KKR REAL ESTATE FINANCE TRUST INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER~~JUNE 30, ~~2019~~2020

INDEX



	PAGE
Part I - Financial Information		15
Item 1. Condensed Consolidated Financial Statements (Unaudited)		15
Condensed Consolidated Balance Sheets (Unaudited) as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019		15
Condensed Consolidated Statements of Income (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019		26
Condensed Consolidated Statements of Changes in Equity (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019		37
Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019		59
Notes to Condensed Consolidated Financial Statements (Unaudited)		610
Item 2. ~~Management’s~~Management's Discussion and Analysis of Financial Condition and Results of Operations		4046
Item 3. Quantitative and Qualitative Disclosures about Market Risk		6171
Item 4. Controls and Procedures		6373
Part II —- Other Information		6474
Item 1. Legal Proceedings		6474
Item 1A. Risk Factors		6474
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		6576
Item 3. Defaults Upon Senior Securities		6576
Item 4. Mine Safety Disclosures		6576
Item 5. Other Information		6576
Item 6. Exhibits		6675
Signatures		6776

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as "outlook," "believe," "expect," "potential," "continue," "may," "should," "seek," "approximately," "predict," "intend," "will," "plan," "estimate," "anticipate," the negative version of these words, other comparable words or other statements that do not relate strictly to historical or factual matters. By their nature, forward-looking statements speak only as of the date they are made, are not statements of historical fact or guarantees of future performance and are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or ~~quantify.~~quantify, in particular due to the uncertainties created by the COVID-19 pandemic, including the projected impact of COVID-19 on our business, financial performance and operating results. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018~~2019 (the "Form 10-K"). , and in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. Such risks and uncertainties include, but are not limited to, the following:

•the severity and duration of the COVID-19 pandemic;

•potential risks and uncertainties relating to the ultimate geographic spread of COVID-19;

•actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact;

•the potential negative impacts of COVID-19 on the global economy and the impacts of COVID-19 on the Company’s financial condition and business operations;

•deterioration in the performance of the properties securing our investments that may cause deterioration in the performance of our investments and, potentially, principal losses to us;

•difficulty or delays in redeploying the proceeds from repayments of our existing investments;

•the general political, economic and competitive conditions in the United States and in any foreign jurisdictions in which we invest;

•the level and volatility of prevailing interest rates and credit spreads;

•adverse changes in the real estate and real estate capital markets;

•general volatility of the securities markets in which we participate;

•changes in our business, investment strategies or target assets;

•difficulty in obtaining financing or raising capital;

•adverse legislative or regulatory developments;

��reductions in the yield on our investments and increases in the cost of our financing;

•acts of God such as hurricanes, earthquakes and other natural disasters, pandemics such as COVID-19, acts of war and/or terrorism and other events that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments;

~~deterioration in the performance of properties securing our investments that may cause deterioration in the performance of our investments and, potentially, principal losses to us;~~

•defaults by borrowers in paying debt service on outstanding indebtedness;

•the adequacy of collateral securing our investments and declines in the fair value of our investments;

•adverse developments in the availability of desirable investment opportunities whether they are due to competition, regulation or otherwise;

•difficulty in successfully managing our growth, including integrating new assets into our existing systems;

•the cost of operating our platform, including, but not limited to, the cost of operating a real estate investment platform and the cost of operating as a publicly traded company;

•the availability of qualified personnel and our relationship with our Manager;

•subsidiaries of KKR & Co. Inc. control us and KKR's interests may conflict with those of our stockholders in the future;

•our qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes and our exclusion from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"); and

•authoritative accounting principles generally accepted in the United States of America ("GAAP") or policy changes from such standard-setting bodies such as the Financial Accounting Standards Board (the "FASB"), the Securities and Exchange Commission (the "SEC"), the Internal Revenue Service, the New York Stock Exchange and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors set forth under Part I, Item 1A. "Risk Factors" in the Form 10-K, ~~and~~ Part ~~II,~~I, Item 7.2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A. "Risk Factors" in this Form 10-Q, as such factors may be updated from time to time in our other periodic filings with the SEC, which are accessible on the SEC's website at www.sec.gov and on the investor relations section of our website at www.kkrreit.com. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q and in other filings we make with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

Except where the context requires otherwise, the terms "Company," "we," "us," "our" and "KREF" refer to KKR Real Estate Finance Trust Inc., a Maryland corporation, and its subsidiaries; "Manager" refers to KKR Real Estate Finance Manager LLC, a Delaware limited liability company, our external manager; and "KKR" refers to KKR & Co. Inc., a Delaware corporation, and its subsidiaries.

PART I — FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(Amounts in thousands, except share and per share data)

September 30, 2019
December 31, 2018^(A)
Assets
Cash and cash equivalents $ 74,517
$ 86,531
Commercial mortgage loans, held-for-investment, net 5,077,038
4,001,820
Equity method investments, at fair value 37,230
30,734
Accrued interest receivable 17,929
16,178
Other assets 4,720
3,596
Commercial mortgage loans held in variable interest entities, at fair value —
1,092,986
Total Assets $ 5,211,434
$ 5,231,845

Liabilities and Equity

Liabilities
Secured financing agreements, net $ 3,038,591
$ 1,951,049
Collateralized loan obligation, net 802,692
800,346
Convertible notes, net 138,725
137,688
Loan participations sold, net 65,000
85,465
Accounts payable, accrued expenses and other liabilities 3,241
4,529
Dividends payable 24,972
25,097
Accrued interest payable 9,447
7,516
Due to affiliates 4,695
4,712
Variable interest entity liabilities, at fair value —
1,080,255
Total Liabilities 4,087,363
4,096,657

Commitments and Contingencies (Note 11)

Temporary Equity
Redeemable preferred stock 2,102
2,846

Permanent Equity
Preferred stock, 50,000,000 authorized (1 share with par value of $0.01 issued and outstanding as of September 30, 2019 and December 31, 2018) —
—
Common stock, 300,000,000 authorized (57,423,911 and 57,596,217 shares with par value of $0.01 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively) 574
576
Additional paid-in capital 1,166,016
1,163,845
Accumulated deficit (8,663 ) (225 )
Repurchased stock, 1,862,689 and 1,649,880 shares repurchased as of September 30, 2019 and December 31, 2018, respectively (35,958 ) (31,854 )
Total KKR Real Estate Finance Trust Inc. stockholders’ equity 1,121,969
1,132,342
Total Permanent Equity 1,121,969
1,132,342
Total Liabilities and Equity $ 5,211,434
$ 5,231,845


	June 30, 2020		December 31, 2019
Assets
Cash and cash equivalents^(A)	$	127,250	$	67,619
Commercial mortgage loans, held-for-investment	5,113,531		4,931,042
Less: Allowance for credit losses	(62,399)		—
Commercial mortgage loans, held-for-investment, net	5,051,132		4,931,042
Equity method investments	33,606		37,469
Accrued interest receivable	16,860		16,305
Other assets	6,759		4,583

Total Assets	$	5,235,607	$	5,057,018

Liabilities and Equity
Liabilities
Secured financing agreements, net	$	3,152,652	$	2,884,887
Collateralized loan obligation, net	806,645		803,376
Convertible notes, net	139,766		139,075
Loan participations sold, net	64,978		64,966
Dividends payable	24,097		25,036
Accrued interest payable	4,275		6,686

Accounts payable, accrued expenses and other liabilities^(B)	5,763		3,363
Due to affiliates	4,928		5,917
Total Liabilities	4,203,104		3,933,306

Commitments and Contingencies (Note 11)

Temporary Equity
Redeemable preferred stock	2,275		1,694

Permanent Equity
Preferred stock, 50,000,000 authorized 1 share with par value of $0.01 issued and outstanding as of June 30, 2020 and December 31, 2019)	—		—
Common stock, 300,000,000 authorized (55,491,405 and 57,486,583 shares with par value of $0.01 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively)	555		575
Additional paid-in capital	1,168,720		1,165,995
Accumulated deficit	(78,048)		(8,594)
Repurchased stock, 3,900,326 and 1,862,689 shares repurchased as of June 30, 2020 and December 31, 2019, respectively	(60,999)		(35,958)
Total KKR Real Estate Finance Trust Inc. stockholders’ equity	1,030,228		1,122,018
Total Permanent Equity	1,030,228		1,122,018
Total Liabilities and Equity	$	5,235,607	$	5,057,018

(A) ~~Derived from the audited consolidated financial statements~~Includes $8.0 million held in collateralized loan obligation as of June 30, 2020 (See Note 5).

(B) Includes $1.9 million and $0.0 million of reserve for unfunded loan commitments at June 30, 2020 and December 31, ~~2018.~~2019, respectively.

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(Amounts in thousands, except share and per share data)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Net Interest Income
Interest income	$	67,219	$	62,944	$	138,298	$	127,695
Interest expense	30,563		37,089		69,645		71,931
Total net interest income	36,656		25,855		68,653		55,764
Other Income

Income (loss) from equity method investments	297		868		(1,604)		1,993
Change in net assets related to CMBS consolidated variable interest entities	—		(1,551)		—		(1,209)
Other income	196		671		556		1,153
Total other income (loss)	493		(12)		(1,048)		1,937

Operating Expenses
General and administrative	4,046		2,781		7,813		5,142
Provision for credit losses, net	(1,366)		—		53,908		—
Management fees to affiliate	4,218		4,288		8,517		8,575
Incentive compensation to affiliate	1,249		1,145		2,855		2,098
Total operating expenses	8,147		8,214		73,093		15,815

Income (Loss) Before Income Taxes, Preferred Dividends and Redemption Value Adjustment	29,002		17,629		(5,488)		41,886
Income tax expense	77		280		159		289
Net Income (Loss)	28,925		17,349		(5,647)		41,597



Preferred Stock Dividends and Redemption Value Adjustment	335		(32)		927		(489)
Net Income (Loss) Attributable to Common Stockholders	$	28,590	$	17,381	$	(6,574)	$	42,086

Net Income (Loss) Per Share of Common Stock
Basic	$	0.52	$	0.30	$	(0.12)	$	0.73
Diluted	$	0.52	$	0.30	$	(0.12)	$	0.73
Weighted Average Number of Shares of Common Stock Outstanding
Basic	55,491,937		57,412,522		56,419,332		57,400,023
Diluted	55,504,077		57,507,219		56,419,332		57,492,296

Dividends Declared per Share of Common Stock	$	0.43	$	0.43	$	0.86	$	0.86

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Net Interest Income
Interest income $ 74,223
$ 51,895
$ 201,918
$ 123,952
Interest expense 45,596
23,337
117,527
52,825
Total net interest income 28,627
28,558
84,391
71,127
Other Income
(Loss) gain on sale of investments (429 ) —
(2,759 ) 13,000
Change in net assets related to CMBS consolidated variable interest entities 544
379
1,665
2,460
Income from equity method investments 1,321
747
3,314
2,084
Other income 853
476
2,006
1,239
Total other income (loss) 2,289
1,602
4,226
18,783

Operating Expenses
General and administrative 2,704
1,653
7,846
6,002
Management fees to affiliate 4,280
4,164
12,855
12,016
Incentive compensation to affiliate —
3,286
2,098
3,286
Total operating expenses 6,984
9,103
22,799
21,304

Income (Loss) Before Income Taxes, Noncontrolling Interests and Preferred Dividends 23,932
21,057
65,818
68,606
Income tax expense (benefit) 77
85
366
227
Net Income (Loss) 23,855
20,972
65,452
68,379
Redeemable Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture —
—
—
63
Net Income (Loss) Attributable to KKR Real Estate Finance Trust Inc. and Subsidiaries 23,855
20,972
65,452
68,316
Preferred Stock Dividends and Redemption Value Adjustment 238
151
(251 ) 395
Net Income (Loss) Attributable to Common Stockholders $ 23,617
$ 20,821
$ 65,703
$ 67,921

Net Income (Loss) Per Share of Common Stock
Basic $ 0.41
$ 0.37
$ 1.14
$ 1.26
Diluted $ 0.41
$ 0.37
$ 1.14
$ 1.25
Weighted Average Number of Shares of Common Stock Outstanding
Basic 57,420,140
55,903,126
57,406,802
54,111,272
Diluted 57,549,066
55,921,655
57,511,292
54,132,331

Dividends Declared per Share of Common Stock $ 0.43
$ 0.43
$ 1.29
$ 1.26

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (Unaudited)

(Amounts in thousands, except share data)


	Permanent Equity																Temporary Equity
	KKR Real Estate Finance Trust Inc.
	Preferred Stock				Common Stock
	Shares	Stated Value		Shares	Par Value		Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Repurchased Stock		Total KKR Real Estate Finance Trust Inc. Stockholders' Equity		Redeemable Preferred Stock
Balance at December 31, 2019	1	$	—	57,486,583	$	575	$	1,165,995	$	(8,594)	$	(35,958)	$	1,122,018	$	1,694
Repurchase of common stock	—	—		(1,648,551)	—		—		—		(19,244)		(19,244)		—
Preferred dividends declared, per share	—	—		—	—		—		—		—		—		(178)
Common dividends declared, $0.43 per share	—	—		—	—		—		(24,010)		—		(24,010)		—
Adjustment of redeemable preferred stock to redemption value	—	—		—	—		—		(414)		—		(414)		414
Stock-based compensation	—	—		—	—		1,607		—		—		1,607		—
Cumulative-effect adjustment upon adoption of ASU 2016-13 (Note 2)	—	—		—	—		—		(15,009)		—		(15,009)		—
Net income (loss)	—	—		—	—		—		(34,750)		—		(34,750)		178
Balance at March 31, 2020	1	$	—	55,838,032	$	575	$	1,167,602	$	(82,777)	$	(55,202)	$	1,030,198	$	2,108

Repurchase of common stock	—	—		(389,086)	(20)		—		—		(5,797)		(5,817)		—

Preferred dividends declared, per share	—	—		—	—		—		—		—		—		(168)
Adjustment of redeemable preferred stock to redemption value	—	—		—	—		—		(167)		—		(167)		167
Common dividends declared,$0.43 per share	—	—		—	—		—		(23,861)		—		(23,861)		—

Stock-based compensation	—	—		42,459	*		1,118		—		—		1,118		—
Net income (loss)	—	—		—	—		—		28,757		—		28,757		168
Balance at June 30, 2020	1	$	—	55,491,405	$	555	$	1,168,720	$	(78,048)	$	(60,999)	$	1,030,228	$	2,275

Permanent Equity Temporary Equity
KKR Real Estate Finance Trust Inc.
Preferred Stock Common Stock
Shares Stated Value Shares Par Value Additional Paid-In Capital
Retained Earnings
(Accumulated Deficit) Repurchased Stock Total KKR Real Estate Finance Trust Inc. Stockholders' Equity Redeemable Noncontrolling Interests in Equity of Consolidated Joint Venture Redeemable Preferred Stock
Balance at December 31, 2018 1
$ —
57,596,217
$ 576
$ 1,163,845
$ (225 ) $ (31,854 ) $ 1,132,342
$ —
$ 2,846
Repurchase of common stock —
—
(212,809 ) (2 ) —
—
(4,104 ) (4,106 ) —
—
Offering costs —
—
—
—
(518 ) —
—
(518 ) —
—
Preferred dividends declared, per share —
—
—
—
—
—
—
—
—
(161 )
Common dividends declared, $0.43 per share —
—
—
—
—
(24,761 ) —
(24,761 ) —
—
Adjustment of redeemable preferred stock to redemption value —
—
—
—
—
618
—
618
—
(618 )
Stock-based compensation —
—
—
—
991
—
—
991
—
—
Net income (loss) —
—
—
—
—
24,087
—
24,087
—
161
Balance at March 31, 2019 1
$ —
57,383,408
$ 574
$ 1,164,318
$ (281 ) $ (35,958 ) $ 1,128,653
$ —
$ 2,228
Preferred dividends declared, per share —
—
—
—
—
—
—
—
—
(165 )
Common dividends declared, $0.43 per share —
—
—
—
—
(24,688 ) —
(24,688 ) —
—
Adjustment of redeemable preferred stock to redemption value —
—
—
—
—
197
—
197
—
(197 )
Stock-based compensation —
—
29,661
*
658
—
—
658
—
—
Net income (loss) —
—
—
—
—
17,184
—
17,184
—
165
Balance at June 30, 2019 1
$ —
57,413,069
$ 574
$ 1,164,976
$ (7,588 ) $ (35,958 ) $ 1,122,004
$ —
$ 2,031
Preferred dividends declared, per share —
—
—
—
—
—
—
—
—
(167 )
Common dividends declared, $0.43 per share —
—
—
—
—
(24,692 ) —
(24,692 ) —
—
Adjustment of redeemable preferred stock to redemption value —
—
—
—
—
(71 ) —
(71 ) —
71
Stock-based compensation —
—
10,842
*
1,040
—
—
1,040
—
—
Net income (loss) —
—
—
—
—
23,688
—
23,688
—
167
Balance at September 30, 2019 1
$ —
57,423,911
$ 574
$ 1,166,016
$ (8,663 ) $ (35,958 ) $ 1,121,969
$ —
$ 2,102

* Rounds to ~~zero~~zero.

Table of Contents


	Permanent Equity																Temporary Equity
	KKR Real Estate Finance Trust Inc.
	Preferred Stock				Common Stock
	Shares	Stated Value		Shares	Par Value		Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Repurchased Stock		Total KKR Real Estate Finance Trust Inc. Stockholders' Equity		Redeemable Preferred Stock
Balance at December 31, 2018	1	$	—	57,596,217	$	576	$	1,163,845	$	(225)	$	(31,854)	$	1,132,342	$	2,846
Repurchase of common stock	—	—		(212,809)	(2)		—		—		(4,104)		(4,106)		—
Offering costs	—	—		—	—		(518)		—		—		(518)		—
Preferred dividends declared, per share	—	—		—	—		—		—		—		—		(161)
Common dividends declared, $0.43 per share	—	—		—	—		—		(24,761)		—		(24,761)		—
Adjustment of redeemable preferred stock to redemption value	—	—		—	—		—		618		—		618		(618)
Stock-based compensation	—	—		—	—		991		—		—		991		—
Net income (loss)	—	—		—	—		—		24,087		—		24,087		161
Balance at March 31, 2019	1	$	—	57,383,408	$	574	$	1,164,318	$	(281)	$	(35,958)	$	1,128,653	$	2,228
Preferred dividends declared, per share	—	—		—	—		—		—		—		—		(165)
Common dividends declared, $0.43 per share	—	—		—	—		—		(24,688)		—		(24,688)		—
Adjustment of redeemable preferred stock to redemption value	—	—		—	—		—		197		—		197		(197)
Stock-based compensation	—	—		29.661	*		658		—		—		658		—
Net income (loss)	—	—		—	—		—		17,184		—		17,184		165
Balance at June 30, 2019	1	$	—	57,413,069	$	574	$	1,164,976	$	(7,588)	$	(35,958)	$	1,122,004	$	2,031

* Rounds to zero.

See Notes to Condensed Consolidated Financial Statements.

