On April 3, 2017, KKR Real Estate Finance Trust (Pending:KREF), a KKR-managed mortgage real estate investment trust company, filed with the SEC to raise up to $220.3 million through an initial public offering. The company plans to list on the NYSE under the symbol "KREF."
Company Overview
Founded in 2014, the New York, NY-based company focuses on commercial real estate debt. KKR Real Estate Finance focuses on acquiring and originating senior loans secured by commercial real estate assets as well as preferred equity, mezzanine loans and other debt-oriented instruments. The company's investment objective is to generate risk-adjusted returns for its stockholders, primarily through dividends, over the long term as well as capital preservation.
Executive Management
Ralph F. Rosenberg joined KRR Real Estate Finance in 2011 and is currently serving as global head of the company. Before taking this position at KRR, Mr. Rosenberg was a partner at Eton Park Capital Management. He also ran R6 Capital Management, his own firm, before choosing to merge it into Eton Park. He was also a prior partner at Goldman Sachs. Mr. Rosenberg earned his MBA from the Stanford Graduate School of Business and holds and undergraduate degree from Brown University.
IPO Details
The REIT plans to offer 10 million shares priced between $20.50 and $21.50 per share, according to its SEC filing. Underwriters will also have a 30-day option to buy an additional 1.5 million shares. If underwriters do exercise this option, and assuming midpoint pricing, KREF will have a market capitalization of $1.1B.
In its statement, the company acknowledges that it plans to fill a market gap caused by restrictive underwriting standards that have created opportunities for well-capitalized alternative lenders and compelled conventional financing sources. The REIT also recognizes an opportunity in the significant number of loans issued during the country's past financial crisis as they come to maturity and will ultimately need to be recapitalized.
KKR Real Estate Finance began with a $400 million commitment from KKR, and the company has raised an additional $438 million from other investors and third parties, bringing the company's total committed capital base to $838.1 million.
The company earned $41 million in revenue for the 12 months ended December 31, 2016. Additionally, as of the same date, KRR Real Estate Finance had established and originated an $840.8 million diversified portfolio of performing commercial real estate investments, including preferred equity, mezzanine loans, senior loans and the junior-most bonds of commercial mortgage-backed securities.
KKR, Morgan Stanley and Wells Fargo as lead underwriters, and J.P. Morgan, Goldman Sachs, Barclays, and Keefe Bruyette & Woods will act as co-managers.
Competitive Landscape
KRR Real Estate Finance competes for opportunities with a number of institutional investors and lenders, including commercial finance and insurance companies, commercial and investment banks, public and private funds, specialty finance companies, other REITs and financial institutions.
Assuming KREF prices at the midpoint, it would have a P/S of 27.36x. This is relatively high compared with other publicly traded REITs in the mortgage space. For example, Blackstone Mortgage Trust (NYSE:BXMT) has a P/S of just 9.1.
According to the company, other competitors may have access to funding sources that KRR Real Estate Finance does not, including the U.S. government. However, the company believes that its access to professionals and their industry relationships and expertise will provide KRR Real Estate Finance with competitive advantages in assessing various risks and determining pricing for possible investments.
Conclusion: Consider Buying In
We are encouraged by KKR's strong backing of KREF.
KKR has invested or committed over $3.0 billion of capital through December 31, 2016. At the same time, KREF's total net interest income has increased $13.2 million during the year ended December 31, 2016; over the same time period net income increased 88% to $32.3M.
Inherent risks do include a fierce market for lending and investment opportunities; risks with debt-oriented real estate investments, and interest rate risk, among others.
Still, we look forward to watching this deal develop and suggest investors consider a modest allocation.
Comments
Log in or sign up to join the conversation.