KKR Financial Holdings LLC
KKR Financial Corp. Announces First Quarter 2007 Financial Results
SAN FRANCISCO, May 3, 2007 /PRNewswire-FirstCall via COMTEX News Network/ -- KKR Financial Corp. (NYSE: KFN) ("KFN" or the "Company") today announced its results for the first quarter of 2007.
Highlights of KKR Financial Corp.'s performance include:
-- Stockholders approved a restructuring transaction whereby the Company
will convert from a real estate investment trust to a limited liability
company.
-- Distribution of an aggregate amount of $45.1 million for the quarter
ended March 31, 2007 on the Company's common stock.
-- Net income for the quarter ended March 31, 2007 of $48.4 million, or
$0.60 per diluted common share.
-- Net income adjusted for share-based compensation, a non-GAAP financial
measurement, for the quarter ended March 31, 2007 of $54.3 million, or
$0.68 per diluted common share.
-- REIT taxable income, a non-GAAP financial measurement, for the quarter
ended March 31, 2007 of $66.0 million, or $0.82 per diluted common
share.
-- Investment portfolio totaled $16.1 billion as of March 31, 2007 as
compared to $17.1 billion as of December 31, 2006.
KFN reported net income for the quarter ended March 31, 2007 of $48.4 million, or $0.60 per diluted common share. Current quarter results represent an increase of 59% from $30.4 million, or $0.38 per diluted common share for the quarter ended March 31, 2006.
Net income includes share-based compensation expense for the quarter ended March 31, 2007 totaling $5.8 million and for the quarter ended March 31, 2006 totaling $6.8 million, or $0.08 and $0.09 per diluted common share, respectively. Net income adjusted for share-based compensation, a non-GAAP financial measurement consisting of GAAP net income plus GAAP share-based compensation expense, for the quarter ended March 31, 2007 totaled $54.3 million, or $0.68 per diluted common share. Current quarter results represent an increase of 46% from net income adjusted for share-based compensation of $37.2 million for the quarter ended March 31, 2006. Net income adjusted for share-based compensation is an important non-GAAP measure because it is an indicative measurement of cash flow generated from operations that is available to make distributions to common stockholders.
REIT taxable income, a non-GAAP financial measurement, for the quarter ended March 31, 2007 totaled $66.0 million, or $0.82 per diluted common share. For the quarter ended March 31, 2006, REIT taxable income totaled $47.7 million or $0.60 per diluted common share. REIT taxable income for the quarter ended March 31, 2007 includes taxable income of approximately $0.16 per diluted common share attributable to certain of the Company's CLO subsidiaries which have a November 30 rather than a December 31 year-end for tax purposes. The non-GAAP financial measurement of REIT taxable income is important because the Company is structured as a REIT and the Internal Revenue Code of 1986, as amended, or the Code, requires that the Company pay substantially all of its taxable income in the form of distributions to its stockholders. REIT taxable income is important in the determination of the amount of the minimum distributions that the Company must pay to its stockholders so as to comply with the rules set forth in the Code. Attached to this release is a schedule reconciling this measure to net income.
The Company filed its Form 10-Q for the quarterly period ended March 31, 2007 with the Securities and Exchange Commission today, May 3, 2007. KFN encourages investors to carefully read the Company's Form 10-Q which contains condensed consolidated financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations.
Conversion Transaction
On May 3, 2007, the Company's shareholders approved a restructuring transaction (the "Conversion Transaction") whereby KKR Financial Corp., currently a publicly traded Maryland corporation, will become a subsidiary of a recently formed Delaware limited liability company that will be publicly traded. The Delaware limited liability company, named KKR Financial Holdings LLC, will not be taxed as a REIT, but is expected to be treated as a pass-through entity for U.S. federal income tax purposes. The Conversion Transaction will result in each share of currently issued and outstanding KKR Financial Corp. common stock being converted into an equal number of limited liability company shares in KKR Financial Holdings LLC. The Company expects that the Conversion Transaction will be consummated on May 4, 2007.
Investment Portfolio
As of March 31, 2007, the Company's investment portfolio totaled $16.1 billion as compared to $17.1 billion as of December 31, 2006. As of March 31, 2007, the Company's unrealized gains and losses from its residential mortgage investments are included in income while the Company's net aggregate unrealized gains from its investments in corporate loans and securities held through consolidated and unconsolidated subsidiaries and its interest rate derivatives designated as cash flow hedges as defined under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, are not included in income and totaled $110.4 million as compared to $118.2 million as of December 31, 2006. These amounts exclude the Company's investments in non-marketable equity securities, which are carried at cost.