Table of Contents

KKR Real Estate Finance Trust Inc. and Subsidiaries

~~Condensed Consolidated Statements of Changes in Equity (Unaudited)~~

~~(Amounts in thousands, except share data)~~

Permanent Equity Temporary Equity
KKR Real Estate Finance Trust Inc.
Preferred Stock Common Stock
Shares Stated Value Shares Par Value Additional Paid-In Capital
Retained Earnings
(Accumulated Deficit) Repurchased Stock Total KKR Real Estate Finance Trust Inc. Stockholders' Equity Redeemable Noncontrolling Interests in Equity of Consolidated Joint Venture Redeemable Preferred Stock
Balance at December 31, 2017 1
$ —
53,685,440
$ 537
$ 1,052,851
$ 6,280
$ (523 ) $ 1,059,145
$ 3,090
$ 949
Repurchase of common stock —
—
(609,865 ) (6 ) —
—
(11,912 ) (11,918 ) —
—
Preferred dividends declared, per share —
—
—
—
—
—
—
—
—
(111 )
Common dividends declared, $0.40 per share —
—
—
—
—
(21,230 ) —
(21,230 ) —
—
Capital distributions —
—
—
—
—
—
—
—
(1,795 ) —
Stock-based compensation —
—
—
—
1,018
—
—
1,018
—
—
Net income (loss) —
—
—
—
—
23,280
—
23,280
34
111
Balance at March 31, 2018 1
$ —
53,075,575
$ 531
$ 1,053,869
$ 8,330
$ (12,435 ) $ 1,050,295
$ 1,329
$ 949
Repurchase of common stock —
—
(77,944 ) (1 ) —
—
(1,536 ) (1,537 ) —
—
Equity component of convertible notes —
—
—
—
1,800
—
—
1,800
—
—
Preferred dividends declared, per share —
—
—
—
—
—
—
—
—
(133 )
Common dividends declared, $0.43 per share —
—
—
—
—
(22,804 ) —
(22,804 ) —
—
Adjustment of redeemable preferred stock to redemption value —
—
—
—
—
(337 ) —
(337 ) —
337
Capital distributions and redemptions —
—
—
—
—
—
—
—
(1,358 ) —
Stock-based compensation —
—
34,259
*
(127 ) —
—
(127 ) —
—
Net income (loss) —
—
—
—
—
23,820
—
23,820
29
133
Balance at June 30, 2018 1
$ —
53,031,890
$ 530
$ 1,055,542
$ 9,009
$ (13,971 ) $ 1,051,110
$ —
$ 1,286
Issuance of stock —
—
5,000,000
50
99,450
—
—
99,500
—
—
Repurchase of common stock —
—
(9,300 ) —
—
—
(184 ) (184 ) —
—
Offering cost —
—
—
—
(1,174 ) —
—
(1,174 ) —
—
Preferred dividends declared, per share —
—
—
—
—
—
—
—
—
(151 )
Adjustment of redeemable preferred stock to redemption value —
—
—
—
—
884
—
884
—
(884 )
Common dividends declared, $0.43 per share —
—
—
—
—
(24,951 ) —
(24,951 ) —
—
Stock-based compensation —
—
—
—
295
—
—
295
—
—
Net income (loss) —
—
—
—
—
20,821
—
20,821
—
151
Balance at September 30, 2018 1
$ —
58,022,590
$ 580
$ 1,154,113
$ 5,763
$ (14,155 ) $ 1,146,301
$ —
$ 402

* Rounds to zero.

~~See Notes to Condensed Consolidated Financial Statements.~~

~~KKR Real Estate Finance Trust Inc. and Subsidiaries~~

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)


	For the Six Months Ended June 30,
	2020		2019
Cash Flows From Operating Activities
Net income (loss)	$	(5,647)	$	41,597
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred debt issuance costs and discounts	10,779		8,496
Accretion of net deferred loan fees and discounts	(8,423)		(10,545)
Payment-in-kind interest	(926)		—
Change in non-cash net assets of consolidated variable interest entities	—		2,330


(Income) Loss from equity method investments	3,362		(587)
Provision for credit losses, net	53,908		—
Stock-based compensation expense	2,981		2,034


Changes in operating assets and liabilities:
Accrued interest receivable, net	(555)		(127)
Other assets	(1,541)		(1,135)
Accrued interest payable	(2,410)		(1,689)
Accounts payable, accrued expenses and other liabilities	1,462		(199)
Due to affiliates	52		6
Net cash provided by (used in) operating activities	53,042		40,181

Cash Flows From Investing Activities


Proceeds from sale/syndication and principal repayments of commercial mortgage loans, held-for-investment	233,972		968,118

Origination of commercial mortgage loans, held-for-investment	(411,762)		(1,784,773)
Investment in commercial mortgage-backed securities, equity method investee	—		(6,245)





Net cash provided by (used in) investing activities	(177,790)		(822,900)

Cash Flows From Financing Activities
Proceeds from borrowings under secured financing agreements	900,560		2,299,598







Payments of common stock dividends	(48,729)		(49,574)
Payments of preferred stock dividends	(429)		(384)
Principal repayments on borrowings under secured financing agreements	(636,735)		(1,359,260)
Payments of debt and collateralized debt obligation issuance costs	(3,774)		(6,168)
Payments of stock issuance costs	(157)		(801)




Payments to reacquire common stock	(25,061)		(4,106)
Tax withholding on stock-based compensation	(1,296)		(385)
Net cash provided by (used in) financing activities	184,379		878,920

Net Increase (Decrease) in Cash, Cash Equivalents	59,631		96,201
Cash, Cash Equivalents at Beginning of Period	67,619		86,531
Cash, Cash Equivalents at End of Period	$	127,250	$	182,732

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	61,785	$	67,459
Cash paid during the period for income taxes	—		336

Supplemental Schedule of Non-Cash Investing and Financing Activities
Loan principal payments held by servicer	$	—	$	7,927
Dividend declared, not yet paid	24,097		24,915
Deferred financing costs, not yet paid	71		—
Deferred issuance costs, not yet paid	101		—
Loan participations sold, net	—		(86,678)
Repayment of commercial loans, held for investment	—		86,678
Loan participations sold, net	—		65,798
Funding of commercial loans, held for investment	—		(65,798)

For the Nine Months Ended September 30,
2019 2018
Cash Flows From Operating Activities
Net income (loss) $ 65,452
$ 68,379
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred debt issuance costs and discounts 12,475
4,338
Accretion of net deferred loan fees and discounts (14,655 ) (7,206 )
Change in non-cash net assets of consolidated variable interest entities —
2,144
Loss (Gain) on sale of investment securities 2,759
(13,000 )
(Income) from equity method investments (989 ) (2,084 )
Stock-based compensation expense 3,075
1,190
Changes in operating assets and liabilities:
Accrued interest receivable, net (1,563 ) (3,130 )
Other assets 233
(580 )
Due to affiliates (17 ) 1,758
Accounts payable, accrued expenses and other liabilities (456 ) 867
Accrued interest payable 1,931
4,753
Net cash provided by (used in) operating activities 68,245
57,429

Cash Flows From Investing Activities
Proceeds from sales of commercial mortgage-backed securities 9,784
112,747
Proceeds from sale/syndication and principal repayments of commercial mortgage loans, held-for-investment 1,169,515
318,996
Origination of commercial mortgage loans, held-for-investment (2,250,958 ) (1,695,188 )
Investment in commercial mortgage-backed securities, equity method investee (6,245 ) (9,770 )
Proceeds from commercial mortgage-backed securities, equity method investee —
1,157
Net cash provided by (used in) investing activities (1,077,904 ) (1,272,058 )

Cash Flows From Financing Activities
Proceeds from borrowings under secured financing agreements 2,745,759
1,607,725
Net proceeds from issuance of convertible notes —
139,438
Proceeds from issuances of common stock —
99,500
Payments of common stock dividends (74,261 ) (63,898 )
Payments of preferred stock dividends (499 ) (227 )
Principal repayments on borrowings under secured financing agreements (1,660,814 ) (451,026 )
Payments of debt and collateralized debt obligation issuance costs (6,911 ) (9,702 )
Payments of stock issuance costs (1,138 ) (1,137 )
Payments of redeemable noncontrolling interest distributions and redemptions —
(3,153 )
Payments to reacquire common stock (4,106 ) (13,640 )
Tax withholding on stock-based compensation (385 ) —
Net cash provided by (used in) financing activities 997,645
1,303,880

Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash (12,014 ) 89,251
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period 86,531
103,520
Cash, Cash Equivalents, and Restricted Cash at End of Period $ 74,517
$ 192,771

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest $ 106,000
$ 41,161
Cash paid during the period for income taxes 364
754

Supplemental Schedule of Non-Cash Investing and Financing Activities
Loan Principal Payments Held by Servicer $ —
$ 16,500
Dividend declared, not yet paid 24,972
25,235
Loan Participations Sold, Net (Note 7) 65,798
1,886
Funding of commercial loans, held for investment (65,798 ) (1,886 )
Loan Participations Sold, Net (Note 7) (86,678 ) —
Repayment of commercial loans, held for investment 86,678
—
Deconsolidation of variable interest entities (assets and liabilities) 1,047,346
—

See Notes to Condensed Consolidated Financial Statements.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 1. Business and Organization

KKR Real Estate Finance Trust Inc. (together with its consolidated subsidiaries, referred to throughout this report as the "Company", "KREF", "we", "us" and "our") is a Maryland corporation that was formed and commenced operations on October 2, 2014 as a mortgage ~~"real~~real estate investment ~~trust"~~trust ("REIT") that focuses primarily on originating and acquiring senior loans secured by commercial real estate ("CRE") assets.

KREF has elected and intends to maintain its qualification to be taxed as a REIT under the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), for U.S. federal income tax purposes. As such, KREF will generally not be subject to U.S. federal income tax on that portion of its income that it distributes to stockholders if it distributes at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. See Note 14 regarding taxes applicable to KREF.

KREF is externally managed by KKR Real Estate Finance Manager LLC ("Manager"), an indirect subsidiary of KKR & Co. Inc. (together with its subsidiaries, "KKR"), through a management agreement ("Management Agreement") pursuant to which the Manager provides a management team and other professionals who are responsible for implementing KREF’s business strategy, subject to the supervision of KREF’s board of directors. For its services, the Manager is entitled to management fees and incentive compensation, both defined in, and in accordance with the terms of, the Management Agreement (Note 12).

As of ~~September~~June 30, ~~2019,~~2020, KKR beneficially owned 22,008,616 shares of KREF's common stock, of which 2,008,616 ~~shares~~shares were held by KKR on behalf of a third-party investor.

~~As of September 30, 2019,~~ KREF's principal business activities are related to the origination and purchase of credit investments related to CRE. Management assesses the performance of KREF's current portfolio of leveraged and unleveraged commercial mortgage loans and commercial mortgage-backed securities ("CMBS") as a whole and makes operating decisions accordingly. As a result, management presents KREF's operations within a single reporting segment.

Note 2.2. Summary of Significant Accounting Policies

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements and related notes of KREF are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Accordingly, certain information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The condensed consolidated financial statements include the accounts of KREF and its consolidated subsidiaries, and all intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments considered necessary for a fair presentation of KREF’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with ~~KREF’s~~our Annual Report on Form ~~10-K~~10-K.

Risks and Uncertainties — The recent outbreak of the coronavirus pandemic (“COVID-19”) around the globe continues to adversely impact global commercial activity and has contributed to significant volatility in financial markets. The impact of the outbreak has been rapidly evolving around the globe, with several countries taking drastic me res to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. Such actions are creating significant disruptions to global supply chains, and adversely impacting several industries, including but not limited to, airlines, hospitality, retail and the broader real estate industry.

The major disruption caused by COVID-19 significantly reduced economic activity in most of the United States during the first half of 2020 resulting in a significant increase in unemployment claims and a significant decline in the U.S. Gross Domestic Product (“GDP”).

COVID-19 could have a continued and prolonged adverse impact on economic and market conditions and trigger a period of global economic slowdown which could have a material adverse effect on the Company’s results and financial condition.

The full impact of COVID-19 on the real estate industry, the credit markets and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to (i) the uncertainty around the severity and duration of the outbreak, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, (v) the timing and speed of economic recovery, including the availability of a treatment or vaccination for COVID-19 and (vi) the ~~fiscal year ended December 31, 2018 (the "Form 10-K").~~negative impact on our borrowers, real estate values and cost of capital.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management makes subjective estimates to project cash flows KREF expects to receive on its investments in loans and securities as well as the related market discount rates, which significantly impacts the interest income, impairments, allowance for loan loss and fair values recorded or disclosed. The effects of COVID-19 may negatively and materially impact significant estimates and assumptions used by the Company including, but not limited to estimates of expected credit losses, valuation of our equity method investments and the fair value estimates of the Company’s assets and liabilities. Actual results could materially differ from those estimates.

Consolidation — KREF consolidates those entities for which (i) it controls ~~significant operating, financial and investing decisions of the entity~~ through either majority ownership or voting rights

or (ii) management determines that KREF is the primary beneficiary of entities deemed to be variable interest entities ("VIEs").

Variable Interest Entities — VIEs are ~~defined as~~ entities (i) in which equity investors do not have an interest with the characteristics of a controlling financial interest, or(ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other ~~parties.~~parties or (iii) established with non-substantive voting rights. A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party that has the power to direct the activities of the VIE that most significantly impact ~~its~~the VIE's economic performance and that has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could be potentially significant to the VIE (Note 8).

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

To assess whether KREF has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, KREF considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power to direct those activities. To assess whether KREF has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE, KREF considers all of its economic interests and applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.

Collateralized Loan Obligation — KREF consolidates a collateralized loan obligation that closed in November 2018 (“KREF 2018-FL1” or “CLO”) (Note 5). Management determined that KREF 2018-FL1 Ltd. and KREF 2018-FL1 LLC (the "CLO Issuers"), wholly-owned subsidiaries of KREF, were VIEs and that KREF was the primary beneficiary. KREF is the primary beneficiary of the VIEs since it has the ability to control the most significant activities of the CLO Issuers through ownership of non-investment grade rated subordinated controlling tranches, has the obligation to absorb losses, and the right to receive benefits, that could potentially be significant to these entities. As a result, KREF consolidates the CLO Issuers.

The collateral assets of the CLO, comprised of a pool of loan participations (Note 5) are included in “Commercial mortgage loans, held-for-investment, net” on the accompanying Condensed Consolidated Balance Sheets. The liabilities of KREF's consolidated CLO Issuers consist solely of obligations to the senior CLO noteholders, excluding subordinated CLO tranches held by KREF as such interests are eliminated in consolidation, are presented in “Collateralized loan obligation, net” in the accompanying Condensed Consolidated Balance Sheets. The collateral assets of the CLO can only be used to settle the obligations of the consolidated CLO. The interest income from the CLO collateral assets and the interest expense on the CLO liabilities are presented on a gross basis in “Interest income” and “Interest expense”, respectively, in KREF's Condensed Consolidated Statements of Income.

CMBS — KREF consolidates those trusts that issue beneficial ownership interests in mortgage loans secured by CRE (commonly known as CMBS) when KREF holds a variable interest in, and management considers KREF to be the primary beneficiary of, those trusts. Management believes the performance of the assets that underlie CMBS issuances most significantly impacts the economic performance of the trust, and the primary beneficiary is generally the entity that conducts activities that most significantly impact the performance of the underlying assets. In particular, the most subordinate tranches of CMBS expose the holder to the greater variability of economic performance when compared to more senior tranches since the subordinate tranches absorb a disproportionately higher amount of the credit risk related to the underlying assets. Generally, a trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust. The special servicer is responsible for the servicing and administration of delinquent and nonperforming loans as well as real estate owned ("REO") properties held as collateral delivered on foreclosed loans. While the special servicer cannot prevent losses, its services to the trust are designed to mitigate credit losses to holders of the CMBS.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

For any CMBS trust that KREF consolidates, KREF holds an unrated tranche that represents the most subordinated tranche of the CMBS issued by that trust, which include the controlling class. As the holder of the most subordinate tranche, KREF is in a first loss position and has the right to receive benefits. As the holder of the controlling class, KREF has the ability to unilaterally appoint and remove the special servicer for the trust. In these cases, management considers KREF to be the primary beneficiary and consolidates that CMBS trust.

For VIEs in which management determines KREF is the primary beneficiary, all of the underlying assets, liabilities and equity of the trusts are recorded on KREF's books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these trusts is eliminated in consolidation.

Management elected the fair value option for KREF's initial and subsequent recognition of the assets and liabilities of KREF's consolidated CMBS VIEs in order to provide users of the financial statements with better information regarding the effects of credit risk and other market factors on the CMBS beneficially held by KREF's stockholders. Since the changes in fair value include the interest income and interest expense associated with these CMBS VIEs, management does not consider the separate presentation of the components of fair value changes to be relevant. Management has elected to present these items in aggregate as "~~Other~~"Other Income — Change in net assets related to CMBS consolidated variable interest entities" in the accompanying Condensed Consolidated Statements of Income; the residual difference between the fair value of the trust's assets and liabilities represents KREF's beneficial interest in the CMBS VIEs.

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

Management separately presents the assets and liabilities of KREF's consolidated VIEs as individual line items on KREF's Condensed Consolidated Balance Sheets for entities in which the VIEs assets can only be used to settle the VIE’s obligations. The liabilities of KREF's consolidated VIEs consist solely of obligations to the CMBS holders of the consolidated trust, excluding CMBS held by KREF as such interests are eliminated in consolidation, and the interest accrued thereon, presented as "Liabilities — Variable interest entity liabilities, at fair value." The assets of KREF's consolidated VIEs consist principally of commercial mortgage loans and the interest accrued thereon, and are likewise presented as a single line item entitled "Assets — Commercial mortgage loans held in variable interest entities, at fair value."

Assets of a CMBS trust, as a whole, can only be used to settle the obligations of the consolidated CMBS VIE. The assets of KREF's CMBS VIEs are not individually accessible by, and obligations of the CMBS VIEs are not recourse to, the bondholders.

KREF derives the fair value of its Level 3 CMBS VIE assets from its Level 3 CMBS VIE liabilities, which management considers to possess more observable market value data than the CMBS VIE assets. See "— Fair Value — Valuation of CMBS Consolidated VIEs" for additional discussion regarding management's valuation of consolidated CMBS VIEs. During the three months ended September 30, 2019, KREF sold the remaining directly held CMBS investments, including an unrated tranche that represented the most subordinated tranche of the CMBS issued by that trust, including the controlling class. Accordingly, KREF deconsolidated the respective CMBS trust ~~as of September 30, 2019~~ (Note 8).

~~Noncontrolling Interests~~— Noncontrolling interests represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than KREF. Those noncontrolling interests that allow the holder to redeem before liquidation or termination of the entity that issued those interests are considered redeemable noncontrolling interests.

The redeemable noncontrolling interests issued by subsidiaries of KREF are subject to certain restrictions and require KREF to transfer assets or issue equity to satisfy the redemption. As KREF does not control the circumstances under which the noncontrolling interests may redeem their interests, management considers these redeemable noncontrolling interests as temporary equity, presented as "~~Temporary Equity~~ ~~— Redeemable noncontrolling interests in equity of consolidated joint venture" in the accompanying Condensed Consolidated Balance Sheets and their share of "Net Income (Loss)" as "Redeemable Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture~~" in the Condensed Consolidated Statements of Income. KREF recorded the redeemable noncontrolling interests at fair value upon issuance by subsidiaries of KREF, and adjusts the carrying value of such interests to equal their respective redemption values at each subsequent reporting period date if KREF determines the noncontrolling interests are redeemable or probable to become redeemable.

Temporary Equity — ~~KREF determined that the~~KREF's Special Non-Voting Preferred Stock (“SNVPS”) became redeemable in the second quarter of 2018. As a result, starting with the second quarter of 2018, KREF adjusts the carrying value of the ~~SNVPS~~SNVPS to its redemption value quarterly. Accordingly, KREF adjusted the carrying value of the SNVPS to its redemption value of ~~$2.1~~$2.3 million as of ~~September~~June 30, ~~2019~~2020 and recorded a ~~$0.1~~$0.2 million and ~~($0.7)~~$0.6 million non-cash redemption value adjustment to the SNVPS (“SNVPS Redemption Value Adjustment”) during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively. Such adjustment is treated similar to a dividend on preferred ~~stock~~stock for GAAP purposes, accordingly, the SNVPS Redemption Value Adjustment is therefore deducted from (or added back to) “Net Income ~~(loss) Attributable to KKR Real Estate Finance Trust Inc. and Subsidiaries”~~(Loss)” to arrive at “Net Income (Loss) Attributable to Common Stockholders” on KREF's Condensed Consolidated Statements of Income.

