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KKR Real Estate: Stable Stock, High Yield, Static Price Performance – Seeking Alpha

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KKR Real Estate Finance Trust Inc. (NYSE:KREF) is a US based mortgage real estate investment trust (REIT) that primarily generates or acquires commercial real estate (CRE) senior mortgage loans. The company’s investment objective is capital preservation and generating attractive risk-adjusted returns primarily through dividends. The company was incorporated in New York on 2nd October, 2014 and has been paying regular quarterly dividends since 2017.

KKR Real Estate Finance Trust Inc. has diversified its portfolio both geographically and over product type. Its major markets are spread over Texas, Massachusetts, California, New York, Florida, Pennsylvania, Virginia, and Illinois. 46 percent of its assets are in the multifamily segment, while 28 percent are operational in the business office segment. However, almost the entire business is concentrated on senior mortgage based loans. Senior loan portfolio consists of 99.4 percent of its total business portfolio.

Portfolio overview

Portfolio overview (Company website)

KKR Real Estate Finance Trust Inc. engages in the origination and purchase of credit investments related to CRE, including leveraged and unleveraged commercial mortgage loans, and commercial mortgage-backed securities. Its senior mortgage loans are based on (collateral) transitional CRE Properties, within the range of $50-$700 million. The duration is typically between two to three years, with certain extension options. Senior loans’ interest carries a premium of 3 to 4 percent over Secured Overnight Financing Rate (SOFR). This interest is much lower compared to the 10 percent plus interest rate of mezzanine loans.

SOFR is to the United States what LIBOR is to the UK. Large financial institutions, mostly banks, need to borrow overnight in order to generate liquidity and meet their reserve requirements. They borrow through negotiations (bid-ask) from each other using Treasury bond repurchase agreements (REPO), where they keep those Treasury bonds as collateral. SOFR comprises the weighted averages of the rates charged in these repo transactions. “Since 2019, billions of dollars in floating-rate notes tied to SOFR have been issued in the United States, according to Ajay Patel, the Thomos S. Goho Chair in Finance at the School of Business at Wake Forest University”.

KKR Real Estate Finance Trust Inc. has a primary investment objective of protecting shareholders’ capital and producing attractive dividends to its investors. This company is not very keen on price growth. It has paid regular quarterly dividends since 2017 on a very attractive yield. It generated annualized yields within a range of 7.84 percent to 9.6 percent. During the past 5 years the average annual yield was almost 8 percent.

Despite the pandemic related market crash in March 2020, the company has kept the quarterly dividend distribution unchanged at $0.43. Since the dividends are paid out of the interest income, which is again almost certain to be repeated in the coming years, I expect KKR Real Estate Finance Trust Inc. to generate almost the same level of yield. As almost the entire bond portfolio is dealing in floating interest rate, this mortgage REIT is also quite protected from the interest rate risk.

Since its inception, KKR Real Estate Finance Trust Inc.’s stock price has been almost static between $20 to $22. Only during the pandemic related market crash during March 2020, the stock fell down below $10, and took almost one year to recover back to the old range. The REIT has recorded a negative price growth of 8.64 percent over the past 30 quarters. Over the past three and five years, KREF’s price has decreased by 0.4 percent and 9 percent respectively.

The price performance has neither been impressive in the short term. KKR Real Estate Finance Trust Inc. recorded a fall of 11 percent in the past six months. Moreover, the stock is likely to observe some further downward movement as all long-term simple moving averages (SMA) of this fund are placed above the short-term SMAs.

As of 22nd April, 2022, the 200 day SMA (21.2), 100 day SMA (20.93), and 50 day SMA (20.62) and 10 day SMA (20.4) indicates a short term bearish rally for this ETF. Only over the past 12 months, it has been able to record a positive growth, but that too is a marginal 2 percent. In a nutshell, KKR Real Estate Finance Trust Inc. is not meant for growth seeking investors.

KKR Real Estate Finance Trust Inc. has a very low market capitalization of $1.23 billion. Total Debt is around $5.3 billion, which is 80 percent of total capital. Price/Cash flow of 10.8 though looks a bit attractive, as compared to sector median price/cash flow of 8.32. However, Price/Book and Price/Sales of this REIT is quite low.

A Price/Book value of 1.05 and Price/Sales of 6.26 suggest that investors are not optimistic about KKR Real Estate Finance Trust Inc. utilizing its assets to generate sufficient cash flow and its sales to generate sufficient cash earnings in the future. In general, there could have been a possibility of such expected lower cash flow impacting the dividend distribution in the future. However, KKR doesn’t have that possibility either, as it pays dividends out of interest on senior notes, which again is protected from interest rate risk.

Having said this, I must acknowledge that the overall historical total return can’t be considered discouraging, during the period in which it paid dividends. During the past five years, its average price loss has been very minimal at 1.7 percent CAGR, while it has recorded an average yield of around 8 percent. Six percent plus return over the long term is quite acceptable for the income seeking investors.

Moreover, these investors don’t need to sell this stock in a hurry, as the price is quite static in the range of $20 to $22. Looking from a long term view point, I’d like to hold this mortgage REIT and enjoy the 8 percent plus dividend yield, and liquidate the stock only in case of significant capital appreciation. It sounds more like a good rental real estate property where I can enjoy the rentals and wait for an opportune moment for selling it.

However, it’ll be wise to cover my exposure by buying a put option of longer duration, if available at a low premium. As I expect KREF’s price to range between $20 and $22, buying a put option at $20 will protect my investments from unforeseen price loss. October 21 (6 months forward) put options with an exercise price of $20 was last traded at a premium of $1.15. I’d prefer to buy the put option near such a premium in order to minimize my loss, which will be within 7 percent of the current market price.

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