The Company invested $0.4 billion during the quarter ended March 31, 2007,
compared to $1.9 billion during the quarter ended March 31, 2006. The table
below summarizes investment portfolio purchases for the periods indicated and
includes the par amount, or face amount, of the securities and loans that were
purchased.
Investment Portfolio Purchases
(Amounts in thousands)
Three months ended Three months ended
March 31, 2007 March 31, 2006
Par % Par %
Amount Amount
Securities:
Residential ARM Securities $-- --% $1,063,776 56.2%
Corporate Debt Securities 34,000 9.2 127,769 6.8
Marketable Equity Securities 17,728 4.9 10,375 0.5
Non-Marketable Equity
Securities 7,500 2.1 50,936 2.7
Total Securities Principal
Balance 59,228 16.2 1,252,856 66.2
Loans:
Residential ARM Loans 17,706 4.9 99,498 5.3
Corporate Loans 287,687 78.9 538,883 28.5
Total Loans Principal
Balance 305,393 83.8 638,381 33.8
Grand Total Principal
Balance $364,621 100.0% $1,891,237 100.0%
Distribution
On May 3, 2007, the Company's Board of Directors declared a distribution of an aggregate amount of $45.1 million for the quarter ended March 31, 2007 on the Company's common stock. The distribution is payable on May 31, 2007 to stockholders of record as of the close of business on May 17, 2007. However, assuming that the Conversion Transaction is consummated on May 4, 2007, the Company's sole common stockholder after that date will be KKR Financial Holdings LLC and this cash distribution will therefore be paid to KKR Financial Holdings LLC. Accordingly, the Company expects that the board of directors of KKR Financial Holdings LLC will declare a cash distribution in the same aggregate amount payable on May 31, 2007 to the holders of its common shares as of the close of business on May 17, 2007. Based on the number of shares of KKR Financial Holdings LLC that the Company expects will be issued in the Conversion Transaction, the Company expects that Holdings will pay a distribution of $0.56 on each of its common shares on May 31, 2007.
Adoption of Fair Value Option
The Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -- Including an amendment of FASB Statement No. 115 ("SFAS No. 159") as of January 1, 2007 and elected to implement fair value accounting for its investments in residential mortgage loans and residential mortgage-backed securities. The Company recorded a transition adjustment loss to accumulated deficit of $55.7 million as of January 1, 2007 to reflect the cumulative effect of the adoption of the fair value option for the Company's residential mortgage investments. This adjustment reflects a reclassification of $21.5 million of unrealized losses included in other comprehensive income to accumulated deficit. Accordingly, this adjustment resulted in a net decrease of stockholders' equity by $34.2 million, or $0.42 per common share outstanding.
Book Value Per Common Share
The Company's book value per common share was $20.95 and $21.42 as of March 31, 2007 and December 31, 2006, respectively, exclusive of the distribution expected to be declared subsequent to the end of the first quarter of 2007 of $0.56 per common share and the distribution declared subsequent to the end of the fourth quarter of 2006 of $0.54 per common share. The Company's book value per common share excludes net unrealized gains from its corporate loan investments, which are carried at amortized cost, held by consolidated and unconsolidated subsidiaries totaling $31.9 million, or $0.40 per common share outstanding as of March 31, 2007 and $26.1 million, or $0.32 per common share outstanding as of December 31, 2006.
Information for Investors: Conference Call and Webcast
KKR Financial Holdings LLC will host a conference call and audio webcast to review its first quarter 2007 results on Friday, May 4, 2007, at 11 a.m. EDT. The conference call can be accessed by dialing 800-753-0420 (Domestic) or 913-981-5554 (International); a pass code is not required. A replay will be available through May 18, 2007 by dialing 888-203-1112 (Domestic) and 719-457- 0820 (International) / pass code 4380335. A live web cast of the call will be accessible on the Company's website, at www.kkrkfn.com, via a link from the Investor Relations section. A replay of the audio web cast will be archived in the Investor Relations section of the Company's website.
About KKR Financial Corp.