Equity method investments ~~at fair value~~— Investments are accounted for under the equity method when KREF has significant influence over the operations of an investee, but KREF does not consolidate that investment. Equity method investments, for which management has not elected a fair value option, are initially recorded at cost and subsequently adjusted for KREF's share of net income or loss and cash contributions and distributions each period.

Management determined that KREF's investment in the Manager is an interest in a VIE, ashowever KREF ~~did~~is not the primary beneficiary. KREF does not have substantive participating or kick-out ~~rights. KREF does not have~~rights nor the power to direct activities and the obligation

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

to absorb losses of the Manager that could be significant to the Manager. KREF accounts for its investment in the Manager using the equity method ~~since KREF is not the primary beneficiary of the Manager~~ (Note 8).

Management determined that ~~its~~KREF's investment in an aggregator vehicle alongside KKR Real Estate Credit Opportunity Partners L.P. ("RECOP I ") is an interest in a VIE, however KREF is not the primary beneficiary and does not have substantive participating or kick-out rights. ~~Management elected the fair value option for KREF's investment in RECOP I.~~ KREF records its

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

share of net asset value in RECOP I asin “Equity method ~~investments, at fair value” in~~investments” on its Condensed Consolidated Balance Sheets and its share of unrealized gains or losses in "Income from equity method investments" in its Condensed Consolidated Statements of Income.

Management elected the fair value option for KREF's investment in RECOP I.

~~Use~~

KREF classifies distributions received from equity method investees using the cumulative earnings approach. Distributions received up to the cumulative earnings from each equity method investee are considered returns on investment and presented within “Cash Flows from Operating Activities” in the Condensed Consolidated Statements of ~~Estimates~~ ~~— The preparation~~Cash Flows; excess distributions received are considered returns of ~~condensed consolidated financial statements~~investment and presented within “Cash Flows from Investing Activities” in ~~conformity with GAAP requires management to make estimates and assumptions that affect~~ the ~~reported amounts~~Condensed Consolidated Statements of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management makes subjective estimates to project cash flows KREF expects to receive on its investments in loans and securities as well as the related market discount rates, which significantly impacts the interest income, impairments, allowance for loan loss and fair values recorded or disclosed. Actual results could differ from those estimates.Cash Flows.

Fair Value — GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.


~~Level 1~~	~~- Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.~~

Level 1 - Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.


~~Level 2~~	- Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

Level 2 - Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.


~~Level 3~~	~~- Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.~~

Level 3 - Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

KREF follows this hierarchy for its financial instruments. The classifications are based on the lowest level of input that is significant to the fair value measurement.

Estimates of fair value for cash and cash equivalents, restricted cash, and convertible notes are measured using observable, quoted market prices, or Level 1 inputs.

Valuation Process — The Manager reviews the valuation of Level 3 financial instruments as part of KKR's quarterly process. As of ~~September~~June 30, ~~2019,~~2020, KKR’s valuation process for Level 3 measurements, as described below, subjected valuations to the review and oversight of various committees. KKR has a global valuation committee assisted by the asset class-specific valuation committees, including a real estate valuation committee that reviews and approves all preliminary Level 3 valuations for real estate assets, including the financial instruments held by KREF. The global valuation committee is responsible for coordinating and implementing KKR’s valuation process to ensure consistency in the application of valuation principles across portfolio investments and between periods. All Level 3 valuations are also subject to approval by the global valuation committee.

Valuation of Commercial Mortgage Loans and Participation Sold — Management generally considers KREF's commercial mortgage loans Level 3 assets in the fair value hierarchy as such assets are illiquid, structured investments that are specific to the underlying property and its operating ~~performance.~~performance (Note 13). On a quarterly basis, management engages an independent valuation firm to estimate the fair value of each loan categorized as a Level 3 asset. Management reviews the quarterly loan valuation estimates provided by the independent valuation firm. These loans are generally valued using a discounted cash flow model using discount rates derived from observable market data applied to the capital structure of the respective sponsor and estimated property value. For commercial mortgage loans risk-rated 1-3, the loans are valued using a discounted cash flow model using discount rates derived from relevant market indices. For commercial mortgage loans risk-rated 4 or 5, the loans are valued using a discounted cash flow model using discount rates derived from relevant market indices and estimates of the underlying property's value to assess collateral coverage and recovery of principal and any accrued interest. In the event that management's estimate of fair value differs from the fair value estimate provided by the independent valuation firm, KREF ultimately relies solely upon the valuation prepared by the investment personnel of the Manager.

Valuation of CLO Consolidated VIEs — Management estimates the fair value of the CLO liabilities using prices obtained from an independent valuation firm. If prices received from the independent valuation firm are inconsistent with values determined in connection with management’s independent review, management makes inquiries to the independent valuation firm about the ~~prices received and related methods. In the event management determines the price obtained from an independent valuation~~

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

prices received and related methods. In the event management determines the price obtained from an independent valuation firm to be unreliable or an inaccurate representation of the fair value of the CLO liabilities (based on considerations given to observable market data), management then compiles evidence independently and presents the independent valuation firm with such evidence supporting a different value. As a result, the independent valuation firm may revise their price accordingly. However, if management continues to disagree with the price from the independent valuation firm, in light of evidence presented that management compiled independently and believes to be compelling, management considers the independent valuation firm's quotation unreliable or inaccurate representation of the fair value of the CLO liabilities.

In the event that the quotation from the independent valuation firm is not available or determined to be unreliable or an inadequate representation of the fair value of the CLO liabilities, valuations are prepared using inputs based on non-binding broker quotes obtained from independent, well-known, major financial brokers that are CLO market makers. In validating any non-binding broker quote used in this circumstance, management compares the non-binding quote to the observable market data points at such time and used to validate prices received from the independent valuation firm in addition to understanding the valuation methodologies used by the market makers. These market participants utilize a similar methodology as the independent valuation firm to value the CLO liabilities, with the key input of expected yield determined independently based on both observable and unobservable factors (as described above). To avoid reliance on any single broker-dealer, management receives a minimum of two non-binding quotes, of which the average is used.

Valuation of CMBS Consolidated VIEs — Management categorizes the financial assets and liabilities of the CMBS trusts that KREF consolidates as Level 3 assets and liabilities in the fair value hierarchy and has elected the fair value option for financial assets and liabilities of each CMBS trust. Management has adopted the measurement alternative included in Accounting Standards Update ("ASU") No. 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity ("ASU 2014-13"). Pursuant to ASU 2014-13, management measures both the financial assets and financial liabilities of the CMBS trusts consolidated by KREF using the fair value of the financial liabilities, which management considers more observable than the fair value of the financial assets. Accordingly, KREF presents the CMBS issued by a consolidated trust, but not beneficially owned by KREF's stockholders, as financial liabilities in KREF's condensed consolidated financial statements, measured at their estimated fair value; KREF measures the financial assets as the total estimated fair value of the CMBS issued by a consolidated trust, regardless of whether such CMBS represent interests beneficially owned by KREF's stockholders. Under the measurement alternative prescribed by ASU 2014-13, KREF's "~~Net~~"Net Income (Loss)" reflects the economic interests in the consolidated CMBS beneficially owned by KREF's stockholders, presented as "Change in net assets related to CMBS consolidated variable interest entities" in the Condensed Consolidated Statements of Income, which includes applicable (i) changes in the fair value of CMBS beneficially owned by KREF, (ii) interest and servicing fees earned from the CMBS trust and (iii) other residual returns or losses of the CMBS trust, if any (Note 8).

Other Valuation Matters — For Level 3 financial assets originated, or otherwise acquired, and financial liabilities assumed during the calendar month immediately preceding a quarter end that were conducted in an orderly transaction with an unrelated party, management generally believes that the transaction price provides the most observable indication of fair value given the illiquid nature of these financial instruments, unless management is aware of any circumstances that may cause a material change in the fair value through the remainder of the reporting period. For instance, significant changes to the underlying property or its planned operations may cause material changes in the fair value of commercial mortgage loans acquired, or originated, by KREF.

KREF’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management’s best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, management selects a value within the range provided by the independent valuation firm, generally the midpoint, to assess the reasonableness of management’s estimated fair value for that financial instrument.

See Note 13 for additional information regarding the valuation of KREF's financial assets and liabilities.

Sales of Financial Assets and Financing Agreements — KREF will, from time to time, ~~sell~~transfer loans, securities and other assets as well as finance assets in the form of secured borrowings. In each case, management evaluates whether the transaction constitutes a sale through legal isolation of the transferred financial asset from KREF, the ability of the transferee to pledge or exchange the transferred asset without constraint and the transfer of control of the transferred asset. For transfers that constitute sales, KREF (i) recognizes the financial assets it retains and liabilities it has incurred, if any, (ii) derecognizes the financial ~~assets it has sold, and derecognizes liabilities when extinguished and (iii) recognizes a realized gain, or loss, based upon the~~

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

assets it has sold, and derecognizes liabilities when extinguished and (iii) recognizes a realized gain, or loss, based upon the excess, or deficient, proceeds received over the carrying value of the transferred asset. KREF does not recognize a gain, or loss, on interests retained, if any, where management elected the fair value option prior to sale.

Balance Sheet Measurement

Cash and Cash Equivalents and Restricted Cash — KREF considers cash equivalents as highly liquid short-term investments with maturities of 90 days or less when purchased. Substantially all amounts on deposit with major financial institutions exceed insured limits.

KREF must also maintain sufficient cash and cash equivalents to satisfy liquidity covenants related to its secured financing agreements. However, such amounts are not restricted from use in KREF's current operations, and KREF does not present these cash and cash equivalents as restricted. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, KREF was required to maintain unrestricted cash and cash equivalents of at least ~~$39.2~~$36.3 million and ~~$15.2~~$33.4 million, respectively, to satisfy its liquidity covenants (Note 4).

Adoption of ASU No. 2016-13, Financial Instruments — Credit Losses — On January 1, 2020, KREF adopted ASU No. 2016-13, Financial Instruments-Credit Losses, and subsequent amendments (“ASU 2016-13”), which replaces the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. CECL amends the previous credit loss model to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, and off-balance sheet credit exposures such as unfunded loan commitments. The allowance for credit losses required under ASU 2016-13 is deducted from the respective loans’ amortized cost basis on our condensed consolidated balance sheets. The allowance for credit losses attributed to unfunded loan commitments is included in “Accounts payable, accrued expenses and other liabilities” in the condensed consolidated balance sheets. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

In connection with KREF’s adoption of ASU 2016-13 on January 1, 2020, KREF implemented new processes including the utilization of loan loss forecasting models, updates to KREF's reserve policy documentation, changes to internal reporting processes and related internal controls. KREF has implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for its commercial mortgage loan portfolio. The CECL forecasting methods used by KREF include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 2019 and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. KREF might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data.

KREF estimates the CECL expected credit losses for its loan portfolio, including unfunded loan commitments, at the individual loan level. Significant inputs to KREF’s forecasting methods include (i) key loan-specific inputs such as loan-to-value ("LTV"), vintage year, loan-term, underlying property type, occupancy, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and KREF's internal loan risk rating and (iii) a macro-economic forecast. These estimates may change in future periods based on available future macro-economic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio. KREF considers the individual loan internal risk rating as the primary credit quality indicator underlying the CECL assessment. In certain instances, KREF considers relevant loan-specific qualitative factors to certain loans to estimate its CECL expected credit losses.

KREF considers loan investments that are both (i) expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) for which the borrower is experiencing financial difficulty, to be “collateral-dependent” loans. For such loans that KREF determines that foreclosure of the collateral is probable, the Company measures the expected losses based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For collateral-dependent loans that KREF determines foreclosure is not probable, KREF applies a practical expedient to estimate expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Based on KREF's loan portfolio at January 1, 2020, the pre COVID-19 economic environment and the respective expectations for future economic conditions at the time, KREF recorded a cumulative-effect adjustment to KREF's accumulated deficit as of January 1, 2020 of $15.0 million, or $0.26 per common share, of which $1.1 million, or $0.02 per common share, is attributable to unfunded loan commitments.

The following table illustrates the day-one financial statements impact of the adoption of ASU 2016-13 on January 1, 2020:


	Pre-adoption		Transition Adjustment		Post-adoption
Assets
Commercial mortgage loans, held-for-investment	$	4,931,042	$	—	$	4,931,042
Less: Allowance for credit losses	—		(13,909)		(13,909)
Commercial mortgage loans, held-for-investment, net	$	4,931,042	$	(13,909)	$	4,917,133

Liabilities
Accounts payable, accrued expenses and other liabilities^(A)	$	3,363	$	1,100	$	4,463

Permanent Equity
Accumulated deficit	$	(8,594)	$	(15,009)	$	(23,603)

(A) Includes reserve for unfunded loan commitments.

Commercial Mortgage Loans ~~Held‑For‑Investment~~Held-For-Investment and ~~Provision~~Allowance for ~~Loan~~Credit Losses — KREF recognizes its investments in commercial mortgage loans based on management's intent, and KREF's ability, to hold those investments through their contractual maturity. Management classifies those loans that management does not intend to sell in the foreseeable future, and KREF is able to hold until maturity, as held-for-investment. Loans that are ~~held‑for‑investment~~held-for-investment are carried at their aggregate outstanding ~~face amount,~~principal, net of applicable (i) unamortized origination or acquisition premiums and discounts, (ii) unamortized deferred nonrefundable fees and other direct loan origination costs, and (iii) allowance for ~~loan~~credit losses, ~~and (iv) charge-offs or write-downs~~net of write-offs of impaired ~~loans.~~loans. If a loan is determined to be impaired, management writes down the loan through a charge to the ~~provision~~"Allowance for ~~loan losses.~~credit losses". See "—Expense Recognition — ~~Loan Impairment~~— Commercial Mortgage Loans, ~~Held-For-Investment~~"Held-For-Investment" for additional discussion regarding management’s determination for loan losses. KREF applies the interest method to amortize origination or acquisition premiums and discounts and deferred nonrefundable fees or other direct loan origination costs, or on a ~~straight line~~straight-line basis when it approximates the interest method. Loans for which management elects the fair value option at the time of origination, or acquisition, are carried at fair value on a recurring basis (Note 3).

Commercial Mortgage Loans ~~Held‑For‑Sale~~Held-For-Sale — Loans that KREF originates or acquires, which KREF is unable to hold, or management intends to sell or otherwise dispose of, in the foreseeable future are classified as ~~held‑for‑sale~~held-for-sale and are carried at the lower of amortized cost or fair value.

~~Commercial Mortgage-Backed and Commercial Real Estate Collateralized Loan Obligation Securities~~ — From time to time, KREF may acquire CMBS and CRE CLO securities primarily for cash management purposes, and also for investment purposes. The Company designates such CMBS and CRE CLO securities as available-for-sale on the acquisition date. Additionally, CMBS and CRE CLO securities that are not classified as held-to-maturity and which KREF does not hold for the purpose of selling in the near-term, but may dispose of prior to maturity, are also designated as available-for-sale and are carried at fair value. KREF’s recognition of interest income from its CMBS and CRE CLO securities, including its amortization of premium and discount, follows KREF’s revenue recognition policy as described under “Income Recognition” below. Available-for-sale securities are carried at fair value, with changes in fair value recognized in Other Comprehensive Income. KREF uses a specific identification method when determining the cost of a security sold and the amount of unrealized gain or loss reclassified from Accumulated Other Comprehensive Income (Loss) into earnings. Unrealized losses on securities that, in the judgment of management, are other than temporary are charged against earnings as a loss in the condensed consolidated statements of income and comprehensive income.

Secured Financing Agreements — KREF's secured financing agreements, including uncommitted repurchase facilities, Term Lending Agreement, Warehouse Facility, Asset Specific Financings and Term Loan Financings, are treated as floating-rate collateralized financing arrangements carried at their contractual amounts, net of unamortized debt issuance costs (Note 4). Included within KREF's secured financing agreements is KREF's corporate revolving credit facility ("Revolver"), which is full recourse to certain guarantor wholly-owned subsidiaries of KREF.

Convertible Notes, Net — KREF accounts for its convertible debt with a cash conversion feature in accordance with ASC 470-20 “Debt with Conversion and Other Options” which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The initial proceeds from the sale of convertible notes are allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

nonconvertible debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the notes as of the date of issuance. KREF measured the estimated fair value of the debt component of the 6.125% convertible senior notes due May 15, 2023 (“Convertible Notes”) as of the issuance date based on KREF’s nonconvertible debt borrowing rate. The equity component of the Convertible Notes is reflected within additional paid-in capital on the Condensed Consolidated Balance Sheets, and the resulting debt discount is amortized over the

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

period during which such Convertible Notes are expected to be outstanding (through the maturity date) as additional non-cash interest expense using the interest method, or on a straight line basis when it approximates the interest method. The additional non-cash interest expense attributable to such convertible notes will increase in subsequent periods through the maturity date as the notes accrete to their par value over the same period (Note 6).

Loan Participations Sold, Net — In connection with its investments in CRE loans, KREF finances certain investments through the syndication of non-recourse, or limited-recourse, loan participation to unaffiliated third parties. KREF’s presentation of the senior loan and related financing involved in the syndication depends upon whether ~~GAAP recognized~~ the transaction is recognized as a sale under GAAP, though such differences in presentation do not generally impact KREF’s net stockholders’ equity or net income aside from timing differences in the recognition of certain transaction costs.

To the extent that ~~GAAP recognizes~~ a sale ~~resulting~~is recognized under GAAP from the syndication, KREF derecognizes the participation in the senior/whole loan that KREF sold and continues to carry the retained portion of the loan as an investment. While KREF does not generally expect to recognize a material gain or loss on these sales, KREF would realize a gain or loss in an amount equal to the difference between the net proceeds received from the third party purchaser and its carrying value of the loan participation that KREF sold at time of sale. Furthermore, KREF recognizes interest income only on the portion of the loan that it retains as a result of the sale.

To the extent that ~~GAAP does not recognize~~ a sale ~~resulting~~is not recognized under GAAP from the syndication, KREF does not derecognize the participation in the senior/whole loan that it sold. Instead, KREF recognizes a loan participation sold liability in an amount equal to the principal of the loan participation syndicated less any unamortized discounts or financing costs resulting from the syndication. KREF continues to recognize interest income on the entire senior loan, including the interest attributable to the loan participation sold, as well as interest expense on the loan participation sold liability (Note 7).

Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities — As of ~~September~~June 30, 2020, other assets included $2.9 million of deferred financing costs related to KREF's Revolver (Note 4) and $0.9 million of prepaids. As of December 31, 2019, other assets primarily included ~~$2.6~~$2.4 million of deferred financing costs related to KREF's ~~corporate revolving~~Revolver. As of June 30, 2020, accounts payable, accrued expenses and other liabilities consisted of $3.5 million of accrued expenses and $1.9 million of allowance for credit ~~facility (Note 4).~~losses related to KREF's unfunded loan commitments. As of December 31, 2018, other assets included $1.4 million of deferred financing costs related to KREF's revolving credit facility and $1.3 million of collateralized loan obligations interest receivable on collateral assets held by a third-party servicer. As of September 30, 2019, accounts payable, accrued expenses and other liabilities mainly consisted of ~~$2.8~~$2.7 million of accrued expenses and ~~$0.5~~$0.7 million of good faith deposits. As

Dividends Payable — KREF accrues for dividends on its common stock and the redeemable preferred stock upon declaration of ~~December 31, 2018, accounts payable,~~such dividends. In June 2020, KREF's board of directors declared a dividend of $0.43 per share of common stock to shareholders of record as of June 30, 2020, which was accrued ~~expenses~~in “Dividends payable” on KREF’s Condensed Consolidated Balance Sheet as of June 30, 2020 and ~~other liabilities included $2.0 million of accrued share buybacks and $1.0 million of accrued deferred financing costs and offering costs.~~was subsequently paid on July 15, 2020.

