interest was 50% of the facility, or $30.6 million. The facility is comprised of
Previous wording
individual cross-collateralized whole loans. As of March 31, 2024, there were four underlying senior loans in the facility with a commitment of $71.2 million and outstanding principal of $64.2 million
Current wording
individual cross-collateralized whole loans. As of June 30, 2024, there was one underlying senior loan in the facility with a commitment of $30.6 million and an outstanding principal balance of
Previous wording
(K) Represents our investment in an aggregator vehicle alongside RECOP I that invests in CMBS B-Pieces. Committed principal represents our total commitment to the aggregator vehicle whereas current principal represents the current funded amount.
Current wording
(L) Represents our investment in an aggregator vehicle that invests in CMBS B-Pieces. Committed principal represents our total commitment to the aggregator vehicle whereas current principal represents the current funded amount.
Previous wording
As of March 31, 2024, the average risk rating of our loan portfolio was 3.2, weighted by total loan exposure, consistent with that as of December 31, 2023.
Current wording
As of June 30, 2024, the average risk rating of our portfolio was 3.1, weig hted by total loan exposure, as compared to 3.2 as of March 31, 2024 and December 31, 2023.
Previous wording
(B) In certain instances, KREF finances its loans through the non-recourse sale of a senior interest that is not included in the condensed consolidated financial statements. Total loan exposure includes the entire loan KREF originated and financed, including $188.6 million of such non-consolidated interests as of March 31, 2024 and December 31, 2023.
Current wording
(B) In certain instances, we finances our loans through the non-recourse sale of a senior interest that is not included in the condensed consolidated financial statements. Total loan exposure includes the entire loan we originated and financed, including $38.6 million and $188.6 million of such non-consolidated interests as of June 30, 2024 and December 31, 2023, respectively.
Previous wording
In September 2023, we modified a risk-rated 4 senior office loan located in Chicago, IL, with an outstanding principal balance of $118.4 million. The terms of the modification included, among others, a $15.0 million principal repayment, a $15.0 million reduction in unfunded loan commitment, and a restructure of the $103.4 million senior loan (after the $15.0 million repayment) into (i) a $105.0 million committed senior mortgage loan (with $16.6 million in unfunded commitment) and (ii) a $15.0 million subordinated note. The restructured senior loan earns a coupon rate of S+2.25% and has a new term of five years. The $15.0 million subordinated note is subordinate to a new $18.5 million sponsor interest and was deemed uncollectible and written off. The loan modification was accounted for as a new loan for GAAP purposes. The restructured senior loan with an outstanding principal balance of $88.4 million was risk-rated 3 as of March 31, 2024.
Current wording
In September 2023, we modified a risk-rated 4 senior office loan located in Chicago, IL, with an outstanding principal balance of $118.4 million. The terms of the modification included, among others, a $15.0 million principal repayment, a $15.0 million reduction in unfunded loan commitment, and a restructure of the $103.4 million senior loan (after the $15.0 million repayment) into (i) a $105.0 million committed senior mortgage loan (with $16.6 million in unfunded commitment) and (ii) a $15.0 million subordinated note which is subordinate to a new $18.5 million sponsor interest. The restructured senior loan earns a coupon rate of S+2.25% and has a new term of five years. The $15.0 million subordinated note was deemed uncollectible and written off. The loan modification was accounted for as a new loan for GAAP purposes. The restructured senior loan with an outstanding principal balance of $88.4 million was risk-rated 3 as of June 30, 2024.
Previous wording
Our current CMBS exposure is through RECOP I, an equity method investment. Our Manager has processes and procedures in place to monitor and assess the credit quality of our CMBS B-Piece investments and promote the regular and active management of these investments. This includes reviewing the performance of the real estate assets underlying the loans that collateralize the investments and determining the impact of such performance on the credit and return profile of the investments. Our Manager holds monthly surveillance calls with the special servicer of our CMBS B-Piece investments to monitor the performance of our portfolio and discuss issues associated with the loans underlying our CMBS B-Piece investments. At each meeting, our Manager is provided with a due diligence submission for each loan underlying our CMBS B-Piece investments, which includes both property- and loan-level information. These meetings assist our Manager in monitoring our portfolio, identifying any potential loan issues, determining if a re-underwriting of any loan is warranted and examining the timing and severity of any potential losses or impairments.