KKR Financial Corp. is a specialty finance company that invests in multiple asset classes and uses leverage with the objective of generating competitive leveraged risk-adjusted returns. The Company currently makes investments in the following asset classes: (i) residential mortgage loans and mortgage-backed securities; (ii) corporate loans and debt securities; (iii) commercial real estate loans and debt securities; (iv) asset-backed securities; and (v) marketable and non-marketable equity securities. The Company also makes opportunistic investments in other asset classes from time to time. The Company was organized as a Maryland corporation on July 7, 2004, and commenced operations on August 12, 2004. The Company is structured as a real estate investment trust and KKR Financial Advisors LLC manages the Company pursuant to a management agreement. KKR Financial Corp. and KKR Financial Advisors LLC are affiliates of Kohlberg Kravis Roberts & Co. L.P.
Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although KKR Financial Corp. believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company's expectations include completion of pending investments, continued ability to originate new investments, the mix of originations and prepayment levels, the availability and cost of capital for future investments, competition within the specialty finance sector, economic conditions, credit loss experience, and other risks disclosed from time to time in the Company's filings with the SEC.
Schedule I
KKR Financial Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(amounts in thousands, except
per share information)
For the three For the three
months ended months ended
March 31, 2007 March 31, 2006
Net investment income:
Securities interest income $115,608 $79,964
Loan interest income 133,742 125,106
Dividend income 974 883
Other interest income 2,687 1,845
Total investment income 253,011 207,798
Interest expense (200,066) (156,563)
Net investment income 52,945 51,235
Other income:
Net unrealized gain on trading securities
and loans carried at fair value 2,769 --
Net realized and unrealized gain on
derivatives and foreign exchange 7,138 10
Net realized gain on investments 6,944 1,448
Fee and other income 2,048 215
Total other income 18,899 1,673
Non-investment expenses:
Related party management compensation 19,299 14,440
Professional services 541 947
Loan servicing expense 3,263 3,996
Insurance expense 194 224
Directors expenses 320 373
General and administrative expenses 6,008 2,228
Total non-investment expenses 29,625 22,208
Income before equity in income of
unconsolidated affiliate and
income tax expense 42,219 30,700
Equity in income of unconsolidated affiliate 6,981 --
Income before income tax expense 49,200 30,700
Income tax expense 776 312
Net income $48,424 $30,388
Net income per common share:
Basic $0.61 $0.39
Diluted $0.60 $0.38
Weighted-average number of common
shares outstanding:
Basic 78,768 77,675
Diluted 80,257 79,314
Distributions declared per common share $0.54 $0.40
Schedule II
KKR Financial Corp. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands,
except share information)
March 31, December 31,
2007 2006
Assets
Cash and cash equivalents $3,296 $5,125
Restricted cash and cash equivalents 291,117 138,065
Trading securities, $6,988,360 and $0
pledged as collateral as of March 31, 2007
and December 31, 2006, respectively 7,033,094 --
Securities available-for-sale, $734,108 and
$8,336,435 pledged as collateral as of
March 31, 2007 and December 31, 2006,
respectively 880,340 8,500,636
Loans ($4,845,144 and $0 at fair value as
of March 31, 2007 and December 31, 2006,
respectively), net of allowance for loan
losses of $0 and $1,500 as of March 31, 2007
and December 31, 2006, respectively 8,042,492 8,442,021
Derivative assets 49,387 63,433
Interest receivable 77,603 84,048
Principal receivable 8,201 4,540
Non-marketable equity securities 173,823 166,323
Investment in unconsolidated affiliate 128,813 104,035
Other assets 52,598 56,951
Total assets $16,740,764 $17,565,177
Liabilities
Repurchase agreements $3,551,840 $4,457,089
Collateralized loan obligation senior
secured notes 2,252,500 2,252,500
Asset-backed secured liquidity notes 8,822,785 8,705,601
Secured revolving credit facility 25,200 34,710
Secured demand loan 41,658 41,658
Junior subordinated notes 257,743 257,743
Accounts payable, accrued expenses
and other liabilities 46,032 45,237
Accrued interest payable 42,163 36,991
Related party payable 10,221 6,901
Income tax liability 877 601
Derivative liabilities 3,811 2,715
Total liabilities 15,054,830 15,841,746
Stockholders' Equity
Preferred stock, $0.01 par value,
50,000,000 shares authorized and none
issued and outstanding at March 31, 2007