Special Non-Voting Preferred Stock — Equity instruments that are redeemable for cash or other assets are classified as temporary equity if the instrument is redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the issuer. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, which is subsequently adjusted at each balance sheet date if the instrument is currently redeemable or probable of becoming redeemable. KREF accounted for the SNVPS as redeemable preferred stock since a third party holds a redemption option, exercisable after May 5, 2018, and such redemption is not solely within KREF's control. The SNVPS became redeemable in the second quarter of 2018. As a result, starting with the second quarter of 2018, KREF adjusts the carrying value of the SNVPS to its redemption value quarterly. Accordingly, KREF adjusted the carrying value of the SNVPS to its redemption value of ~~$2.1~~$2.3 million as of ~~September~~June 30, ~~2019~~2020 and ~~recorded~~recorded a ~~$0.1~~$0.2 million and ~~($0.7)~~$0.6 million non-cash SNVPS Redemption Value Adjustment during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, respectively.

Repurchased Stock — KREF accounts for repurchases of its common stock based on the settlement date and presents repurchased stock in “Repurchased stock” on its Condensed Consolidated Balance Sheets (Note 9). Payments for stock repurchases that are not yet settled as of the reporting date are presented within “Other assets” on the Condensed Consolidated Balance Sheets. As of June 30, 2020, KREF did not retire any repurchased stock.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Income Recognition

Interest Income — Loans where management expects to collect all contractually required principal and interest payments are considered performing loans. KREF accrues interest income on performing loans based on the outstanding principal amount and contractual terms of the loan. Interest income also includes origination fees and direct loan origination costs for loans that KREF originates, but where management did not elect the fair value option, as a yield adjustment using the interest method

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

over the loan term, or on a straight line basis when it approximates the interest method. KREF expenses origination fees and direct loan origination costs for loans acquired, but not originated, by KREF as well as loans for which management elected the fair value option, as incurred.

Other Income— KREF recognizes interest income earned on its cash balances and miscellaneous fee income in “Other income” on its Condensed Consolidated Statements of Income. Interest income on cash balances totaled $0.4 million and $0.9 million for the six months ended June 30, 2020 and 2019, respectively.

Realized Gain (Loss) on Sale of Investments — KREF recognizes the excess, or deficiency, of net proceeds received, less the net carrying value of such investments, as realized gains or losses, respectively. KREF reverses cumulative, unrealized gains or losses previously reported in its Condensed Consolidated Statements of Income with respect to the investment sold at the time of sale.

Expense Recognition

~~Expense Recognition~~

~~Loan Impairment— KREF holds commercial mortgage loans for both investment and sale, which management periodically evaluates for impairment.~~

Commercial Mortgage Loans, Held-For-Investment —— For each loan in KREF's portfolio, management performs a quarterly evaluation of impairment indicators of loans classified as ~~held‑for‑investment~~held-for-investment using applicable loan, property, market and sponsor information obtained from borrowers, loan servicers and local market participants. Such indicators may include the net present value of the underlying collateral, property operating cash flows, the sponsor’s financial wherewithal and competency in managing the property, macroeconomic trends, and property ~~submarket-specific~~submarket—specific economic factors. The evaluation of these indicators of impairment requires significant judgment by management to determine whether failure to collect contractual amounts is probable.

If management deems that it is probable that KREF will be unable to collect all amounts owed according to the contractual terms of a loan, impairment of that loan is indicated. If management considers a loan to be impaired, management ~~establishes an allowance for~~writes-down the loan ~~losses,~~ through a ~~valuation provision in earnings, which reduces~~charge to the ~~carrying value of the loan to~~"Allowance for credit losses" based on the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Significant judgment is required in determining impairment and in estimating the resulting credit loss allowance, and actual losses, if any, could materially differ from those estimates.

Management considers loans to be past due when a monthly payment is due and unpaid for 60 days or more. Loans are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of collection. Interest received on loans placed on nonaccrual status are accounted for under the cost-recovery method, until qualifying for return to accrual. Management may return a loan to accrual status when repayment of principal and interest is reasonably assured under the terms of the restructured loan. During the three months ended June 30, 2020, management placed 1 mezzanine loan with an outstanding principal balance of $5.5 million on nonaccrual status and wrote off $4.7 million (the "Write-off") of the loan balance determined uncollectable (Note 3). As of ~~September~~June 30, ~~2019, KREF did not hold any loans that management~~2020, no other loan was placed on nonaccrual status or otherwise considered past due.

In ~~addition~~certain circumstances, KREF may also modify the original terms of a loan agreement by granting a concession to a borrower experiencing financial difficulty. Such modifications are considered troubled debt restructurings (“TDR”) under GAAP and typically include interest rate reductions, payment extension and modification of loan covenants. KREF did not have any loan modifications accounted for as TDRs during the three and six months ended June 30, 2020.

In conjunction with reviewing commercial mortgage loans held-for-investment for impairment, the Manager evaluates KREF's commercial mortgage loans ~~to determine if an allowance for loan loss should be established. In conjunction with this review, the Manager~~on a quarterly basis, assesses the risk factors of each loan, and assigns a risk rating based on a variety of factors, including, without limitation, underlying real estate performance and asset value, values of comparable properties, durability and quality of property cash flows, sponsor experience and financial wherewithal, and the existence of a risk-mitigating loan structure. Additional key considerations include loan-to-value ratios, debt service coverage ratios, loan

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

structure, real estate and credit market dynamics, and risk of default or principal loss. Based on a five-point scale, KREF's loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:

1—Very Low Risk—The underlying property performance has surpassed underwritten expectations, and the sponsor’s business plan is generally complete. The property demonstrates stabilized occupancy and/or rental rates resulting in strong current cash flow and/or a very low loan-to-value ratio (<65%). At the level of performance, it is very likely that the underlying loan can be refinanced easily in the period’s prevailing capital market conditions.

2—Low Risk—The underlying property performance has matched or exceeded underwritten expectations, and the sponsor’s business plan may be ahead of schedule or has achieved some or many of the major milestones from a risk mitigation perspective. The property has achieved improving occupancy at market rents, resulting in sufficient current cash flow and/or a low loan-to-value ratio (65%-70%). Operating trends are favorable, and the underlying loan can be refinanced in today’s prevailing capital market conditions. The sponsor/manager is well capitalized or has demonstrated a history of success in owning or operating similar real estate.

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

3—Average Risk—The underlying property performance is in-line with underwritten expectations, or the sponsor may be in the early stages of executing its business plan. Current cash flow supports debt service payments, or there is an ample interest reserve or loan structure in place to provide the sponsor time to execute the value-improvement plan. The property exhibits a moderate loan-to-value ratio (<75%). Loan structure appropriately mitigates additional risks. The sponsor/manager has a stable credit history and experience owning or operating similar real estate.

4—High Risk/Potential for Loss: A loan that has a risk of realizing a principal loss. The underlying property performance is behind underwritten expectations, or the sponsor is behind schedule in executing its business plan. The underlying market fundamentals may have deteriorated, comparable property valuations may be declining or property occupancy has been volatile, resulting in current cash flow that may not support debt service payments. The loan exhibits a high loan-to-value ratio (>80%), and the loan covenants are unlikely to fully mitigate some risks. Interest payments may come from an interest reserve or sponsor equity.

5—Impaired/Loss Likely: A loan that has a very high risk of realizing a principal loss or has otherwise incurred a principal loss. The underlying property performance is significantly behind underwritten expectations, the sponsor has failed to execute its business plan and/or the sponsor has missed interest payments. The market fundamentals have deteriorated, or property performance has unexpectedly declined or valuations for comparable properties have declined meaningfully since loan origination. Current cash flow does not support debt service payments. With the current capital structure, the sponsor might not be incentivized to protect its equity without a restructuring of the loan. The loan exhibits a very high loan-to-value ratio (>90%), and default may be imminent.

Commercial Mortgage Loans, Held-For-Sale — For commercial mortgage loans held-for-sale, KREF applies the lower of cost or fair value accounting and may be required, from time to time, to record a nonrecurring fair value adjustment.

Accrued Interest Receivables— KREF elected not to measure an allowance for credit losses for accrued interest receivables. KREF generally writes off accrued interest receivable balance when interest is 120 days or more past due unless the loan is both well secured and in the process of collection. Write-offs of accrued interest receivable are recognized as “Provision for credit losses, net” in the Condensed Consolidated Statements of Income.

Interest Expense — ~~Management~~KREF expenses contractual interest due in accordance with KREF's financing agreements as incurred.

Deferred Debt Issuance Costs — ~~Management~~KREF capitalizes and amortizes deferred financing costs incurred in connection with financing arrangements over their respective expected term using the interest method, or on a straight line basis when it approximates the interest method. KREF presents such expensed amounts, as well as deferred amounts written off, as additional interest expense in its Condensed Consolidated Statements of Income.

General and Administrative Expenses — ~~Management~~KREF expenses general and administrative costs, including legal, diligence and audit fees; information technology costs; insurance premiums; and other costs as incurred.

Management and Incentive Compensation to Affiliate — ~~Management~~KREF expenses management fees and incentive compensation earned by the Manager on a quarterly basis in accordance with the Management Agreement (Note 12).

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Income Taxes — Certain activities of KREF are conducted through joint ventures that are formed as limited liability companies, taxed as partnerships, and consolidated by KREF. Some of these joint ventures are subject to state and local income taxes, based on the tax jurisdictions in which they operate. In addition, certain activities of KREF are conducted through taxable REIT subsidiaries consolidated by KREF. Taxable REIT subsidiaries are subject to federal, state and local income taxes (Note 14).

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, KREF did not have any material deferred tax assets or liabilities arising from future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities in accordance with GAAP and their respective tax bases.

KREF recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes in KREF's Condensed Consolidated Statements of Income. As of ~~September~~June 30, ~~2019,~~2020, KREF did not have any material uncertain tax positions.

~~KKR Real Estate Finance Trust Inc.~~

~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~

~~(dollars in tables in thousands, except per share amounts)~~

Stock-Based Compensation

KREF's stock-based compensation consists of awards issued to employees of the Manager or its affiliates that vest over the life of the awards, as well as restricted stock units issued to certain members of KREF's board of directors. The Company ~~early adopted ASU No. 2018-07,~~ ~~Improvement to Nonemployee Share-based Payment Accounting~~ ~~upon its issuance in June 2018. Accordingly, the Company~~ recognizes the compensation cost of stock-based awards to its directors and employees of the Manager or its affiliates on a straight-line basis over the awards’ term at their grant date fair value.

~~Upon the adoption of ASU 2016-09,~~ ~~Improvements to Employee Share-Based Payment Accounting~~ ~~(Topic 718),~~ KREF ~~elected to account~~accounts for forfeitures as they occur. Refer to Note 10 for additional information.

Earnings per Share

KREF presents basic and diluted earnings per share ("EPS"). Basic EPS, or Net Income (Loss) Per Share of Common Stock, Basic, is calculated by dividing Net Income (Loss) Attributable to Common Stockholders by the Basic Weighted Average Number of Shares of Common Stock Outstanding, for the period.

Diluted EPS, or Net Income (Loss) Per Share of Common Stock, Diluted, is calculated by starting with Basic EPS and adding the weighted average dilutive shares issuable from restricted stock units, computed using the treasury stock method, to the weighted average common shares outstanding in the denominator. Refer to Note 9 for additional discussion of earnings per share.

Recent Accounting Pronouncements

~~Credit Losses~~

~~In June 2016,~~On March 12, 2020, the FASB issued ASU No. ~~2016-13,~~ 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial ~~Instruments - Credit Losses. The standard, known as~~Reporting, which provides temporary optional expedients and exceptions to the ~~Current Expected Credit Loss ("CECL") model, amends~~US GAAP guidance on contract modifications and hedge accounting to ease the ~~existing credit loss model~~financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to reflect a reporting entity's current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information.alternative reference rates. The guidance ~~also requires a cumulative-effect adjustment to retained earnings as~~is effective upon issuance and generally can be applied through December 31, 2022. KREF has not adopted any of the ~~beginning of~~optional expedients or exceptions through June 30, 2020, but will continue to evaluate the reporting period of adoption. In addition, for available-for-sale debt securities, the new guidance replaces the other-than-temporary impairment model, and requires the recognition of an allowance for reductions in a security's fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline is determined to be other-than-temporary. ASU No. 2016-13 is effective for KREF in the first quarter of 2020. Early adoption is permitted beginning in the first quarter of 2019.

While KREF is currently evaluating the impact that ASU 2016-13 will have on KREF's consolidated financial statements, we expect that the adoption will result in an increased amount of provisions for potential loan losses as well as the recognition of such provisions earlier in the credit cycle. KREF currently does not have any provision for loan losses recorded in the condensed consolidated financial statements.

~~FASB Codification Updates~~

In July 2019, the FASB issued ASU 2019-07, which includes updates related to certain SEC guidance in the FASB accounting standards codification to add certain SEC final rules that address financial reporting and disclosures. The ASU became effective on July 26, 2019. Thepossible adoption of ~~this ASU did not have a material impact on~~any such expedients or exceptions during the ~~condensed consolidated financial statements or disclosures.~~

effective period as circumstances evolve.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 3. Commercial Mortgage Loans

The following table summarizes KREF's investments in commercial mortgage loans as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


								Weighted Average
Loan Type	Outstanding Principal		Amortized Cost^(A)		Carrying Value^(B)		Loan Count	Floating Rate Loan %^(C)		Coupon^(C)		Life (Years)^(D)
June 30, 2020
Loans held-for-investment
Senior loans^(E)	$	5,081,125	$	5,057,522	$	4,996,218	36	100.0	%	4.8	%	3.6
Mezzanine loans	61,400		56,009		54,914		3	91.0		10.0		4.1
	$	5,142,525	$	5,113,531	$	5,051,132	39	99.9	%	4.8	%	3.7
December 31, 2019
Loans held-for-investment
Senior loans^(E)	$	4,919,298	$	4,890,408	4,890,408		37	100.0	%	5.0	%	4.1
Mezzanine loans	41,400		40,634		40,634		2	86.7		9.6		4.6
	$	4,960,698	$	4,931,042	4,931,042		39	99.9	%	5.1	%	4.1

Weighted Average
Loan Type Outstanding Face Amount Carrying Value Loan Count
Floating Rate Loan %^(A)

Coupon^(A)

Life (Years)^(B)
September 30, 2019
Loans held-for-investment
Senior loans^(C)
$ 5,064,968
$ 5,036,519
36
100.0 % 5.3 % 3.8
Mezzanine loans 41,400
40,519
2
86.7
9.6
4.1
$ 5,106,368
$ 5,077,038
38
99.9 % 5.3 % 3.8
December 31, 2018
Loans held-for-investment
Senior loans^(C)
$ 3,970,856
$ 3,946,086
33
100.0 % 6.0 % 3.7
Mezzanine loans 55,857
55,734
8
53.0
12.0
4.1
$ 4,026,713
$ 4,001,820
41
99.3 % 6.0 % 3.7
(A) Amortized cost represents the outstanding principal of loan, net of applicable unamortized discounts, loan origination fees and write-off on uncollectable loan balances.


~~(A)~~	Average weighted by outstanding face amount of loan. Weighted average coupon assumes the greater of applicable one-month LIBOR rates of 2.02% and 2.50% as of September 30, 2019 and December 31, 2018, respectively, or the applicable contractual LIBOR floor.


~~(B)~~	~~The weighted average life of each loan is based on the expected timing of the receipt of contractual cash flows assuming all extension options are exercised by the borrower.~~

~~(C)~~

Senior loans may include accommodation mezzanine loans in connection with the senior mortgage financing. Also, includes loan participations sold with a face amount of $65.0 million and $85.9 million, and a carrying value of $65.0 million and $85.6 million as of September 30, 2019 and December 31, 2018, respectively. Includes CLO loan participations of $1.0 billion and $1.0 billion as of September 30, 2019 and December 31, 2018, respectively.

(B) Carrying value represents the amortized cost of loan, net of applicable allowance for credit losses.

(C) Average weighted by outstanding principal of loan. Weighted average coupon assumes the greater of applicable one-month LIBOR rates of 0.16% and 1.76% as of June 30, 2020 and December 31, 2019, respectively, or the applicable contractual LIBOR floor.

(D) The weighted average life of each loan is based on the expected timing of the receipt of contractual principal repayments assuming all extension options are exercised by the borrower.

(E) Senior loans may include accommodation mezzanine loans in connection with the senior mortgage financing. Also, includes vertical loan participations sold with a principal of $65.0 million and a carrying value of $65.0 million as of June 30, 2020 and December 31, 2019, respectively. Includes CLO loan participations of $992.0 million and $1.0 billion as of June 30, 2020 and December 31, 2019, respectively.

Activity — For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the loan portfolio activity was as follows:


	Amortized Cost		Allowance for Credit Losses		Carrying Amount




Balance at December 31, 2019	$	4,931,042	$	—	$	4,931,042
Originations and future fundings, net^(A)	411,762		—		411,762
Proceeds from sales and principal repayments	(233,972)		—		(233,972)
Accretion of loan discount and other amortization, net^(B)	8,423		—		8,423
PIK interest	926		—		926
Cumulative-effect adjustment upon adoption of ASU 2016-13	—		(13,909)		(13,909)
Provision for credit losses, net	—		(53,140)		(53,140)
Loan write-off	(4,650)		4,650		—
Balance at June 30, 2020	$	5,113,531	$	(62,399)	$	5,051,132

(A) Net of applicable premiums, discounts and deferred loan origination costs. Includes fundings on previously originated loans.

Held-for-Investment Held-for-Sale Total
Balance at December 31, 2018 $ 4,001,820
$ —
$ 4,001,820
Purchases and originations, net^(A)
2,316,756
—
2,316,756
Proceeds from sales and principal repayments^(B)
(1,256,193 ) —
(1,256,193 )
Accretion of loan discount and other amortization, net^(C)
14,655
—
14,655
Balance at September 30, 2019 $ 5,077,038
$ —
$ 5,077,038
(B) Includes accretion of applicable discounts, certain fees and deferred loan origination costs.


~~(A)~~	~~Net of applicable premiums, discounts and deferred loan origination costs. Includes fundings on previously originated loans.~~


~~(B)~~	~~Includes $142.8 million in net proceeds from non-recourse sale of senior interests and $65.0 million in proceeds from pari passu loan syndication.~~


~~(C)~~	~~Includes accretion of applicable discounts and deferred loan origination costs.~~

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there was ~~$29.3~~$24.3 million and ~~$24.9~~$29.7 million, respectively, of unamortized deferred loan fees and discounts included in commercial mortgage loans, held-for-investment, net in the Condensed Consolidated Balance Sheets. KREF recognized net accelerated fees income of $0.1 million and $0.3 million, during the three and six months ended June 30, 2020, respectively. KREF recognized prepayment fee income and net accelerated fees income of $0.0 million and ~~$0.3~~$0.5 million, respectively, during the three months ended ~~September~~June 30, 2019; and $0.2 million and ~~$3.1~~$2.8 million, respectively, during the ~~nine~~six months ended ~~September~~June 30, 2019.