Current wording
Our current CMBS exposure is through, an equity method investment. Our Manager has processes and procedures in place to monitor and assess the credit quality of our CMBS B-Piece investments and promote the regular and active management of these investments. This includes reviewing the performance of the real estate assets underlying the loans that collateralize the investments and determining the impact of such performance on the credit and return profile of the investments. Our Manager holds monthly surveillance calls with the special servicer of our CMBS B-Piece investments to monitor the performance of our portfolio and discuss issues associated with the loans underlying our CMBS B-Piece investments. At each meeting, our Manager is provided with a due diligence submission for each loan underlying our CMBS B-Piece investments, which includes both property- and loan-level information. These meetings assist our Manager in monitoring our portfolio, identifying any potential loan issues, determining if a re-underwriting of any loan is warranted and examining the timing and severity of any potential losses or impairments.
Previous wording
Our Non-Mark-to-Market Financing Sources, which accounted for 78% of our total financing as of March 31, 2024, are not subject to credit or capital markets mark-to-market provisions. The remaining 22% of our total financing, which is primarily comprised of three master repurchase agreements, are only subject to credit marks.
Current wording
Our Non-Mark-to-Market Financing Sources, which accounted for 79% of our total financing as of June 30, 2024, are not subject to credit or capital markets mark-to-market provisions. The remaining 21% of our total financing, which is primarily comprised of three master repurchase agreements, are only subject to credit marks.
Previous wording
Each of our existing master repurchase facilities includes "credit mark-to-market" features. "Credit mark-to-market" provisions in repurchase facilities are designed to keep the lenders' credit exposure generally constant as a percentage of the underlying collateral value of the assets pledged as security to them. If the credit underlying collateral value decreases, the gross amount of leverage available to us will be reduced as our assets are marked-to-market, which would reduce our liquidity. The lender under the applicable repurchase facility sets the valuation and any revaluation of the collateral assets in its sole, good faith discretion. As a contractual matter, the lender has the right to reset the value of the assets at any time based on then-current market conditions, but the market convention is to reassess valuations on a monthly, quarterly and annual basis using the financial information delivered pursuant to the facility documentation regarding the real property, borrower and guarantor under such underlying loans. Generally, if the lender determines (subject to certain conditions) that the market value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, the lender may require us to provide additional collateral or lead to margin calls that may require us to repay all or a portion of the funds advanced. We closely monitor our liquidity and intend to maintain sufficient liquidity on our balance sheet in order to meet any margin calls in the event of any significant decreases in asset values. As of March 31, 2024, the weighted average haircut under our repurchase agreements was 33.8% (or 31.2%, if we had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates). In addition, our existing master repurchase facilities are not entirely term-matched financings and may mature before our CRE debt investments that represent underlying collateral to those financings. As we negotiate renewals and extensions of these liabilities, we may experience lower advance rates and higher pricing under the renewed or extended agreements.
Current wording
Each of our existing master repurchase facilities includes "credit mark-to-market" features. "Credit mark-to-market" provisions in repurchase facilities are designed to keep the lenders' credit exposure generally constant as a percentage of the underlying collateral value of the assets pledged as security to them. If the credit underlying collateral value decreases, the gross amount of leverage available to us will be reduced as our assets are marked-to-market, which would reduce our liquidity. The lender under the applicable repurchase facility sets the valuation and any revaluation of the collateral assets in its sole, good faith discretion. As a contractual matter, the lender has the right to reset the value of the assets at any time based on then-current market conditions, but the market convention is to reassess valuations on a monthly, quarterly and annual basis using the financial information delivered pursuant to the facility documentation regarding the real property, borrower and guarantor under such underlying loans. Generally, if the lender determines (subject to certain conditions) that the market value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, the lender may require us to provide additional collateral or lead to margin calls that may require us to repay all or a portion of the funds advanced. We closely monitor our liquidity and intend to maintain sufficient liquidity on our balance sheet in order to meet any margin calls in the event of any significant decreases in asset values. As of June 30, 2024, the weighted average haircut under our repurchase agreements was 30.9% (or 28.5%, if we had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates). In addition, our existing master repurchase facilities are not entirely term-matched financings and may mature before our CRE debt investments that represent underlying collateral to those financings. As we negotiate renewals and extensions of these liabilities, we may experience lower advance rates and higher pricing under the renewed or extended agreements.
Previous wording
In 2021, we entered into a $500.0 million Master Repurchase and Securities Contract Agreement with a financial institution (“KREF Lending IX Facility”); the borrowing capacity was increased to $750.0 million, then further increased to $1.0 billion in 2022. The facility, which provides financing on a non-mark-to-market basis with partial recourse to us, has a three-year draw period and match- term to the underlying loans.
Current wording
In 2021, we entered into a $500.0 million Master Repurchase and Securities Contract Agreement with a financial institution (“KREF Lending IX Facility”) and subsequently increased the borrowing capacity to $1.0 billion. The facility, which provides financing on a non-mark-to-market basis with partial recourse to us, has a three-year draw period and match- term to the underlying loans. In May 2024, the lender assigned its rights and obligations under the KREF Lending IX Facility to another financial institution and our borrowing capacity under the facility was amended to $701.1 million.
