KKR Real Estate Finance Stock: Outlook for 13%-Yielder Is Robust
January 10, 2024
Why KREF Stock’s Price Has Climbed
The share prices of real estate investment trusts (REITs) like KKR Real Estate Finance Trust Inc (NYSE:KREF) received a big jolt in early November 2023 after the Federal Reserve announced it was leaving its key lending rate unchanged.
Then, in mid-December, the Fed held its interest rate again and signaled that multiple rate cuts would be coming in 2024. (Source: “December 2023 Fed Meeting: Rates Stay Put,” JPMorgan Chase & Co, December 14, 2023.)
Why was this good news for mortgage REITs (mREITs) in particular?
These REITs invest in mortgages instead of investing directly in real estate. They provide financing for income-generating properties by purchasing or originating mortgages and mortgage-backed securities. Then, they earn income from interest payments.
When interest rates are near zero, it can mean less money comes in to mREITs, leading to lower profits. High interest rates are great for mREITs in general, and they’re especially a big bonus for mREITs with a lot of floating-rate loans.
But there’s a balancing act. If interest rates are too high for too long, they curb borrowing too much and can tip the economy into a recession. Interest rate cuts, which—as just mentioned—are expected to begin this year, should bring more borrowers in from the sidelines.
KKR Real Estate Finance Trust Inc is an mREIT that focuses on originating and acquiring senior loans that are secured by commercial real estate assets.
The company focuses its attention on commercial real estate assets (institutional, multifamily, office, hospitality, and industrial properties) that are owned and operated by well-capitalized sponsors and are located in top markets that have strong fundamentals. (Source: “Investor Presentation: October 2023,” KKR Real Estate Finance Trust Inc, last accessed January 3, 2024.)
Its target assets also include mezzanine loans, preferred equity, and other debt-oriented instruments.
With offices in 16 cities in 11 countries, KKR Real Estate Finance currently has $64.0 billion worth of assets under management, with an average loan size of $124.0 million.
Of its current loan portfolio of $7.9 billion, 99.0% is made up of floating interest rates with a weighted average unlevered all-in yield of 8.9%. (Source: “KKR Real Estate Finance Trust Inc. Reports Third Quarter 2023 Financial Results,” KKR Real Estate Finance Trust Inc, October 23, 2023.)
The company is obviously good at what it does; 67% of its clients are repeat borrowers.
KKR Real Estate Finance Trust Inc’s Net Income Swung Toward Profitability in Q3
For the third quarter ended September 30, 2023, KKR Real Estate Finance reported net income of $21.4 million, or $0.31 per share, compared to a net loss of $25.8 million, or $0.37 per share, in the third quarter of 2022. (Source: Ibid.)
KKR Real Estate Finance Trust Inc reported third-quarter distributable earnings of $17.4 million, or $0.25 per share, down from $33.1 million, or $0.48 per share, in the second quarter of 2023.
During the third quarter, it funded $164.9 million for loans that were closed in previous quarters and received loan payments of $152.3 million. As of September 30, its liquidity position stood at $715.7 million, including $108.0 million in cash and $500.0 million of undrawn capacity on its revolving credit agreement.
Patrick Mattson, KKR Real Estate Finance Trust Inc’s president and chief operating officer (COO), commented, “KREF is well positioned in this market environment with best-in-class non-mark-to-market financing, high levels of liquidity and deep relationships with our financing partners and borrowers.” (Source: Ibid.)
Management Declared Q4 Distribution of $0.43 Per Share
KKR Real Estate Finance stock only went public in 2017, but the company has raised its quarterly dividends a few times since then.
KREF stock currently pays dividends of $0.43 per share. (Source: “Dividend Tax Treatment,” KKR Real Estate Finance Trust Inc, last accessed January 3, 2024.)
As of this writing, that translates to a dividend yield of about 13%.
KKR Real Estate Finance Stock Up 30%+ Since November 2023
As you can see in the chart below, KREF stock began to trend lower in early 2022 when the Federal Reserve began its cycle of unprecedented interest rate hikes. From March 2022 through July 2023, the Fed raised its key lending rate 11 times, from near-zero to the range of $5.25%–5.5%.
But with inflation cooling and the odds of the U.S. avoiding a recession growing, the Fed has paused its interest rate increases and is expected to announce its first rate cut in the first half of 2024.
As mentioned earlier, lower interest rates should bring in more borrowers from the sidelines, which should help juice the profits of leading mREITs like KKR Real Estate Finance Trust Inc.
Investors think so. KKR Real Estate Finance stock has been climbing significantly since the Fed held its interest rate in early November and said at its December meeting that cuts were coming.
As of this writing, KREF stock is up by:
- 22% over the last three months
- 32% since November 1, 2023
- 9.5% year-over-year
Chart courtesy of StockCharts.com
The Lowdown on KKR Real Estate Finance Trust Inc
KKR Real Estate Finance stock is a tremendous mREIT stock whose share price took a hit during the Federal Reserve’s aggressive interest-rate-hike cycle. But with that cycle likely being over and rate cuts expected to begin in 2024, the macroeconomic and microeconomic outlooks for KREF stock and other mREIT stocks are robust.
Stock traders agree. As mentioned earlier, KKR Real Estate Finance Trust Inc’s share price is up by more than 30% since the start of November 2023 (as of this writing). Moreover, 73.7% of the company’s shares are held by institutional investors, who tend to be on the conservative side.
Wall Street analysts forecast that, in 2024, KKR Real Estate Finance’s earnings will climb to $1.55 per share, from $1.25 per share in 2023.
As such, the outlook for KKR Real Estate Finance stock’s price and dividends is excellent.