During the three months ended June 30, 2020, KREF entered into loan modifications on 2 hotel loans with a total outstanding principal and net book value of $216.9 million and $209.2 million, respectively. These modifications included, among other changes, incremental capital contributions from the borrowers, repurposing of reserves, and a temporary partial deferral for a

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

portion of the coupon as payment-in-kind interest (“PIK Interest”) due, which is capitalized, compounded, and added to the outstanding principal balance of the respective loans. These loan modifications were not considered TDRs under GAAP.

Loan Risk Ratings — As further described in Note 2, our Manager evaluates KREF's commercial mortgage loan portfolio on a quarterly basis. In conjunction with the quarterly commercial mortgage loan portfolio review, KREF's Manager assesses the risk factors of each loan and assigns a risk rating based on a variety of factors. Loans are rated “1” (very low risk) through “5” Impaired/Loss Likely), which ratings are defined in Note 2. The following table allocates the principal balance and net book value of the loan portfolio based on KREF's internal risk ratings:


June 30, 2020														December 31, 2019
Risk Rating	Number of Loans	Net Book Value		Total Loan Exposure^(A)		Total Loan Exposure %		Risk Rating	Number of Loans	Net Book Value		Total Loan Exposure^(A)		Total Loan Exposure %
1	2	$	159,131	$	159,348	3.1	%	1	1	$	85,730	$	86,000	1.7	%
2	2	249,816		250,695		4.8		2	5	450,827		451,858		9.0
3	27	3,845,141		3,966,103		76.0		3	33	4,394,485		4,501,440		89.3
4	7	796,194		839,479		16.0		4	—	—		—		—
5	1	850		5,500		0.1		5	—	—		—		—
	39	$	5,051,132	$	5,221,125	100.0	%		39	$	4,931,042	$	5,039,298	100.0	%

September 30, 2019 December 31, 2018
Risk Rating Number of Loans
Net Book Value^(A)

Total Loan Exposure^(A)(B)
Risk Rating Number of Loans Net Book Value
Total Loan Exposure^(B)
1 1
$ 85,677
$ 86,000
1 —
$ —
$ —
2 6
562,404
564,890
2 8
466,742
468,860
3 31
4,363,957
4,534,078
3 33
3,535,078
3,625,008
4 —
—
—
4 —
—
—
5 —
—
—
5 —
—
—
38
$ 5,012,038
$ 5,184,968
41
$ 4,001,820
$ 4,093,868
(A) In certain instances, KREF finances its loans through the non-recourse sale of a senior interest that is not included in the condensed consolidated financial statements. Total loan exposure includes the entire loan KREF originated and financed, including $143.6 million of such non-consolidated interests and excludes $65.0 million vertical loan participation as of June 30, 2020 and December 31, 2019, respectively.


~~(A)~~	~~Excludes $65.0 million pari passu loan syndication as of September 30, 2019.~~


~~(B)~~	In certain instances, KREF finances its loans through the non-recourse sale of a senior interest that is not included in the condensed consolidated financial statements. Total loan exposure includes the entire loan KREF originated and financed, including $143.6 million and $67.2 million of such non-consolidated interests as of September 30, 2019 and December 31, 2018, respectively.

As of ~~September~~June 30, ~~2019,~~2020, the average risk rating of KREF's portfolio was ~~2.9~~3.1 (Average Risk), ~~weighted~~weighted by total loan exposure, ~~with 100.0% of commercial mortgage loans held-for-investment, rated 3 (Average Risk) or better by KREF's Manager~~ as compared to 2.9 (Average Risk) as of December 31, ~~2018.~~2019.

Loan Vintage — The following tables present the amortized cost of the loan portfolio at June 30, 2020, by KREF's internal risk rating and year of origination. The risk ratings are updated as of June 30, 2020.


June 30, 2020
				Amortized Cost by Year of Origination
Risk Rating	Number of Loans	Outstanding Principal		2020		2019		2018		2017		2016		2015		Total		Carrying Amount
Commercial Mortgage Loans
1	2	$	159,348	$	—	$	—	$	159,156	$	—	$	—	$	—	$	159,156	$	159,131
2	2	250,695		—		61,064		—		189,004		—		—		250,068		249,816
3	27	3,887,503		195,213		2,462,688		1,059,214		149,887		—		—		3,867,002		3,845,141
4	7	839,479		105,084		76,003		333,360		197,130		—		124,878		836,455		796,194
5	1	5,500		—		—		—		—		—		850		850		850
	39	$	5,142,525	$	300,297	$	2,599,755	$	1,551,730	$	536,021	$	—	$	125,728	$	5,113,531	$	5,051,132

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Allowance for Credit Losses — For the three months ended March 31, 2020 and June 30, 2020, respectively, the changes to allowance for credit losses were as follows:


	Commercial Mortgage Loans		Unfunded Loan Commitments		Total
Balance at December 31, 2019	$	—	$	—	$	—
Cumulative-effect adjustment upon adoption of ASU 2016-13	13,909		1,100		15,009
Provision for credit losses, net	52,070		3,204		55,274
Write-offs charged	—		—		—
Recoveries	—		—		—
Balance at March 31, 2020	$	65,979	$	4,304	$	70,283
Provision for credit losses, net	1,070		(2,436)		(1,366)
Write-offs charged	(4,650)		—		(4,650)
Recoveries	—		—		—
Balance at June 30, 2020	$	62,399	$	1,868	$	64,267

The increase in the provision for credit losses during the three months ended March 31, 2020 of $55.3 million, compared to the January 1, 2020 cumulative-effect adjustment upon adoption of ASU 2016-13 of $15.0 million, is primarily attributable to the significant adverse change in the economic outlook due to the COVID-19 pandemic. In addition, the average risk ratings of KREF's loan portfolio increased from 2.9 as of December 31, 2019 to 3.0 as of March 31, 2020.

The decrease of $1.4 million in the provision for credit losses during the three months ended June 30, 2020 compared to the March 31, 2020 provision is primarily attributable to a slightly more stable macro-economic outlook based on recent observed economic data.

Concentration of Credit Risk — The following tables present the geographies and property types of collateral underlying KREF's commercial mortgage loans as a percentage of the loans' ~~face~~principal amounts:

September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Geography
Collateral Property Type
New York 27.1 % 30.3 % Multifamily 54.1 % 41.0 %
Illinois 9.2
—
Office 33.4
44.6
California 8.0
9.7
Hospitality 4.2
3.7
Pennsylvania 7.3
5.4
Condo (Residential) 3.0
4.3
Florida 6.7
11.3
Industrial 2.7
3.3
Massachusetts 6.6
4.9
Retail 2.6
3.1
Washington 6.6
8.3
Total 100.0 % 100.0 %
Virginia 6.4
—

Minnesota 5.0
5.7

Colorado 4.2
2.4

Georgia 4.0
11.1

New Jersey 2.9
3.7

Oregon 2.4
3.1

Texas 2.3
0.1

Alabama 1.1
—

Washington D.C. —
2.4

Tennessee —
1.3

Other U.S. 0.2
0.3

Total 100.0 % 100.0 %



	June 30, 2020		December 31, 2019			June 30, 2020		December 31, 2019
Geography						Collateral Property Type
New York	21.4	%	22.5	%	Multifamily	52.3	%	58.3	%
Illinois	9.7		9.7		Office	28.6		25.5
Pennsylvania	8.9		9.2		Condo (Residential)	6.3		3.0
Virginia	7.9		8.2		Retail	4.5		4.7
Massachusetts	7.5		7.7		Hospitality	4.2		4.4
California	6.9		6.9		Industrial	2.7		2.8
Washington	6.6		6.9		Student Housing	1.4		1.3
Texas	5.9		2.5		Total	100.0	%	100.0	%
Florida	5.3		6.9
Georgia	4.3		4.3
Minnesota	3.7		3.7
Colorado	3.1		2.8
New Jersey	3.0		3.1
Oregon	2.4		2.5
Alabama	1.2		1.2
Washington D.C.	1.0		—
Other U.S.	1.2		1.9
Total	100.0	%	100.0	%

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 4. Debt Obligations

The following table summarizes KREF's secured master repurchase agreements and other financing arrangements in place as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	June 30, 2020																										December 31, 2019
	Facility																								Collateral	Facility
	Month Issued	Outstanding Principal		Carrying Value^(A)		Maximum Facility Size		Final Stated Maturity		Weighted Average Funding Cost^(B)		Weighted Average Life (Years) ^(B)		Outstanding Principal		Amortized Cost Basis		Carrying Value		Weighted Average Life (Years)^(C)	Carrying Value^(A)
Master Repurchase Agreements^(D)
Wells Fargo^(E)	Oct 2015	$	469,259	$	466,889	$	1,000,000	Nov 2023		1.9	%	2.2		$	658,280	$	654,512	$	627,079	3.6	$	464,933
Morgan Stanley^(F)	Dec 2016	418,605		417,478		600,000		Dec 2022		2.1		2.1		558,140		554,929		553,826		4.5	392,279
Goldman Sachs^(G)	Sep 2016	199,942		198,843		400,000		Oct 2021		3.2		1.0		305,770		305,572		301,099		2.3	223,867
Term Lending Agreement
KREF Lending V^(H)	Jun 2019	900,000		898,702		900,000		Jun 2026		2.2		1.9		1,126,938		1,120,471		1,113,909		3.9	868,816
Warehouse Facility
HSBC Facility^(I)	Mar 2020	57,616		56,861		500,000		Mar 2023		1.8		2.6		76,821		75,999		75,319		4.6	—
Asset Specific Financing
BMO Facility^(J)	Aug 2018	82,268		81,662		300,000		n.a		2.0		3.4		107,348		106,955		104,405		3.5	141,120
Revolving Credit Agreement

Revolver^(K)	Dec 2018	50,000		50,000		335,000		Dec 2023		3.0		3.4		n.a		n.a		n.a		n.a	—
Total / Weighted Average				$	2,177,690	$	2,170,435	$	4,035,000			2.2	%	2.0									$	2,091,015

(A) Net of $7.3 million and $9.5 million unamortized debt issuance costs as of June 30, 2020 and December 31, 2019, respectively.

(B) Average weighted by the outstanding principal of borrowings. Funding cost includes deferred financing costs.

(D) Borrowings under these repurchase agreements are collateralized by senior loans, held-for-investment, and bear interest equal to the sum of (i) a floating rate index, equal to one-month LIBOR, or an index approximating LIBOR, and (ii) a margin, based on the collateral. As of June 30, 2020 and December 31, 2019, the percentage of the outstanding principal of the collateral sold and not borrowed under these repurchase agreements, or average "haircut" weighted by outstanding principal of collateral, was 28.5% and 27.4%, respectively (or 26.9% and 25.7%, respectively, if KREF had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates).

(E) The current stated maturity date is November 2021, which does not reflect 2, twelve-month facility term extensions available to KREF, which is contingent upon certain covenants and thresholds. As of June 30, 2020, the collateral-based margin was between 1.25% and 2.15%.

(F) In February 2020, the Morgan Stanley repurchase agreement was amended to change the initial maturity to December 2020, with 2 one-year extension options upon giving written notice and another 2 one-year extension periods subject to approval by Morgan Stanley. KREF has the option to increase the facility amount to $750.0 million. As of June 30, 2020, the collateral-based margin was between 1.75% and 1.85%.

(G) In May 2020, the facility was amended to extend the current stated maturity date to October 30, 2021, which does not reflect KREF's option to extend the maturity date to October 31, 2023 subject to the satisfaction of certain conditions. As of June 30, 2020, the collateral-based margin was between 1.85% and 2.40%.

(H) In June 2019, KREF Lending V LLC, a wholly-owned indirect subsidiary of KREF, entered into a Master Repurchase and Securities Contract Agreement (the "Term Lending Agreement") with Morgan Stanley Mortgage Capital Holdings LLC ("Administrative Agent"), as administrative agent on behalf of Morgan Stanley Bank, N.A. ("Initial Buyer"), which provides for current and future financings of up to $900.0 million on a non-mark-to-market basis. The Initial Buyer subsequently syndicated a portion of the facility to multiple financial institutions. As of June 30, 2020, the Initial Buyer held 48.9% of the total commitment under the facility. Borrowings under the Term Lending Agreement are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a 1.9% margin. The Term Lending Agreement has an initial maturity of June 2021, subject to 5 one-year extension options, which may be exercised by KREF upon the satisfaction of certain customary conditions and thresholds.

(I) In March 2020, KREF Lending VIII LLC, a wholly-owned indirect subsidiary of KREF, entered into a $500.0 million Loan and Security Agreement with HSBC Bank USA, National Association (“HSBC Facility”). The facility, which matures in March 2023, provides warehouse financing on a non-mark-to-market basis with partial recourse to KREF. As of June 30, 2020, the collateral-based margin was 1.50%.

(J) In August 2018, KREF entered into a $200.0 million loan financing facility with BMO Harris Bank ("BMO Facility"). The facility provides asset-based financing on a non-mark to market basis with matched-term up to five years with partial recourse to KREF. During May 2019, KREF increased the borrowing capacity to $300.0 million. As of June 30, 2020, the collateral-based margin was between 1.50% and 1.70%.

(K) In December 2018, KREF entered into a $100.0 million corporate revolving credit facility (“Revolver”) administered by Morgan Stanley Senior Funding, Inc. Additional lenders were added in 2019 and 2020, further increasing the borrowing capacity under the Revolver to $335.0 million as of June 30, 2020. The current stated maturity of the facility is December 2023. Borrowings under the facility bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. Borrowings under this facility are full recourse to certain guarantor wholly-owned subsidiaries of KREF. As of June 30, 2020, the carrying value excluded $2.9 million unamortized debt issuance costs presented within " — Other assets" in KREF's Condensed Consolidated Balance Sheets.

September 30, 2019 December 31, 2018
Facility Collateral Facility
Month Issued Outstanding Face Amount
Carrying Value^(A)
Maximum Facility Size Final Stated Maturity
Weighted Average Funding Cost^(B)

Weighted Average Life (Years) ^(B)
Outstanding Face Amount Amortized Cost Basis Carrying Value
Weighted Average Life (Years)^(C)

Carrying Value^(A)
Master Repurchase Agreements^(D)

Wells Fargo^(E)
Oct 2015 $ 425,134
$ 422,605
$ 1,000,000
Nov 2023 4.0 % 1.7 $ 615,617
$ 613,319
$ 613,319
3.1 $ 508,523
Morgan Stanley^(F)
Dec 2016 354,377
353,180
750,000
Dec 2022 4.0
2.8 472,502
469,951
469,951
5.3 300,081
Goldman Sachs^(G)
Sep 2016 245,740
245,203
400,000
Oct 2020 4.1
0.9 344,502
343,753
343,753
2.5 340,671
Term Lending Agreement
KREF Lending V^(H)
Jun 2019 875,455
873,800
900,000
Jun 2026 4.1
2.4 1,071,871
1,061,843
1,061,843
4.6 —
Asset Specific Financing
BMO Facility^(I)
Aug 2018 142,267
140,940
300,000
n.a 4.3
4.0 206,097
204,727
204,727
4.2 58,815
Revolving Credit Agreement
Revolver^(J)
Dec 2018 130,000
130,000
250,000
Dec 2023 5.1
4.2 n.a
n.a
n.a
n.a —
Total / Weighted Average $ 2,172,973
$ 2,165,728
$ 3,600,000
4.1 % 2.3 $ 1,208,090


~~(A)~~	~~Net of $7.2 million and $9.2 million unamortized debt issuance costs as of September 30, 2019 and December 31, 2018, respectively.~~


~~(B)~~	~~Average weighted by the outstanding face amount of borrowings.~~


~~(C)~~	~~Average based on the fully extended loan maturity, weighted by the outstanding face amount of the collateral.~~

~~(D)~~

Borrowings under these repurchase agreements are collateralized by senior loans, held-for-investment, and bear interest equal to the sum of (i) a floating rate index, equal to one-month LIBOR, or an index approximating LIBOR, and (ii) a margin, based on the collateral. As of September 30, 2019 and December 31, 2018, the percentage of the outstanding face amount of the collateral sold and not borrowed under these repurchase agreements, or average "haircut" weighted by outstanding face amount of collateral, was 28.4% and 25.8%, respectively (or 25.8% and 23.4%, respectively, if KREF had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates).

~~(E)~~

In November 2018, KREF and Wells Fargo Bank, National Association (“Wells Fargo”) amended the September 2018 amended and restated master repurchase agreement to extend the facility maturity date. The current stated maturity date is ~~November 2021~~, which does not reflect 2, twelve-month facility term extensions available to KREF, which is contingent upon certain covenants and thresholds. As of September 30, 2019, the collateral-based margin was between 1.40% and 2.15%.

~~(F)~~

In November 2017, KREF and Morgan Stanley Bank, N.A. ("Morgan Stanley") amended and restated the master repurchase agreement to extend the facility maturity date and to increase the maximum facility size from $500.0 million to $600.0 million and, subject to customary conditions, permits KREF to request the facility be further increased to $750.0 million. In March 2019, the Morgan Stanley repurchase agreement was amended to extend the current stated maturity of the facility to December 2021, which does not reflect 1, twelve-month facility term extension available to KREF, which is contingent upon certain covenants and thresholds. In June 2019, the Morgan Stanley repurchase agreement was amended to increase the facility amount to $750.0 million. As of September 30, 2019, the collateral-based margin was 1.75%.


~~(G)~~	In October 2018, KREF and Goldman Sachs Bank USA (“Goldman Sachs”) amended the July 2018 amended and restated master repurchase agreement to modify certain terms and provisions. The amended and restated facility includes a $400.0 million term facility with a maturity of October 2020. As of September 30, 2019, the collateral-based margin was between 1.85% and 2.00%.

~~(H)~~

In June 2019, KREF Lending V LLC, a wholly-owned indirect subsidiary of KREF, entered into a Master Repurchase and Securities Contract Agreement (the "Term Lending Agreement") with Morgan Stanley Mortgage Capital Holdings LLC ("Administrative Agent"), as administrative agent on behalf of Morgan Stanley Bank, N.A. ("Initial Buyer"), which provides for current and future financings of up to $900.0 million on a non-mark-to-market basis. The Initial Buyer subsequently syndicated a portion of the facility to multiple financial institutions. As of September 30, 2019, the Initial Buyer held 52.2% of the total commitment under the facility. Borrowings under the Term Lending Agreement are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a 1.9% margin, inclusive of an ongoing administrative fee. The Term Lending Agreement has an initial maturity of June 2021, subject to 5 one-year extension options, which may be exercised by KREF upon the satisfaction of certain customary conditions and thresholds.

~~(I)~~

In August 2018, KREF entered into a $200.0 million loan financing facility with BMO Harris Bank ("BMO Facility"). The facility provides asset-based financing on a non-mark to market basis with matched-term up to five years with partial recourse to KREF. During May 2019, KREF increased the borrowing capacity to $300.0 million. As of September 30, 2019, the collateral-based margin was between 1.50% and 1.70%.

~~(J)~~

In December 2018, KREF entered into a $100.0 million corporate revolving credit facility (“Revolver”) administered by Morgan Stanley Senior Funding, Inc. Additional lenders were added in March, April and May 2019, further increasing the borrowing capacity under the Revolver to $250.0 million. The current stated maturity of the facility is December 2023. Borrowings under the facility bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. Borrowings under this facility are full recourse to certain guarantor wholly-owned subsidiaries of KREF. As of September 30, 2019, the carrying value excluded $2.6 million unamortized debt issuance costs presented as " — Other assets" in KREF's Condensed Consolidated Balance Sheets.