and December 31, 2006 -- --
Common stock, $0.01 par value, 250,000,000
shares authorized and 80,464,713 shares
issued and outstanding at March 31, 2007
and December 31, 2006, respectively 805 805
Additional paid-in-capital 1,676,168 1,670,330
Accumulated other comprehensive income 77,940 70,520
Accumulated deficit (68,979) (18,224)
Total stockholders' equity 1,685,934 1,723,431
Total liabilities and
stockholders' equity $16,740,764 $17,565,177
Schedule III
KKR Financial Corp. and Subsidiaries
SUMMARY FINANCIAL DATA (UNAUDITED)
(amounts in thousands,
except share information)
Three Months Three Months
Ended Ended
March 31,2007 March 31,2006
Net Income: $48,424 $30,388
Earnings per diluted common share $0.60 $0.38
Net Income + Share-Based Compensation (1): $54,262 $37,171
Net income, adjusted for share-based
compensation, per diluted common share $0.68 $0.47
REIT Taxable Income (2): $65,989 $47,694
REIT taxable income per diluted common share $0.82 $0.60
Profitability Ratio Information (3):
Return on equity 11.4% 7.4%
Return on assets 1.1% 0.8%
Efficiency ratio 10.6% 10.6%
Share Information:
Common shares outstanding 80,465 80,374
Basic EPS common shares outstanding 78,768 77,675
Diluted EPS common shares outstanding 80,257 79,314
Investment Portfolio Information March 31, December 31,
2007 2006
Residential mortgage securities $7,033,094 $7,536,196
Residential loans 4,845,144 5,109,261
Total residential 11,878,238 12,645,457
Corporate securities 759,228 863,449
Corporate loans 3,092,020 3,225,567
Total corporate 3,851,248 4,089,016
Commercial real estate securities 32,133 32,023
Commercial real estate loans 105,328 108,693
Total commercial real estate 137,461 140,716
Marketable equity securities 88,979 68,968
Non-marketable equity securities 173,823 166,323
Total investment portfolio 16,129,749 17,110,480
Balance Sheet Information March 31, December 31,
2007 2006
Investment portfolio $16,129,749 $17,110,480
Total assets 16,740,764 17,565,177
Total borrowings 14,951,726 15,749,301
Total liabilities 15,054,830 15,841,746
Stockholders' equity 1,685,934 1,723,431
Book value per common share 20.95 21.42
Leverage 8.9x 9.1x
Three Months Three Months
Ended Ended
March 31, March 31,
Statement of Operations Information 2007 2006
Investment income $253,011 $207,798
Other income 18,899 1,673
Total income 271,910 209,471
Interest expense (200,066) (156,563)
Share-based compensation expense (5,838) (6,783)
Management compensation (13,567) (7,830)
Loan servicing expense (3,263) (3,996)
Other expenses (6,957) (3,599)
Total non-investment expenses (29,625) (22,208)
Equity in income of unconsolidated affiliate 6,981 --
Income before income tax expense 49,200 30,700
Income tax expense (776) (312)
Net income $48,424 $30,388
(1) Non-GAAP financial measurement consisting of GAAP net income plus
GAAP share-based compensation expense.
(2) Non-GAAP financial measurement.
(3) All ratios computed on an annualized basis. The efficiency ratio is
defined as non-interest expense divided by total income.
Schedule IV
KKR Financial Corp. and Subsidiaries
INVESTMENT PORTFOLIO BY INTEREST RATE TYPE AS OF MARCH 31, 2007 (UNAUDITED)
(amounts in thousands)(1)
Portfolio
Carrying Amortized Estimated Mix % by
Value Cost Fair Value Fair Value
Floating Rate:
Residential
ARM Loans $1,294,678 $1,311,889 $1,294,678 8.0%
Residential ARM
Securities 5,229,852 5,218,304 5,229,852 32.4
Corporate Loans 3,067,020 3,067,020 3,090,999 19.1
Corporate Debt
Securities 266,917 258,004 266,917 1.7
Commercial Real
Estate Loans 105,328 105,328 106,118 0.6
Total Floating
Rate 9,963,795 9,960,545 9,988,564 61.8
Hybrid Rate:
Residential Hybrid
ARM Loans 3,550,466 3,569,558 3,550,466 21.9
Residential Hybrid
ARM Securities 1,803,242 1,832,947 1,803,242 11.2
Total Hybrid Rate 5,353,708 5,402,505 5,353,708 33.1
Fixed Rate:
Corporate Loans 25,000 25,000 24,570 0.2
Corporate Debt
Securities 492,311 468,738 492,311 3.0
Commercial Real Estate
Debt Securities 32,133 32,000 32,133 0.2
Total Fixed Rate 549,444 525,738 549,014 3.4
Marketable and
Non-Marketable
Equity Securities:
Common and
Preferred Stock 88,979 84,561 88,979 0.6
Non-Marketable
Equity Securities 173,823 173,823 173,823 1.1
Total Marketable
and Non-Marketable
Equity Securities 262,802 258,384 262,802 1.7
Total $16,129,749 $16,147,172 $16,154,088 100.0%
(1) The schedule summarizes the carrying value, amortized cost, and fair
value of the Company's investment portfolio as of March 31, 2007,
classified by interest rate type. Carrying value is the value that
investments are recorded on the Company's consolidated balance sheet
and is fair value for securities and residential mortgage loans and
amortized cost for corporate and commercial real estate loans.
