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Is KKR Real Estate Finance Trust a Buy?

A diverse, high-performance portfolio now yielding around 9% says yes.

Apr 12, 2021 by Marc Rapport
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KKR Real Estate Finance Trust (NYSE: KREF) is a real estate investment trust (REIT) that specializes in acquiring and originating senior loans secured by well-capitalized commercial real estate properties (CRE) in liquid markets with strong underlying fundamentals.

Along with those kinds of properties, the REIT uses mezzanine loans, preferred equity, and other debt-oriented instruments, with the goal of providing investors in this real estate stock with what it calls attractive risk-adjusted returns and capital preservation.

The New York-based REIT has about $16 billion of assets under management (AUM) and is managed as part of the global real estate group of KKR & Co. (NYSE: KKR), a global investment giant with more than $252 billion in AUM.

Public since 2017, with an aggressive growth strategy

KREF has only been public since mid-2017 and just wrapped up a good year. “KREF achieved record distributable earnings for the year, bolstered by another strong performance in the fourth quarter,” CEO Matt Salem said in the company’s fourth-quarter 2020 and year-end report.

Salem added: "The fourth quarter also marked our return to offense, with $565 million of new originations and a continued focus on institutional real estate owned by high-quality sponsors. KREF remains well-positioned for the year ahead, supported by a conservative portfolio and robust pipeline.”

KREF also plans to continue its acquisitive ways, announcing on April 9 that it would use the net proceeds of $150 million in the sale of 6 million shares of a new issue of 6.50% redeemable preferred stock to “acquire its target assets in a manner consistent with its investment strategies and investment guidelines and for general corporate purposes.”

The vast majority of KREF’s portfolio -- fully 98.5% -- is in senior loans, with the rest in mezzanine lending. Half of the portfolio is in multifamily loans, with office space accounting for 31%, and the rest split among condo, retail, hospitality, industrial, and student housing loans. Nine states account for 82% of the portfolio, from New York at 14% to Florida and Texas at 6% each.

The Millionacres bottom line

KREF stock closed on April 9 at $19 a share, just 2.26% off its 52-week high of $19.44 reached on March 17. That was good for a yield of 9.05% based on an annual dividend payout of $1.72 per share, including $0.43 per share declared on March 15.

That payout was the 12th straight at that amount, dating back to June 2018, when it was the REIT’s fourth quarterly payout after its IPO. That payout also is coming from a portfolio that, in the fourth quarter, collected 99.4% of its interest payments for the year. A high-yielding, diverse portfolio managed by an affiliate as one of the world’s best-known asset managers makes KREF, in my view, a compelling consideration for a buy, especially if you’re more interested in income than growth.

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Marc Rapport has no position in any of the stocks mentioned. The Motley Fool recommends KKR. The Motley Fool has a disclosure policy.