~~The preceding table excludes loan participations sold (Note 7).~~

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

The preceding table excludes loan participations sold (Note 7).

As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, KREF had outstanding repurchase agreements and a Term Lending Agreement where the amount at risk with any individual counterparty, or group of related counterparties, exceeded 10.0% of KREF’s stockholders' equity. The amount at risk under these agreements is the net counterparty exposure, defined as the excess of the carrying amount (or market value, if higher than the carrying amount, for repurchase agreements) of the assets sold under agreement to repurchase, including accrued interest plus any cash or other assets on deposit to secure the repurchase obligation, over the amount of the repurchase liability, adjusted for accrued interest. The following table summarizes certain characteristics of KREF's repurchase agreements where the amount at risk with any individual counterparty, or group of related counterparties, exceeded 10.0% of KREF’s stockholders' equity as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	Outstanding Principal		Net Counterparty Exposure		Percent of Stockholders' Equity		Weighted Average Life (Years)^(A)
June 30, 2020
Wells Fargo	$	469,259	$	168,675	16.4	%	2.2
Morgan Stanley	418,605		136,756		13.3		2.1
Term Lending Agreement^(B)	900,000		217,087		21.1		1.9
Goldman Sachs	199,942		103,151		10.0		1.0
Total / Weighted Average	$	1,987,806	$	625,669	60.8	%	1.9
December 31, 2019
Wells Fargo	$	468,452	$	178,827	15.9	%	2.6
Morgan Stanley	394,499		136,764		12.2		2.5
Term Lending Agreement^(B)	870,051		203,800		18.2		2.1
Total / Weighted Average	$	1,733,002	$	519,391	46.3	%	2.4

Outstanding Face Amount Net Counterparty Exposure Percent of Stockholders' Equity
Weighted Average Life (Years)^(A)
September 30, 2019
Wells Fargo $ 425,134
$ 190,748
17.0 % 1.7
Morgan Stanley 354,377
116,632
10.4
2.8
Term Lending Agreement^(B)
875,455
189,019
16.8
2.4
Total / Weighted Average $ 1,654,966
$ 496,399
44.2 % 2.3
December 31, 2018
Wells Fargo $ 512,298
$ 223,780
19.8 % 1.5
Morgan Stanley 302,595
145,066
12.8
1.2
Goldman Sachs 342,368
122,461
10.8
1.4
Total / Weighted Average $ 1,157,261
$ 491,307
43.7 % 1.4
(A) Average weighted by the outstanding principal of borrowings under the secured financing agreement.

(B) There were multiple counterparties to the Term Lending Agreement. Morgan Stanley Bank, N.A. represented 10.3% and 8.9% of the net counterparty exposure as a percent of stockholders' equity as of June 30, 2020 and December 31, 2019, respectively.


~~(A)~~	~~Average weighted by the outstanding face amount of borrowings under the secured financing agreement.~~


~~(B)~~	There were multiple counterparties to the Term Lending Agreement as of September 30, 2019. Morgan Stanley Bank, N.A. represented 8.8% of the net counterparty exposure as a percent of stockholders' equity as of September 30, 2019.

Debt obligations included in the tables above are obligations of KREF’s consolidated subsidiaries, which own the related collateral, and such collateral is generally not available to other creditors of KREF.

While KREF is generally not required to post margin under certain repurchase agreement terms for changes in general capital market conditions such as changes in credit spreads or interest rates, KREF may be required to post margin for changes in conditions to specific loans that serve as collateral for those repurchase agreements. Such changes may include declines in the appraised value of property that secures a loan or a negative change in the borrower's ability or willingness to repay a loan. To the extent that KREF is required to post margin, KREF's liquidity could be significantly impacted. Both KREF and its lenders work cooperatively to monitor the performance of the properties and operations related to KREF's loan investments to mitigate investment-specific credit risks. Additionally, KREF incorporates terms in the loans it originates to further mitigate risks related to loan nonperformance.

Term Loan Financing

In April 2018, KREF, through its consolidated subsidiaries, entered into a term loan financing agreement (“Term Loan Facility”) with third party lenders for an initial borrowing capacity of $200.0 million that was subsequently increased to $1.0 billion in October 2018. The facility provides asset-based financing on a non-mark-to-market basis with matched term up to five years and is non-recourse to KREF. Borrowings under the facility are collateralized by senior loans, held-for-investment, and bear interest equal to one-month LIBOR plus a margin. As of ~~September~~June 30, 2020, the weighted average margin and interest rate on the facility were 1.6% and 1.7%, respectively. As of December 31, 2019, the weighted average margin and interest rate on the facility were 1.5% and ~~3.5%, respectively. As of December 31, 2018, the weighted average margin and interest rate on the facility were 1.4% and 3.9%~~3.2%, respectively. The following tables summarize our borrowings under the Term Loan Facility:

June 30, 2020

Term Loan Facility

Count

Outstanding Principal

Amortized Cost

Carrying Value

Wtd. Avg. Yield/Cost^(A)

Guarantee^(B)

Wtd. Avg. Term^(C)

Collateral assets

1,187,632

1,181,365

1,170,979

L + 3.1%

n.a.

February 2024

Financing provided

n.a.

984,851

982,217

L + 1.9%

n.a.

February 2024

September 30, 2019
Term Loan Facility Count Outstanding Face Amount Carrying Value
Wtd. Avg. Yield/Cost^(A)

Guarantee^(B)

Wtd. Avg. Term^(C)
Collateral assets 11 $ 1,091,581
$ 1,083,239
L + 3.2% n.a. September 2023
Financing provided n.a. 877,648
872,863
L + 1.8% n.a. September 2023

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

December 31, 2019

Term Loan Facility

Count

Outstanding Principal

Amortized Cost

Carrying Value

Wtd. Avg. Yield/Cost^(A)

Guarantee^(B)

Wtd. Avg. Term^(C)

Collateral assets

1,003,995

997,081

L + 3.0%

n.a.

November 2023

Financing provided

n.a.

798,180

793,872

L + 1.9%

n.a.

November 2023

(A) Floating rate loans and related liabilities are indexed to one-month LIBOR. KREF's net interest rate exposure is in direct proportion to its interest in the net assets indexed to that rate. In addition to cash coupon, yield/cost includes the amortization of deferred origination/financing costs.

December 31, 2018
Term Loan Facility Count Outstanding Face Amount Carrying Value
Wtd. Avg. Yield/Cost^(A)

Guarantee^(B)

Wtd. Avg. Term^(C)
Collateral assets 10 $ 941,905
$ 933,179
L + 3.1% n.a. August 2023
Financing provided n.a. 748,414
742,959
L + 1.8% n.a. August 2023
(B) Financing under the Term Loan Facility is non-recourse to KREF.

(C) The weighted-average term is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower.


~~(A)~~	Floating rate loans and related liabilities are indexed to one-month LIBOR. KREF's net interest rate exposure is in direct proportion to its interest in the net assets indexed to that rate. In addition to cash coupon, yield/cost includes the amortization of deferred origination/financing costs.


~~(B)~~	~~Financing under the Term Loan Facility is non-recourse to KREF.~~


~~(C)~~	~~The weighted-average term is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower.~~

Activity — For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the activity related to the carrying value of KREF’s secured financing agreements were as follows:

Balance as of December 31, 2018 $ 1,951,049
Principal borrowings 2,745,759
Principal repayments (1,660,814 )
Deferred debt issuance costs (5,528 )
Amortization of deferred debt issuance costs 8,123
Balance as of September 30, 2019 $ 3,038,589


	Secured Financing Agreements, Net


































Balance as of December 31, 2019	$	2,884,887
Principal borrowings	900,560
Principal repayments/sales/deconsolidation	(636,736)
Deferred debt issuance costs	(2,462)
Amortization of deferred debt issuance costs	6,403
Balance as of June 30, 2020	$	3,152,652

Maturities — KREF’s secured financing agreements, term loan financing and other consolidated debt obligations in place as of ~~September~~June 30, ~~2019~~2020 had current contractual maturities as follows:


Year	Nonrecourse		Recourse^(A)		Total

2020	$	400,652	$	133,550	$	534,202
2021	603,065		20,643		623,708
2022	999,240		293,114		1,292,354
2023	402,851		96,546		499,397
2024	174,812		38,068		212,880

	$	2,580,620	$	581,921	$	3,162,541

(A) Except for the Revolver, which is full recourse, amounts borrowed subject to a maximum 25.0% recourse limit. The Revolver expires in December 2023.

Year Nonrecourse
Recourse^(A)
Total
2019 $ —
$ 215,009
$ 215,009
2020 82,481
775,299
857,780
2021 636,429
—
636,429
2022 78,413
940,409
1,018,822
2023 80,325
—
80,325
Thereafter —
242,256
242,256
$ 877,648
$ 2,172,973
$ 3,050,621


~~(A)~~	~~Except for the Revolver, which is full recourse, amounts borrowed subject to a maximum 25.0% recourse limit. The Revolver expires in December 2023.~~

Covenants — KREF is required to comply with customary loan covenants and event of default provisions related to its secured financing agreements and Revolver, including, but not limited to, negative covenants relating to restrictions on operations with respect to KREF’s status as a REIT, and financial covenants. Such financial covenants include an interest income to interest expense ratio covenant (1.5 to 1.0); a minimum consolidated tangible net worth covenant (75.0% of the aggregate cash proceeds of any equity issuances made and any capital contributions received by KREF and certain subsidiaries or up to approximately ~~$880.2~~$880.2 million depending upon the facility); a cash liquidity covenant (the greater of $10.0 million or 5.0% of KREF's recourse indebtedness); and a total indebtedness covenant (75.0% of KREF's total assets, net of VIE liabilities and non-recourse indebtedness). As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, KREF was in compliance with its financial debt covenants.

KKR Real Estate Finance Trust Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 5. Collateralized Loan Obligation

In November 2018, KREF financed a pool of loan participations from our existing loan portfolio through a managed CLO. KREF 2018-FL1 provides KREF with match-term financing on a non-mark-to-market and non-recourse basis. KREF 2018-FL1 has a ~~two-year~~two-year reinvestment feature that allows principal proceeds of the collateral assets to be reinvested in qualifying replacement assets, subject to the satisfaction of certain conditions set forth in the indenture.

The following ~~table outlines~~tables outline KREF 2018-FL1 collateral assets and respective ~~borrowing:~~borrowing as of June 30, 2020 and December 31, 2019:


	June 30, 2020
Collateralized Loan Obligation	Count	Outstanding Principal		Amortized Cost		Carrying Value		Wtd. Avg. Yield/Cost^(B)	Wtd. Avg. Term^(C)
Collateral assets^(A)	21	$	1,000,000	$	1,000,000	$	984,363	L + 2.8%	November 2023
Financing provided	1	810,000		806,645		806,645		L + 2.2%	June 2036

September 30, 2019
Collateralized Loan Obligation Count Face Amount Carrying Value
Wtd. Avg.
Yield/Cost^(B)

Wtd. Avg. Term^(C)
Collateral assets^(A)
23 $ 1,000,000
$ 1,000,000
L + 3.0% July 2023
Financing provided 1 810,000
802,692
L + 1.8% June 2036

December 31, 2018
Collateralized Loan Obligation Count Face Amount Carrying Value
Wtd. Avg.
Yield/Cost^(B)

Wtd. Avg. Term^(C)
Collateral assets^(A)
24 $ 1,000,000
$ 1,000,000
L + 3.5% December 2022
Financing provided 1 810,000
800,346
L + 1.8% June 2036


~~(A)~~	Collateral assets represent 19.6% and 24.8% of the face amount of KREF's commercial mortgage loans as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, 100% of KREF loans financed through the CLO are floating rate loans.


~~(B)~~	~~Yield on collateral assets is based on cash coupon. Financing cost includes amortization of deferred financing costs incurred in connection with the CLO.~~


~~(C)~~	Loan term represents weighted-average final maturity, assuming extension options are exercised by the borrower. Repayments of CLO notes are dependent on timing of related collateral loan asset repayments post reinvestment period. The term of the CLO notes represents the rated final distribution date.


	December 31, 2019
Collateralized Loan Obligation	Count	Outstanding Principal		Amortized Cost		Carrying Value		Wtd. Avg. Yield/Cost^(B)	Wtd. Avg. Term^(C)
Collateral assets^(A)	22	$	1,000,000	$	1,000,000	$	1,000,000	L +2.8%	November 2023
Financing provided	1	810,000		803,376		803,376		L + 1.8%	June 2036

(A)Excluding $8.0 million and $0.0 million of cash, collateral assets represent 19.3% and 20.2% of the principal of KREF's commercial mortgage loans as of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020 and December 31, 2019, 100% of KREF loans financed through the CLO are floating rate loans.

(B)Yield on collateral assets is based on cash coupon. Financing cost includes amortization of deferred financing costs incurred in connection with the CLO.

(C)Loan term represents weighted-average final maturity, assuming extension options are exercised by the borrower. Repayments of CLO notes are p-dependent on timing of related collateral loan asset repayments post reinvestment period. The term of the CLO notes represents the rated final distribution date.

The following table presents the KREF 2018-FL1 Assets and Liabilities included in KREF’s Condensed Consolidated Balance Sheets:

Assets September 30, 2019 December 31, 2018
Commercial mortgage loans, held-for-investment, net 1,000,000
1,000,000
Accrued interest receivable 3,259
4,263
Other assets 5
1,295
Total $ 1,003,264
$ 1,005,558
Liabilities
Collateralized loan obligation, net 802,692
800,346
Accrued interest payable 1,270
3,341
Accounts payable, accrued expenses and other liabilities 73
314
Total $ 804,035
$ 804,001


Assets	June 30, 2020		December 31, 2019
Cash	$	8,000	$	—
Commercial mortgage loans, held-for-investment	992,168		1,000,000
Less: Allowance for credit losses	(7,643)		—
Commercial mortgage loans, held-for-investment, net	984,525		1,000,000
Accrued interest receivable	2,978		3,280
Other assets	5		5
Total	$	995,508	$	1,003,285
Liabilities
Collateralized loan obligation, net	806,645		803,376
Accrued interest payable	636		1,254
Accounts payable, accrued expenses and other liabilities	72		72
Total	$	807,353	$	804,702

Table of Contents

The following table details our quarterly loan activity (dollars in thousands):


	Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019
Loan originations	$	—	$	352,500	$	764,089	$	484,000
Loan fundings^(A)	$	77,818	$	337,055	$	619,748	$	471,634
Loan repayments/syndications^(B)	(54,419)		(179,553)		(765,418)		(193,470)
Net fundings	23,399		157,502		(145,670)		278,164

PIK interest	926		—		—		—
Total activity	$	24,325	$	157,502	$	(145,670)	$	278,164

Three Months Ended
September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018
Loan originations $ 484,000
$ 1,649,600
$ 214,000
$ 907,982
Loan fundings^(A)
$ 471,634
$ 1,474,022
$ 325,787
$ 855,369
Loan repayments^(B)
(193,470 ) (272,025 ) (648,493 ) (110,840 )
Net fundings 278,164
1,201,997
(322,706 ) 744,529
Loan participations sold —
—
—
—
Non-consolidated senior interest —
(142,800 ) —
—
Total activity $ 278,164
$ 1,059,197
$ (322,706 ) $ 744,529
(A) Includes initial funding of new loans and additional fundings made under existing loans. Excludes fundings on loan participations sold.


~~(A)~~	~~Includes initial funding of new loans and additional fundings made under existing loans. Excludes fundings on loan participations sold.~~


~~(B)~~	~~Includes $65.0 million of pari passu loan syndication for the three months ended June 30, 2019.~~

(B) Includes $65.0 million of proceeds from syndication of vertical participation during the three months ended December 31, 2019, which did not qualify for sale accounting for GAAP purposes.

The following table details overall statistics for our loan portfolio as of ~~September~~June 30, ~~2019~~2020 (dollars in thousands):


				Total Loan Exposure^(A)
	Balance Sheet Portfolio			Total Loan Portfolio			Floating Rate Loans			Fixed Rate Loans
Number of loans	39			39			38			1
Principal balance	$	5,142,525		$	5,221,125		$	5,215,625		$	5,500
Amortized cost	$	5,113,531		$	5,192,131		$	5,191,281		$	850
Unfunded loan commitments^(B)	$	512,011		$	512,011		$	512,011		$	—
Weighted-average cash coupon^(C)	4.8		%	4.8		%	L + 3.0		%	11.0		%
Weighted-average all-in yield^(C)	5.1		%	5.1		%	L + 3.3		%	11.0		%
Weighted-average maximum maturity (years)^(D)	3.7			3.7			3.7			5.0
LTV^(E)	66		%	66		%	66		%	72		%

(A) In certain instances, we finance our loans through the non-recourse sale of a senior interest that is not included in our condensed consolidated financial statements. Total loan exposure includes the entire loan we originated and financed.

(B) Unfunded commitments will primarily be funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments will be funded over the term of each loan, subject in certain cases to an expiration date.

(C) As of June 30, 2020, 100.0% of floating rate loans by principal balance are indexed to one-month USD LIBOR. In addition to cash coupon, all-in yield includes the amortization of deferred origination fees, loan origination costs and purchase discounts. Cash coupon and all-in yield for the total portfolio assume applicable floating benchmark rates as of June 30, 2020. L = the greater of one-month USD LIBOR; spot rate of 0.16%, and the applicable contractual LIBOR floor, included in portfolio-wide averages represented as fixed rates. Does not factor in prepayment fee income that might be earned upon prepayment.

(D) Maximum maturity assumes all extension options are exercised by the borrower; however, our loans may be repaid prior to such date. As of June 30, 2020, based on total loan exposure, 44.7% of our loans were subject to yield maintenance or other prepayment restrictions and 55.3% were open to repayment by the borrower without penalty.

(E) Loan-to-value ratio ("LTV") is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value.

Total Loan Exposure^(A)
Balance Sheet Portfolio Total Loan
Portfolio Floating Rate Loans Fixed Rate Loans
Number of loans 38
38
37
1
Principal balance $ 5,106,368
$ 5,184,968
$ 5,179,468
$ 5,500
Carrying value $ 5,077,038
$ 5,155,638
$ 5,150,138
$ 5,500
Unfunded loan commitments^(B)
$ 551,845
$ 551,845
$ 551,845
$ —
Weighted-average cash coupon^(C)
5.3 % 5.3 % L + 3.1 % 11.0 %
Weighted-average all-in yield^(C)
5.8 % 5.7 % L + 3.7%
11.7 %
Weighted-average maximum maturity (years)^(D)
3.8
4.0
4.0
5.8
LTV^(E)
66 % 67 % 67 % 73 %

Table of Contents


~~(A)~~	In certain instances, we finance our loans through the non-recourse sale of a senior interest that is not included in our condensed consolidated financial statements. Total loan exposure includes the entire loan we originated and financed.


~~(B)~~	Unfunded commitments will primarily be funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments will be funded over the term of each loan, subject in certain cases to an expiration date.

~~(C)~~

As of September 30, 2019, 100.0% of floating rate loans by principal balance are indexed to one-month USD LIBOR. In addition to cash coupon, all-in yield includes the amortization of deferred origination fees, loan origination costs and purchase discounts. Cash coupon and all-in yield for the total portfolio assume applicable floating benchmark rates as of September 30, 2019. L = the greater of one-month USD LIBOR rate; spot rate of 2.02%, or the applicable contractual LIBOR floor, included in portfolio-wide averages represented as fixed rates.


~~(D)~~	Maximum maturity assumes all extension options are exercised by the borrower; however, our loans may be repaid prior to such date. As of September 30, 2019, based on total loan exposure, 75.1% of our loans were subject to yield maintenance or other prepayment restrictions and 24.9% were open to repayment by the borrower without penalty.


