If nothing else, KKR Real Estate Finance Trust (NYSE: KREF) is consistent. A specialist in originating senior loans secured by commercial real estate assets, KREF has paid $0.43 a share in dividends every quarter since the second quarter of 2018, and its income performance held up well through the tumultuous first six months of this year.
KREF’s current yield of 9.32% is based on a stock price of $18.45 as of Sept. 9, well down from a 52-week high of $22.03 but well off its 52-week low of $6.84 as the pandemic hit the market hard this spring. The company had been trading in a fairly tight range of about $18 to $21 per share since it went public in May 2017 at $20.50 a share.
Investing in CRE assets with strong fundamentals
Founded on Oct. 2, 2014, this real estate investment trust (REIT) is externally managed by KKR Real Estate, which provides equity and debt capital as a subsidiary of KKR & Co. (NYSE: KKR), a New York-based global investment firm that claims more than $200 million in assets under management.
KREF focuses on originating senior loans secured by commercial real estate assets. “Our investment strategy is to originate senior loans collateralized by institutional-quality commercial real estate assets that are owned and operated by experienced and well-capitalized sponsors and located in liquid markets with strong underlying fundamentals,” the REIT says.
It also invests in mezzanine loans, preferred equity, and other debt-oriented instruments. The overall emphasis is on capital preservation and dividend returns to shareholders.
Senior loans in a world of high-yield bonds
Here’s how KREF describes its $5.3 billion portfolio: “Purpose-built portfolio focused on senior loans on institutional real estate and sponsorship secured predominantly by lighter transitional, multifamily, and office properties.”
The average loan size is $134 million, and 99.5% of them are senior loans. Essentially, an investment in KREF is an investment in senior loans, which are “loans made by commercial investment banks to the same cohort of companies that issue high-yield bonds.”
That would imply a portfolio full of properties considered less than top investment grade, but a senior loan also means it’s first in line for payment and even the assets if the loan defaults.
And the REIT’s handling of that portfolio seems pretty solid.
Heavily invested in multifamily and office, and the interest payments kept flowing
In its second-quarter report, KREF says it collected 99.8% of its interest payments for that quarter itself and for July. That’s due in no small part to the fact that 81% of its investment portfolio are loans in the multifamily and office sectors, which have held up notably better than hospitality and retail, which comprise 8% of its investment.
The company also reported net income of $28.6 million, or $0.52 per share of common stock, in the second quarter after posting a net loss of $35.2 million, or $0.61 per share, in the first quarter of 2020. Second-quarter 2019 net income was $17.4 million.
A lot of that change is attributable to the company’s provision for possible future loan losses under the new Current Expected Credit Loss (CECL) standards, which accounted for $55.3 million, or $0.96 per share, in the first quarter. For the second quarter, the company added $0.02 per share as a CECL benefit.
KREF also has purchased about 2 million shares of its own stock at an average price of $12.27 so far this year and has $431.1 million in available liquidity.
An income play, which is a REIT’s typical calling card
With such a conservative portfolio in what can be a volatile financing setting, KREF looks like a potential buy if you believe that approach can fuel a slow but steady return to its typical stock price. And, primarily, this is an income play.
As the company says itself, “Our investment objective is capital preservation and the generation of attractive risk-adjusted returns for our stockholders over the long term, primarily through dividends.”
Its dividend performance since its creation in 2014 speaks to that, and that makes KREF a good candidate for a buy and hold at its current price.