Previous wording
(A) Collateral loan assets represent 32.0% of the principal of our commercial real estate loans as of March 31, 2024. As of March 31, 2024, 100% of KREF loans financed through the CLOs are floating-rate loans.
Current wording
(A) Collateral loan assets represent 34.7% of the principal of our commercial real estate loans as of June 30, 2024. As of June 30, 2024, 100% of our loans financed through the CLOs are floating-rate loans.
Previous wording
In certain instances, we finance our loans through the non-recourse sale of a senior loan interest that is not included in our condensed consolidated financial statements. These non-consolidated senior interests provide structural leverage on a non-mark-to-market, match-term basis for our net investments, which are typically reflected in the form of mezzanine loans or other subordinate interests on our condensed consolidated balance sheet and in our condensed consolidated statement of income.
Current wording
In certain instances, we finance our loans through the non-recourse sale of a senior loan interest that is not included in our condensed consolidated financial statements. These non-consolidated senior interests provide structural leverage on a non-mark-to-market, match-term basis for our net investments, which are typically reflected in the form of mezzanine loans or other subordinate interests on our condensed consolidated balance sheets and in our condensed consolidated statement of income.
Previous wording
In 2020, we entered into a $300.0 million secured term loan at a price of 97.5%. The secured term loan is partially amortizing, with an amount equal to 1.0% per annum of the principal balance due in quarterly installments. In 2021, we completed a $52.2 million add-on, for an aggregate principal amount of $350.0 million, which was issued at par. In 2023, the secured term loan was amended to transition the benchmark rate from LIBOR to SOFR. The new secured term loan bears coupon interest at Adjusted Term SOFR, as defined in the secured term loan agreements, plus a 3.50% margin, and is subject to a 0.50% SOFR floor.
Current wording
In 2020, we entered into a $300.0 million secured term loan at a price of 97.5%. The secured term loan is partially amortizing, with an amount equal to 1.0% per annum of the principal balance due in quarterly installments. In 2021, we completed a $52.2 million add-on, for an aggregate principal amount of $350.0 million, which was issued at par. In 2023, the secured term loan was amended to transition the benchmark rate from LIBOR to SOFR. Post amendment, the secured term loan bears coupon interest at Adjusted Term SOFR, as defined in the secured term loan agreements, plus a 3.50% margin, and is subject to a 0.50% SOFR floor.
Previous wording
In 2015, we originated a $177.0 million senior loan secured by a retail property in Portland, Oregon. In 2021, we took title to the retail property; such acquisition was accounted for as an asset acquisition under ASC 805. Accordingly, we recognized the property on our balance sheet as REO with a carrying value of $78.6 million, which included the estimated fair value of the property. In addition, we assumed $2.0 million in other net assets of the REO.
Current wording
Portland Retail /Redevelopment—In 2015, we originated a $177.0 million senior loan secured by a retail property in Portland, OR. In December 2021, we took title to the retail property and accounted for the property on a consolidated basis. The transaction was accounted for as an asset acquisition under ASC 805. Accordingly, we recorded the property on the Condensed Consolidated Balance Sheets as REO with a carrying value of $78.6 million, which included the estimated fair value of the property. In addition, we assumed $2.0 million in other net assets of the REO. We contributed a portion of the REO asset with a carrying value of $68.9 million to a joint venture (the "REO JV") with a third party local developer (“JV Partner”), whereby we had a 90% interest and the JV Partner had a 10% interest. The JV Partner's interest in the property was presented within "Noncontrolling interests in equity of consolidated joint ventures" on the Condensed Consolidated Balance Sheets. As of June 30, 2024, the REO JV held REO assets with a net carrying value of $77.4 million. We have priority of distributions up to $81.6 million before the JV Partner can participate in the economics of the REO JV.
Previous wording
In 2019, we originated a $182.6 million senior loan secured by an office portfolio in Philadelphia, PA. In 2022, this loan was placed on nonaccrual status and subsequent interest collections were accounted for under the cost recovery method. As of September 30, 2023, the loan had a risk rating of 5 with an amortized cost of $151.1 million. On December 22, 2023, we received a $6.0 million partial repayment and then took title to the office property through a deed-in-lieu of foreclosure. The transaction was accounted for as an asset acquisition under ASC 805. Accordingly, we recorded the property with its net assets on the Condensed Consolidated Balance Sheet with an estimated fair value of $86.4 million, which included $1.3 million of cash received and $76.5 million, $24.6 million and $15.9 million allocated to REO held for sale, lease intangible and other assets, and leasing and other liabilities, respectively. As a result, we recognized a $58.7 million loan write-off for the difference between the carrying value of the foreclosed loan and the fair value of the REO’s net assets. As of March 31, 2024, the REO's assets and liabilities met the criteria to be classified as held for sale under ASC 360. As such, depreciation on the building and building improvements was suspended.