~~(E)~~	Loan-to-value ratio ("LTV") is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value.

The table below sets forth additional information relating to our portfolio as of ~~September~~June 30, ~~2019~~2020 (dollars in millions):


	Investment^(H)	Investment Date	Committed Principal Amount		Current Principal Amount		Net Equity^(B)		Location		Property Type	Coupon^(C)(D)	Max Remaining Term (Years)^(C)(E)	Loan Per SF / Unit / Key	LTV^(C)(F)		Risk Rating
	Senior Loans^(A)
1	Senior Loan	5/22/2019	$	386.0	$	375.1	$	91.9	Brooklyn, NY		Multifamily	L + 2.7%	3.9	$437,738 / unit	51	%	3
2	Senior Loan	6/28/2019	340.0		334.6		82.7		Chicago, IL		Multifamily	L + 2.8	6.0	$418,289 / unit	75		3
3	Senior Loan	6/28/2019	273.5		265.1		65.4		Arlington, VA		Multifamily	L + 2.5	4.0	$238,843 / unit	70		3
4	Senior Loan	12/20/2018	234.5		194.3		37.0		New York, NY		Condo (Residential)	L + 3.6	3.5	$1,213 / SF	71		4
5	Senior Loan	5/23/2018	227.3		207.0		36.7		Boston, MA		Office	L + 2.4	2.9	$447 / SF	68		3
6	Senior Loan	2/6/2020	226.5		176.8		32.7		Plano, TX		Office	L + 2.7	4.6	$190 / SF	64		3
7	Senior Loan	5/31/2019	216.5		208.5		39.2		Various		Multifamily	L + 3.5	3.9	$194,882 / unit	74		3
8	Senior Loan	11/13/2017	194.4		189.2		34.7		Minneapolis, MN		Office	L + 3.8	2.4	$178 / SF	63		2
9	Senior Loan	6/6/2019	186.0		179.5		35.3		Chicago, IL		Multifamily	L + 2.7	3.9	$364,837 / unit	74		3
10	Senior Loan	8/13/2019	185.0		161.1		34.7		Denver, CO		Multifamily	L + 2.8	4.2	$271,167 / unit	64		3
11	Senior Loan	11/15/2019	183.3		155.9		39.3		Irvine, CA		Office	L + 2.9	4.4	$256 / SF	66		3
12	Senior Loan	4/11/2019	182.6		153.9		24.3		Philadelphia, PA		Office	L + 2.6	3.9	$218 / SF	65		3
13	Senior Loan	12/20/2019	175.5		53.0		11.9		Washington, D.C.		Office	L + 3.4	4.5	$320 / SF	58		3
14	Senior Loan	9/13/2018	172.0		168.0		29.8		Seattle, WA		Office	L + 3.8	3.3	$490 / SF	62		3
15	Senior Loan	7/15/2019	170.0		130.7		25.5		Chicago, IL		Office	L + 3.3	4.1	$126 / SF	59		3
16	Senior Loan	6/19/2018	165.0		157.3		29.6		Philadelphia, PA		Office	L + 2.5	3.0	$162 / SF	71		3
17	Senior Loan	12/5/2018	163.0		148.0		23.1		New York, NY		Multifamily	L + 2.6	3.4	$556,391 / unit	67		3
18	Senior Loan	11/9/2018	150.6		140.6		27.8		Fort Lauderdale, FL		Hospitality	L + 2.9	3.4	$406,239 / key	62		4
19	Senior Loan	10/23/2017	150.0		150.0		37.8		North Bergen, NJ		Multifamily	L + 3.2	2.4	$468,750 / unit	57		3
20	Senior Loan	12/19/2019	147.0		102.2		25.0		Various		Retail	L + 2.6	5.1	$76 / SF	55		3
21	Senior Loan	3/29/2019	138.0		137.0		22.1		Boston, MA		Multifamily	L + 2.7	3.8	$351,282 / unit	63		3
22	Senior Loan	11/7/2018	135.0		131.6		20.9		West Palm Beach, FL		Multifamily	L + 2.9	3.4	$162,108 / unit	73		3
23	Senior Loan	8/4/2017	131.0		131.0		58.0		New York, NY		Condo (Residential)	L + 4.7	1.3	$1,841 / SF^(I)	53		4
24	Senior Loan	10/26/2015	125.0		125.0		49.9		Portland, OR		Retail	L + 5.5	0.4	$115 / SF	61		4
25	Senior Loan	2/3/2020	106.0		106.0		21.5		San Diego, CA		Multifamily	L + 3.3	4.6	$458,874 / unit	71		4
26	Senior Loan	10/15/2019	93.4		69.4		16.9		State College, PA		Student Housing	L + 2.7	4.4	$54,620 / bed	64		3
27	Senior Loan	9/7/2018	92.3		92.3		16.7		Seattle, WA		Multifamily	L + 2.6	3.2	$515,571 / unit	76		3
28	Senior Loan	12/11/2019	91.0		91.0		18.9		Los Angeles, CA		Multifamily	L + 2.8	2.5	$421,220 / unit	72		3
29	Senior Loan	3/29/2018	86.0		86.0		14.4		New York, NY		Multifamily	L + 2.6	2.8	$462,366 / unit	48		1
30	Senior Loan	3/20/2018	80.7		80.7		14.6		Seattle, WA		Office	L + 3.6	2.8	$473 / SF	61		3
31	Senior Loan	10/30/2018	77.0		77.0		12.9		Philadelphia, PA		Multifamily	L + 2.7	3.4	$150,980 / unit	73		3
32	Senior Loan	1/8/2019	76.4		76.4		16.0		Brooklyn, NY		Hospitality	L + 2.9	3.6	$389,633 / key	69		4
33	Senior Loan	7/21/2017	75.1		66.3		12.2		Queens, NY		Industrial	L + 3.0	2.1	$116 / SF	64		4
34	Senior Loan	7/24/2018	74.5		73.3		17.0		Atlanta, GA		Industrial	L + 2.7	3.1	$67 / SF	74		1
35	Senior Loan	12/23/2019	73.9		72.8		11.7		Herndon, VA		Multifamily	L + 2.5	4.5	$247,700 / unit	72		3
36	Senior Loan	9/12/2019	67.5		67.5		12.3		Austin, TX		Multifamily	L + 2.5	4.2	$190,678 / unit	75		3
37	Senior Loan	8/9/2019	61.5		61.5		11.2		Atlanta, GA		Multifamily	L + 3.0	4.2	$170,833 / unit	74		2
	Total/Weighted Average Senior Loans Unlevered				$	5,713.0	$	5,195.6	$	1,111.6			L + 3.0%	3.7			66	%	3.1
	Mezzanine Loans
1	Mezzanine	1/27/2020	20.0		20.0		19.9		Westbury, NY		Multifamily	L + 9.0	4.1	$464,135 / unit	66		3
2	Mezzanine^(J)	6/19/2015	5.5		5.5		0.9		Various		RT	11.0%	5.0	$46 / SF	72		5
	Total/Weighted Average Mezzanine Loans Unlevered				$	25.5	$	25.5	$	20.8			11.0	4.3			67	%	3.4
	CMBS B-Pieces
1	RECOP I^(G)	2/13/2017	40.0		35.7		35.7		Various		Various	4.8	9.0		58
	Total/Weighted Average CMBS B-Pieces Unlevered				$	40.0	$	35.7	$	35.7			4.8%	9.0			58	%

Table of Contents

Investment^(H)
Investment Date Committed Principal Amount Current Principal Amount
Net Equity^(B)
Location Property Type
Coupon^(C)(D)

Max Remaining Term (Years)^(C)(E)

LTV^(C)(F)

Senior Loans^(A)

1 Senior Loan 5/22/2019 $ 386.0
$ 342.5
$ 83.1
Brooklyn, NY Multifamily L + 2.7% 4.7
51 %
2 Senior Loan 6/28/2019 340.0
314.3
69.6
Chicago, IL Multifamily L + 2.8 6.8
75
3 Senior Loan 6/28/2019 338.5
328.5
129.1
Arlington, VA Multifamily L + 2.5 4.8
70
4 Senior Loan 5/9/2018 285.0
222.8
43.1
Queens, NY Office L + 3.4 3.7
71
5 Senior Loan 12/20/2018 234.5
184.9
30.6
New York, NY Multifamily L + 3.6 4.3
72
6 Senior Loan 5/23/2018 227.3
200.8
38.1
Boston, MA Office L + 2.4 3.7
68
7 Senior Loan 5/31/2019 216.5
178.7
29.4
Various Multifamily L + 3.5 4.7
74
8 Senior Loan 11/13/2017 194.4
178.0
31.3
Minneapolis, MN Office L + 3.8 3.2
63
9 Senior Loan 6/6/2019 186.0
179.5
35.0
Chicago, IL Multifamily L + 2.7 4.7
74
10 Senior Loan 8/13/2019 185.0
130.1
128.4
Denver, CO Multifamily L + 2.8 4.9
64
11 Senior Loan 4/11/2019 182.6
145.4
29.8
Philadelphia, PA Office L + 2.6 4.6
65
12 Senior Loan 9/13/2018 172.0
162.1
28.1
Seattle, WA Office L + 3.7 4.0
62
13 Senior Loan 7/15/2019 170.0
119.1
19.3
Chicago, IL Office L + 3.3 4.9
59
14 Senior Loan 9/9/2016 168.0
162.4
45.0
San Diego, CA Office L + 4.2 2.0
71
15 Senior Loan 6/19/2018 165.0
150.5
33.4
Philadelphia, PA Office L + 2.5 3.8
71
16 Senior Loan 12/5/2018 163.0
148.0
22.7
New York, NY Multifamily L + 2.6 4.2
67
17 Senior Loan 4/11/2017 162.1
144.7
44.7
Irvine, CA Office L + 3.9 2.6
62
18 Senior Loan 10/26/2015 155.0
125.0
49.6
Portland, OR Retail L + 5.5 1.1
61
19 Senior Loan 8/4/2017 152.2
152.2
49.1
New York, NY Condo (Residential) L + 4.7 2.0
57
20 Senior Loan 10/23/2017 150.0
150.0
35.5
North Bergen, NJ Multifamily L + 3.2 3.1
57
21 Senior Loan 11/9/2018 150.0
140.0
27.0
Fort Lauderdale, FL Hospitality L + 2.9 4.2
62
22 Senior Loan 3/29/2019 138.0
137.0
24.0
Boston, MA Multifamily L + 2.7 4.5
63
23 Senior Loan 11/7/2018 135.0
130.1
26.9
West Palm Beach, FL Multifamily L + 2.9 4.1
73
24 Senior Loan 11/20/2018 103.5
100.2
39.7
San Diego, CA Multifamily L + 3.4 4.2
74
25 Senior Loan 9/7/2018 93.0
92.3
16.5
Seattle, WA Multifamily L + 2.6 3.9
76
26 Senior Loan 3/29/2018 86.0
86.0
14.3
New York, NY Multifamily L + 2.6 3.5
48
27 Senior Loan 2/28/2017 85.9
84.3
21.4
Denver, CO Multifamily L + 3.8 2.4
75
28 Senior Loan 3/20/2018 80.7
80.7
14.5
Seattle, WA Office L + 3.6 3.5
61
29 Senior Loan 3/28/2018 80.0
72.0
13.0
Orlando, FL Multifamily L + 2.8 3.5
70
30 Senior Loan 10/30/2018 77.0
77.0
12.7
Philadelphia, PA Multifamily L + 2.7 4.1
73
31 Senior Loan 1/18/2019 76.0
76.0
15.5
Brooklyn, NY Hospitality L + 2.9 4.4
69
32 Senior Loan 1/16/2018 75.5
75.5
13.5
St Paul, MN Office L + 3.6 3.4
69
33 Senior Loan 7/21/2017 75.1
66.0
13.6
Queens, NY Industrial L + 3.0 2.8
64
34 Senior Loan 7/24/2018 74.5
71.9
15.3
Atlanta, GA Industrial L + 2.7 3.9
74
35 Senior Loan 9/12/2019 67.5
67.5
14.3
Austin, TX Multifamily L + 2.5 5.0
75
36 Senior Loan 8/9/2019 61.5
61.5
11.1
Atlanta, GA Multifamily L + 3.0 4.9
74
37 Senior Loan 10/9/2018 45.0
42.0
7.8
Queens, NY Multifamily L + 2.8 4.1
70
Total/Weighted Average Senior Loans Unlevered $ 5,737.2
$ 5,179.5
$ 1,275.9
L + 3.1% 4.0
67 %
Mezzanine Loans
1 Mezzanine 6/8/2015 5.5
5.5
5.5
Various Retail 11.0 5.8
73
Total/Weighted Average Mezzanine Loans Unlevered $ 5.5
$ 5.5
$ 5.5
11.0% 5.8
73 %
CMBS B-Pieces
1
RECOP I^(G)
2/13/2017 40.0
35.7
35.7
Various Various 4.8 9.8
58
Total/Weighted Average CMBS B-Pieces Unlevered $ 40.0
$ 35.7
$ 35.7
4.8% 9.8
58 %
* Numbers presented may not foot due to rounding.

(A) Our total portfolio represents the current principal amount on senior and mezzanine loans and net equity in RECOP I, which holds CMBS B-Piece investments.


*	~~Numbers presented may not foot due to rounding.~~

~~(A)~~

~~Our total portfolio represents the current principal amount on~~

(B) Net equity reflects (i) the amortized cost basis of our loans, net of borrowings; and (ii) the cost basis of our investment in RECOP I.

(C) Weighted average is weighted by current principal amount for our senior and mezzanine loans and by net equity for our RECOP I CMBS B-Pieces.

(D) L = the greater of one-month USD LIBOR; spot rate of 0.16%, and ~~mezzanine loans and net equity in RECOP I, which holds CMBS B-Piece investments.~~


~~(B)~~	~~Net equity reflects (i) the amortized cost basis of our loans, net of borrowings; and (ii) the cost basis of our investment in RECOP I.~~


~~(C)~~	~~Weighted average is weighted by current principal amount for our senior and mezzanine loans and by net equity for our RECOP I CMBS B-Pieces.~~

~~(D)~~

~~L = the greater of one-month USD LIBOR rate; spot rate of 2.02%, or~~ the applicable contractual LIBOR floor, included in portfolio-wide averages represented as fixed rates.

(E) Max remaining term (years) assumes all extension options are exercised, if applicable.

(F) For senior loans, LTV is based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value; for Senior Loan 4, LTV is based on the initial loan amount divided by the appraised bulk sale value assuming a condo-conversion and no renovation; for Senior Loan 23, LTV is based on the current principal amount divided by the adjusted appraised gross sellout value net of sales cost; for mezzanine loans, LTV is based on the current balance of the whole loan dividend by the as-is appraised value as of the date the loan was originated; for RECOP I CMBS B-Pieces, LTV is based on the weighted average LTV of the underlying loan pool at issuance.

(G) Represents our investment in an aggregator vehicle alongside RECOP I that invests in CMBS B-Pieces. Committed principal represents our total commitment to the aggregator vehicle whereas current principal represents the current funded amount.

(H) Senior loans include senior mortgages and similar credit quality investments, including junior participations in our originated senior loans for which we have syndicated the senior participations and retained the junior participations for our portfolio and excludes vertical loan participations.

(I) For Senior Loan 23, Loan per SF of $1,841 is based on the allocated loan amount of the residential units. Excluding the value of the retail and parking components of the collateral, the Loan per SF is $2,086 based on allocating the full amount of the loan to only the residential units.

(J) For Mezzanine Loan 2, Current Principal Amount is gross of $4.7 million write-off (of amortized cost) during the three months ended June 30, 2020.


~~(E)~~	~~Max remaining term (years) assumes all extension options are exercised, if applicable.~~

~~(F)~~

For senior loans, LTV is based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value; for Senior Loan 5, LTV is based on the initial loan amount divided by the appraised bulk sale value assuming a condo-conversion and no renovation; for Senior Loan 19, LTV is based on the current principal amount divided by the adjusted appraised gross sellout value net of sales cost; for mezzanine loans, LTV is based on the current balance of the whole loan dividend by the as-is appraised value as of the date the loan was originated; for RECOP I CMBS B-Pieces, LTV is based on the weighted average LTV of the underlying loan pool at issuance.


~~(G)~~	Senior loans include senior mortgages and similar credit quality investments, including junior participations in our originated senior loans for which we have syndicated the senior participations and retained the junior participations for our portfolio and excludes pari passu loan syndications.


~~(H)~~	Represents our investment in an aggregator vehicle alongside RECOP I that invests in CMBS B-Pieces. Committed principal represents our total commitment to the aggregator vehicle whereas current principal represents the current funded amount.

Portfolio Surveillance and Credit Quality

Senior and Mezzanine Loans

Our Manager actively manages our portfolio and assesses the risk of any loan impairment by quarterly evaluating the performance of the underlying property, the valuation of comparable assets as well as the financial wherewithal of the associated borrower. Our loan documents generally give us the right to receive regular property, borrower and guarantor financial statements; approve annual budgets and tenant leases; and enforce loan covenants and remedies. In addition, our Manager evaluates the macroeconomic environment, prevailing real estate fundamentals and micro-market dynamics where the underlying property is located. Through site inspections, local market experts and various data sources, as part of its risk assessment, our Manager monitors criteria such as new supply and tenant demand, market occupancy and rental rate trends, and capitalization rates and valuation trends.

We maintain a robust asset management relationship with our borrowers and have utilized these relationships to proactively address the potential impacts of the COVID-19 pandemic on our loans secured by properties experiencing cash flow pressure, most significantly hospitality and retail assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences and have requested temporary interest deferral or forbearance, or other modifications of their loans. Accordingly, discussions we have had with our borrowers have addressed potential near-term defensive loan modifications, which could include repurposing of reserves, temporary deferrals of interest, or performance test or covenant waivers on loans collateralized by assets directly impacted by the COVID-19 pandemic, and which would generally be coupled with an additional equity commitment and/or guaranty from sponsors.

During the three months ended June 30, 2020, we entered into loan modifications on our two hotel loans with a total outstanding principal and net book value of $216.9 million and $209.2 million, respectively. These modifications included, among other changes, incremental capital contributions from the borrowers, repurposing of reserves, and a temporary partial deferral for the coupon as payment-in-kind interest (“PIK Interest”) due, which is capitalized, compounded, and added to the outstanding principal balance of the respective loans. These loan modifications were not considered troubled debt restructurings under GAAP.

We believe our loan sponsors are generally committed to supporting assets collateralizing our loans through additional equity investments, and that we will benefit from our long-standing core business model of originating senior loans collateralized by large assets in major markets with experienced, well-capitalized institutional sponsors. Our portfolio’s low weighted-average LTV⁽¹⁾ of 66% as of June 30, 2020 reflects significant equity value that our sponsors are motivated to protect through periods of cyclical disruption. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments.

In addition to ongoing asset management, our Manager performs a quarterly review of our portfolio whereby each loan is assigned a risk rating of 1 through 5, from lowest risk to highest risk. Our Manager is responsible for reviewing, assigning and updating the risk ratings for each loan on a quarterly basis. The risk ratings are based on many factors, including, but not

(1) LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value.

Table of Contents

limited to, underlying real estate performance and asset value, values of comparable properties, durability and quality of property cash flows, sponsor experience and financial wherewithal, and the existence of a risk-mitigating loan structure. Additional key considerations include LTVs, debt service coverage ratios, real estate and credit market dynamics, and risk of default or principal loss. Based on a five-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:

1—Very Low Risk—The underlying property performance has surpassed underwritten expectations, and the sponsor’s business plan is generally complete. The property demonstrates stabilized occupancy and/or rental rates resulting in strong current cash flow and/or a very low LTV (<65%). At the level of performance, it is very likely that the underlying loan can be refinanced easily in the period’s prevailing capital market conditions.