Estimated fair values set forth in the schedule are as of March 31,
2007 and are based on dealer quotes and/or nationally recognized
pricing services and using management estimates for investment
positions for which dealer quotes and/or nationally recognized
pricing data is not available.
Schedule V
KKR Financial Corp. and Subsidiaries
RECONCILIATION OF REPORTED GAAP NET INCOME TO TOTAL TAXABLE INCOME AND REIT
TAXABLE INCOME (UNAUDITED)
Estimated for the Estimated for the
three months ended three months ended
March 31, 2007 March 31, 2006
(amounts in thousands, Per Per
except per share amounts) Amount Share Amount Share
Reported net income $48,424 $0.60 $30,388 $0.38
Book/tax differences
adjustment for residential
mortgage portfolio (374) -- 2,093 0.03
Share-based compensation 5,838 0.07 6,783 0.09
Vesting of restricted
common stock (140) -- -- --
Foreign exchange gains and losses 1 -- (374) --
Gains on sales of assets to
and among taxable REIT
subsidiaries 364 0.01 888 0.01
Realized and unrealized
derivative gains and losses (430) (0.01) 1,416 0.02
Book/tax differences adjustment
for foreign taxable REIT
subsidiaries 13,205 0.16 8,168 0.10
Other (204) -- 204 --
Income tax expense 776 0.01 312 --
Total taxable income 67,460 0.84 49,878 0.63
Undistributed taxable income
of domestic taxable REIT
subsidiary (1,471) (0.02) (2,184) (0.03)
REIT taxable income $65,989 $0.82 $47,694 $0.60
Number of common shares
outstanding:
Weighted average diluted
common shares outstanding
during the period 80,257 79,314
(1) Total taxable income and REIT taxable income are non-GAAP financial
measurements and do not purport to be an alternative to net income
determined in accordance with GAAP as a measure of operating
performance or to cash flows from operating activities determined in
accordance with GAAP as a measure of liquidity. Total taxable income
is the aggregate amount of taxable income generated by the Company
and by its domestic and foreign taxable REIT subsidiaries. REIT
taxable income excludes the undistributed taxable income of the
Company's domestic taxable REIT subsidiary, which is not included in
REIT taxable income until distributed to the Company. There is no
requirement that the Company's domestic taxable REIT subsidiary
distribute its earnings to the Company. REIT taxable income, however,
includes the taxable income of the Company's foreign taxable REIT
subsidiaries because the Company will generally be required to
recognize and report their taxable income on a current basis. These
non-GAAP financial measurements are important to the Company because
the Company is structured as a REIT and the Internal Revenue Code of
1986, as amended, or the Code, requires that the Company pay
substantially all of its taxable income in the form of distributions
to its stockholders. The non-GAAP financial measurements of total
taxable income and REIT taxable income are important in the
determination of the amount of the minimum distributions that the
Company must pay to its stockholders so as to comply with the rules
set forth in the Code. Because not all companies use identical
calculations, this presentation of total taxable income and REIT
taxable income may not be comparable to other similarly titled
measures prepared and reported by of other companies.
Investor Contact Media Contact
Laurie Poggi Roanne Kulakoff and Joseph Kuo
KKR Financial LLC Kekst and Company
415-315-3718 212-521-4837 and 212-521-4863
SOURCE KKR Financial Corp.
investors, Laurie Poggi of KKR Financial LLC, +1-415-315-3718; or media, Roanne Kulakoff, +1-212-521-4837, or Joseph Kuo, +1-212-521-4863, both of Kekst and Company, for KKR Financial LLC
http://www.kkrfn.com/
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