Current wording
Philadelphia Office / Garage —In 2019, we originated a $182.6 million senior loan secured by an office portfolio in Philadelphia, PA. In December 2023, we received a $6.0 million partial repayment and then took title to the office property through a deed-in-lieu of foreclosure. The transaction was accounted for as an asset acquisition under ASC 805. Accordingly, we recorded the portfolio and its net assets on the Condensed Consolidated Balance Sheets with an estimated fair value of $86.4 million, which included $1.3 million of cash received and $76.5 million, $24.6 million and $15.9 million allocated to REO held for sale, lease intangible and other assets, and leasing and other liabilities, respectively. As a result, we recognized a $58.7 million loan write-off for the difference between the amortized cost of the foreclosed loan and the fair value of the REO’s net assets.
Previous wording
We recognized $4.7 million of deferred loan fees and origination discounts accreted into interest income during the three months ended March 31, 2024, as compared to $5.9 million during the prior year period. We recorded $5.0 million of deferred financing costs amortization into interest expense during the three months ended March 31, 2024, as compared to $6.8 million during the prior year period.
Current wording
Net interest income increased by $1.3 million during the three months ended June 30, 2024, as compared to the preceding three-month period. This increase was primarily due to a decrease in interest expense, partially as a result of lower deferred financing costs amortization. We recorded $4.3 million of deferred financing costs amortization into interest expense during the three months ended June 30, 2024, as compared to $5.0 million for the preceding period. In addition, we recorded $4.8 million of deferred loan fees and origination discounts accreted into interest income during the three months ended June 30, 2024, as compared to $4.7 million during the prior year period.
Previous wording
Total operating expenses decreased by $26.1 million during the three months ended March 31, 2024, as compared to the prior year period. This decrease was primarily due to a $27.2 million change in the provision for credit losses and a $1.8 million decrease in Manager incentive compensation. The decrease was partially offset by a $2.8 million increase in expenses from REO operations.
Current wording
Total operating expenses decreased by $28.1 million during the three months ended June 30, 2024, as compared to the preceding period. This decrease was primarily due to a $28.7 million change in the provision for credit losses.
Previous wording
Three months ended March 31, 2024 Compared to Three months ended March 31, 2023
Current wording
Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023
Previous wording
The following table summarizes the changes in our results of operations for the three months ended March 31, 2024 and 2023 (dollars in thousands, except per share data):
Current wording
The following table summarizes the changes in our results of operations for the six months ended June 30, 2024 and 2023 (dollars in thousands, except per share data):
Showing the first 40 of 56 pairs. Open the source sections for the rest.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
As of June 30, 2024, the remaining REO assets and liabilities met the criteria to be classified as held for sale under ASC 360. As such, depreciation and amortization on the REO and related lease intangibles were suspended.
Rearranged previous paragraphs (6)
Previous report — wording carried elsewhere
(1) For purposes of calculating incentive compensation under our Management Agreement, adjusted equity excludes: (i) the effects of equity issued that provides for fixed distributions or other debt characteristics and (ii) the unrealized provision for (reversal of) credit losses.
Previous report — wording carried elsewhere
(B) Includes a $58.7 million write-off of a defaulted senior loan upon deed-in-lieu of foreclosure during the three months ended December 31, 2023.
Previous report — wording carried elsewhere
For Senior Loans 2, 3, 6, 18, 23, 26, 36, 48, 49, and 67, LTV is calculated as the total commitment amount of the loan divided by the as-stabilized value as of the date the loan was originated.
Previous report — wording carried elsewhere
Concurrently with taking the title to the REO asset, we contributed a portion of the REO asset to a joint venture (the "REO JV") with a third party local development operator (“JV Partner”), whereby we have a 90% interest and the JV Partner has a 10% interest. As of March 31, 2024, the REO JV held REO assets with a net carrying value of $72.8 million. We have priority of distributions up to $79.8 million before the JV Partner can participate in the economics of the REO JV.
Previous report — wording carried elsewhere
the cost recovery method and a decrease in prepayment fees compared to the preceding three-month period. During the three months ended March 31, 2024, $2.5 million of interest collections on nonaccrual loans were applied as a reduction to the loan amortized cost.
Previous report — wording carried elsewhere
We recognized $4.7 million of deferred loan fees and origination discounts accreted into interest income during the three months ended March 31, 2024, as compared to $5.9 million for the preceding period. We recorded $5.0 million of deferred financing costs amortization into interest expense during the three months ended March 31, 2024, as compared to $5.7 million for the preceding period.