2—Low Risk—The underlying property performance has matched or exceeded underwritten expectations, and the sponsor’s business plan may be ahead of schedule or has achieved some or many of the major milestones from a risk mitigation perspective. The property has achieved improving occupancy at market rents, resulting in sufficient current cash flow and/or a low LTV (65%-70%). Operating trends are favorable, and the underlying loan can be refinanced in today’s prevailing capital market conditions. The sponsor/manager is well capitalized or has demonstrated a history of success in owning or operating similar real estate.

3—Average Risk—The underlying property performance is in-line with underwritten expectations, or the sponsor may be in the early stages of executing its business plan. Current cash flow supports debt service payments, or there is an ample interest reserve or loan structure in place to provide the sponsor time to execute the value-improvement plan. The property exhibits a moderate LTV (<75%). Loan structure appropriately mitigates additional risks. The sponsor/manager has a stable credit history and experience owning or operating similar real estate.

4—High Risk/Potential for Loss: A loan that has a risk of realizing a principal loss. The underlying property performance is behind underwritten expectations, or the sponsor is behind schedule in executing its business plan. The underlying market fundamentals may have deteriorated, comparable property valuations may be declining or property occupancy has been volatile, resulting in current cash flow that may not support debt service payments. The loan exhibits a high LTV (>80%), and the loan covenants are unlikely to fully mitigate some risks. Interest payments may come from an interest reserve or sponsor equity.

(dollars in thousands) September 30, 2019
Risk Rating Number of Loans
Net Book Value^(A)

Total Loan Exposure^(A)(B)
1 1 $ 85,677
$ 86,000
2 6 562,404
564,890
3 31 4,363,957
4,534,078
4 — —
—
5 — —
—
38 $ 5,012,038
$ 5,184,968

(dollars in thousands) June 30, 2019
Risk Rating Number of Loans
Net Book Value^(A)

Total Loan Exposure^(A)(B)
1 3 $ 271,853
$ 272,571
2 3 220,767
221,629
3 30 4,242,593
4,411,804
4 — —
—
5 — —
—
36 $ 4,735,213
$ 4,906,004


~~(A)~~	~~Excludes $65.0 million pari passu loan syndication as of September 30, 2019 and June 30, 2019, respectively.~~


~~(B)~~	In certain instances, we finance our loans through the non-recourse sale of a senior interest that is not included in our consolidated financial statements. Total loan exposure includes the entire loan we originated and financed, including $143.6 million and $142.8 million of such non-consolidated interests as of September 30, 2019 and June 30, 2019, respectively.

As of ~~September~~June 30, ~~2019,~~2020, the average risk rating of KREF's portfolio was ~~2.9~~3.1 (Average Risk), weighted by total loan exposure, ~~with 100% of commercial mortgage loans held-for-investment, rated 3 (Average Risk) or better by our Manager~~ as compared to ~~2.8~~2.9 (Average Risk) as of March 31, 2020.


(dollars in thousands)	June 30, 2020
Risk Rating	Number of Loans	Net Book Value		Total Loan Exposure^(A)(B)		Total Loan Exposure %
1	2	$	159,131	$	159,348	3.1	%
2	2	249,816		250,695		4.8
3	27	3,845,141		3,966,103		76.0
4	7	796,194		839,479		16.0
5	1	850		5,500		0.1
	39	$	5,051,132	$	5,221,125	100.0	%

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(dollars in thousands)	March 31, 2020
Risk Rating	Number of Loans	Net Book Value		Total Loan Exposure^(A)(B)		Total Loan Exposure %
1	2	$	157,360	$	158,074	3.0	%
2	3	288,303		291,268		5.6
3	28	3,855,849		4,001,127		77.0
4	7	722,477		746,330		14.4
5	—	—		—		—
	40	$	5,023,989	$	5,196,799	100.0	%

(A) Excludes $65.0 million vertical loan syndication as of June 30, ~~2019. As~~2020 and March 31, 2020, respectively.

(B) In certain instances, we finance our loans through the non-recourse sale of ~~September 30, 2019~~a senior interest that is not included in our condensed consolidated financial statements. Total loan exposure includes the entire loan we originated and financed, including $143.6 million of such non-consolidated interests and excludes $65.0 million vertical loan participation as of June 30, ~~2019, no investments were rated 4 (High Risk/Potential for Loss) or 5 (Impaired/Loss Likely).~~2020 and March 31, 2020, respectively.

CMBS B-Piece Investments

Our Manager has processes and procedures in place to monitor and assess the credit quality of our CMBS B-Piece investments and promote the regular and active management of these investments. This includes reviewing the performance of the real estate assets underlying the loans that collateralize the investments and determining the impact of such performance on the credit and return profile of the investments. Our Manager holds ~~monthly~~monthly surveillance calls with the special servicer of our CMBS B-Piece investments to monitor the performance of our portfolio and discuss issues associated with the loans underlying our CMBS B-Piece investments. At each meeting, our Manager is provided with a due diligence submission for each loan underlying our CMBS B-Piece investments, which includes both property- and loan-level information. These meetings assist our Manager in monitoring our portfolio, identifying any potential loan issues, determining if a re-underwriting of any loan is warranted and examining the timing and severity of any potential losses or impairments.

Valuations for our CMBS B-Piece investments are prepared using inputs from an independent valuation firm and confirmed by our Manager via quotes from two or more broker-dealers that actively make markets in CMBS. As part of the quarterly valuation process, our Manager also reviews pricing indications for comparable CMBS and monitors the credit metrics of the loans that collateralize our CMBS B-Piece investments.

During the three months ended September 30, 2019, ~~the Company~~we sold ~~its~~our remaining ~~direct~~directly held CMBS investments. Consequently, we deconsolidated the respective CMBS trust. Our current CMBS exposure is through RECOP I, an equity method investment.

Portfolio Financing

Our portfolio financing arrangements include term loan financing, term lending agreement, collateralized loan obligations, warehouse facility, asset specific financing, non-consolidated senior interest (collectively “Non-Mark-to-Market Financing Sources”), master repurchase agreements, ~~term lending agreement, asset specific financing, term loan financing, collateralized loan obligations,~~and loan participations ~~sold and non-consolidated senior interests.~~sold.

Our Non-Mark-to-Market Financing Sources, which accounted for 73% of our total secured financing (excluding our corporate revolver) as of June 30, 2020, are not subject to credit or capital markets mark-to-market provisions. The remaining 27% of our secured borrowings, which is primarily comprised of three master repurchase agreements, are only subject to credit marks.

The Company continues to expand and diversify its financing sources, especially those sources that provide ~~non-mark-to-market~~non-mark-to-market financing, reducing our exposure to market volatility. Our ~~non-mark-to-market financing~~Non-Mark-to-Market Financing Sources as of ~~September~~June 30, ~~2019~~2020 represented ~~74%~~73% of ~~our~~our portfolio financing based on outstanding principal balance, primarily as a result of our term lending agreement, warehouse facility, asset based financing, term loan facility and collateralized loan obligations.

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The following table summarizes our portfolio financing (dollars in thousands):


	Portfolio Financing Outstanding Principal Balance^(A)
	June 30, 2020		December 31, 2019
Master repurchase agreements	$	1,087,806	$	1,088,217
Term loan financing	984,851		798,180
Term lending agreement	900,000		870,051
Collateralized loan obligations	810,000		810,000
Warehouse facility	57,616		—
Asset specific financing	82,268		142,268

Non-consolidated senior interests	143,600		143,600
Total portfolio financing	$	4,066,141	$	3,852,316

Portfolio Financing Outstanding Principal Balance
September 30, 2019 December 31, 2018
Master repurchase agreements $ 1,025,251
$ 1,157,261
Term lending agreement 875,455
—
Asset specific financing 142,267
60,000
Term loan financing 877,648
748,414
Collateralized loan obligations 810,000
810,000
Loan participations sold^(A)
—
85,880
Non-consolidated senior interests 143,600
67,155
Total portfolio financing $ 3,874,221
$ 2,928,710
(A) Excludes $65.0 million of vertical loan participations sold as of June 30, 2020 and December 31, 2019, respectively. Such participations did not qualify for sale accounting under GAAP and therefore were consolidated in our Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively.


~~(A)~~	Excludes $65.0 million pari passu loan syndication as of September 30, 2019. Such syndication did not qualify for "sale" accounting under GAAP and therefore is consolidated in our Condensed Consolidated Balance Sheet as of September 30, 2019.

Financing Agreements

The following table details our financing agreements (dollars in thousands):


	June 30, 2020
	Maximum		Collateral		Borrowings
	Facility Size^(A)		Assets^(B)		Potential^(C)		Outstanding		Available
Master Repurchase Agreements
Wells Fargo	$	1,000,000	$	658,280	$	474,960	$	469,259	$	5,701
Morgan Stanley	600,000		558,140		418,605		418,605		—
Goldman Sachs	400,000		305,770		199,942		199,942		—
Term Loan Facility	1,000,000		1,187,632		994,350		984,851		9,499
Term Lending Agreement
KREF Lending V	900,000		1,126,938		900,000		900,000		—
Warehouse Facility
HSBC	500,000		76,821		57,616		57,616		—
Asset Specific Financing
BMO Facility	300,000		107,348		85,879		82,268		3,611
Revolver	335,000		—		335,000		50,000		285,000
	$	5,035,000	$	4,020,929	$	3,466,352	$	3,162,541	$	303,811

September 30, 2019
Maximum Collateral Borrowings

Facility Size^(A)

Assets^(B)

Potential^(C)
Outstanding Available
Master Repurchase Agreements
Wells Fargo $ 1,000,000
$ 615,617
$ 442,963
$ 425,134
$ 17,829
Morgan Stanley 750,000
472,502
354,377
354,377
—
Goldman Sachs 400,000
344,502
246,963
245,740
1,223
Term Lending Agreement
KREF Lending V 900,000
1,071,871
879,686
875,455
4,231
Asset Specific Financing
BMO Facility 300,000
206,097
164,878
142,267
22,611
Term Loan Facility 1,000,000
1,091,581
907,432
877,648
29,784
Revolver 250,000
—
250,000
130,000
120,000
$ 4,600,000
$ 3,802,170
$ 3,246,299
$ 3,050,621
$ 195,678
(A) Maximum facility size represents the largest amount of borrowings available under a given facility once sufficient collateral assets have been approved by the lender and pledged by us.

(B) Represents the principal balance of the collateral assets.

(C) Potential borrowings represents the total amount we could draw under each facility based on collateral already approved and pledged. When undrawn, these amounts are available to us under the terms of each credit facility.


~~(A)~~	~~Maximum facility size represents the largest amount of borrowings available under a given facility once sufficient collateral assets have been approved by the lender and pledged by us.~~


~~(B)~~	~~Represents the principal balance of the collateral assets.~~


~~(C)~~	Potential borrowings represents the total amount we could draw under each facility based on collateral already approved and pledged. When undrawn, these amounts are available to us under the terms of each credit facility.

Master Repurchase Agreements

~~Currently, one of our primary sources of financing is our~~We utilize master repurchase facilities ~~which we use~~ to finance the origination of senior loans. After a mortgage asset is identified by us, the lender agrees to advance a certain percentage of the ~~face value~~principal of the mortgage to us in exchange for a secured interest in the mortgage. We did not have any margin calls on any of our master repurchase facilities to date.

Repurchase agreements effectively allow us to borrow against loans, participations and securities that we own in an amount generally equal to (i) the market value of such loans, participations and/or securities multiplied by (ii) the applicable advance rate. Under these agreements, we sell our loans, participations and securities to a counterparty and agree to repurchase the same loans and securities from the counterparty at a price equal to the original sales price plus an interest factor. The transaction is treated as a secured loan from the financial institution for GAAP purposes. During the term of a repurchase agreement, we receive the principal and interest on the related loans, participations and securities and pay interest to the lender under the master repurchase agreement. At any point in time, the amounts and the cost of our repurchase borrowings will be based upon

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the assets being financed—higher risk assets will result in lower advance rates (i.e., levels of leverage) at higher borrowing costs and vice versa. In addition, these facilities include various financial covenants and limited recourse guarantees, including those described below.

Each of our existing master repurchase facilities includes "credit ~~mark"~~mark-to-market" features. "Credit ~~mark"~~mark-to-market" provisions in repurchase facilities are designed to keep the lenders' credit exposure generally constant as a percentage of the underlying collateral value of the assets pledged as security to them. If the credit underlying collateral value decreases, the gross amount of leverage available to us will be reduced as our assets are ~~marked to market,~~marked-to-market, which would reduce our liquidity. The lender under the applicable repurchase facility sets the valuation and any revaluation of the collateral assets in its sole, good faith discretion. As a contractual matter, the lender has the right to reset the value of the assets at any time based on then-current market conditions, but the market convention is to reassess valuations on a monthly, quarterly and annual basis using the financial information delivered pursuant to the facility documentation regarding the real property, borrower and guarantor under such underlying loans. Generally, if the lender determines (subject to certain conditions) that the market value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, the lender may require us to provide additional collateral or lead to margin calls that may require us to repay all or a portion of the funds advanced. We closely monitor our liquidity and intend to maintain sufficient liquidity on our balance sheet in order to meet any margin calls in the event of any significant decreases in asset values. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the weighted average haircut under our repurchase agreements was ~~28.4% and 25.8%, respectively~~28.5% (or ~~25.8% and 23.4%, respectively,~~26.9% if we had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates). In addition, our existing master repurchase facilities are not entirely term-matched financings and may mature before our CRE debt investments that represent underlying collateral to those financings. As we negotiate renewals and extensions of these liabilities, we may experience lower advance rates and higher pricing under the renewed or extended agreements.

~~Term Lending Agreement~~

In June 2019, we entered into a Master Repurchase and Securities Contract Agreement (the "Term Lending Agreement") with Morgan Stanley Mortgage Capital Holdings LLC ("Administrative Agent"), as administrative agent on behalf of Morgan Stanley Bank, N.A. ("Initial Buyer"), which provides for current and future financings of up to
~~$900.0 million~~ ~~on a non-mark-to-market basis. The Initial Buyer subsequently syndicated a portion of the facility to multiple financial institutions. As of~~ ~~September 30, 2019~~, the Initial Buyer held 52.2% of the total commitment under the facility. Borrowings under the Term Lending Agreement are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a ~~1.9%~~ ~~margin, inclusive of an ongoing administrative fee. Total outstanding borrowings under the Term Lending Agreement as of~~ September 30, 2019 totaled $875.5 million. The Term Lending Agreement has an initial maturity of June 2021, subject to five one-year extension options, which may be exercised by us upon the satisfaction of certain customary conditions and thresholds.

~~Asset Specific Financing~~

In August 2018, we entered into a $200.0 million loan financing facility with BMO Harris Bank (the "BMO Facility”). During May 2019, KREF increased the borrowing capacity to $300.0 million. The facility provides asset-based financing on a non-mark-to-market basis with matched-term up to five years with partial recourse to the Company. As of September 30, 2019, there was $142.3 million outstanding on this facility.

Term Loan Financing

In connection with our efforts to diversify our financing sources, further expand our non-mark-to-market borrowing base and reduce our exposure to market volatility, we entered into a term loan financing agreement in April 2018 with third party lenders for an initial borrowing capacity of $200.0 million that was increased to $1,000.0 million in October 2018 (“Term Loan Facility”). The facility provides us with asset-based financing on a non-mark-to-market basis with matched term up to five years and is non-recourse to the Company. Borrowings under the facility are collateralized by senior loans, held-for-investment,

and bear ~~interest~~interest equal to one-month LIBOR plus a margin. As of ~~September~~June 30, ~~2019,~~2020, the weighted average margin and interest rate on the facility were ~~1.5%~~1.6% and ~~3.5%~~1.7%, ~~respectively.~~respectively.

The following table summarizes our borrowings under the Term Loan Facility (dollars in thousands):

June 30, 2020

Term Loan Facility

Count

Outstanding Principal

Amortized Cost

Carrying Value

Wtd. Avg. Yield/Cost^(A)

Guarantee^(B)

Wtd. Avg. Term^(C)

Collateral assets

1,187,632

1,181,365

1,170,979

L + 3.1%

n.a.

February 2024

Financing provided

n.a.

984,851

982,217

L + 1.9%

n.a.

February 2024

(A) Floating rate loans and related liabilities are indexed to one-month LIBOR. The Company's net interest rate exposure is in direct proportion to its interest in the net assets indexed to that rate. In addition to cash coupon, yield/cost includes the amortization of deferred origination/financing costs.

(B) Financing under the Term Loan Facility is non-recourse to the Company.

(C) The weighted-average term is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower.

Term Lending Agreement

In June 2019, we entered into a Master Repurchase and Securities Contract Agreement (the "Term Lending Agreement") with Morgan Stanley Mortgage Capital Holdings LLC ("Administrative Agent"), as administrative agent on behalf of Morgan Stanley Bank, N.A. ("Initial Buyer"), which provides for current and future financings of up to $900.0 million on a non-mark-to-market basis. The Initial Buyer subsequently syndicated a portion of the facility to multiple financial institutions. As of June 30, 2020, the Initial Buyer held 48.9% of the total commitment under the facility. Borrowings under the Term Lending Agreement are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a 1.9% margin. Total outstanding borrowings under the Term Lending Agreement as of June 30, 2020 totaled $900.0 million. The Term Lending Agreement has an initial maturity of June 2021, subject to five one-year extension options, which may be exercised by us upon the satisfaction of certain customary conditions and thresholds.

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~~(A)~~	Floating rate loans and related liabilities are indexed to one-month LIBOR. The Company's net interest rate exposure is in direct proportion to its interest in the net assets indexed to that rate. In addition to cash coupon, yield/cost includes the amortization of deferred origination/financing costs.


~~(B)~~	~~Financing under the Term Loan Facility is non-recourse to the Company.~~


~~(C)~~	~~The weighted-average term is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower.~~

In March 2020, we entered into a $500.0 million Loan and Security Agreement with HSBC Bank USA, National Association (“HSBC Facility”). The facility, which matures in March 2023, provides warehouse financing on a non-mark-to-market basis with partial recourse to us. Borrowings under the facility are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a margin. As of June 30, 2020, the collateral-based margin was 1.50%.

Asset Specific Financing

In August 2018, we entered into a $200.0 million loan financing facility with BMO Harris Bank (the "BMO Facility”). In May 2019, KREF increased the borrowing capacity to $300.0 million. The facility provides asset-based financing on a non-mark-to-market basis with matched-term up to five years with partial recourse to the Company. As of June 30, 2020, there was $82.3 million outstanding on this facility.

Revolving Credit Agreement

~~In December 2018, the Company entered into~~We have a ~~$100.0~~$335.0 million corporate revolving credit facility (“Revolver”) administered by Morgan Stanley Senior Funding, Inc. ~~The borrowing capacity was further increased in March, April and May 2019 to $250.0 million.~~ We may use our Revolver as a source of financing, which is designed to provide short-term liquidity to purchase ~~loans~~ or ~~other eligible assets,~~de-lever loans, pay operating expenses and borrow amounts for general corporate purposes. Borrowings under the Revolver bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. As of June 30, 2020, there was $50.0 million outstanding on this facility. Our Revolver is secured by corporate level guarantees and does not include asset-based collateral.

Collateralized Loan Obligations

In November 2018, ~~the Company~~we financed a pool of loan participations from our existing loan portfolio through a managed collateralized loan obligation ("CLO" or "KREF 2018-FL1"). The CLO provides ~~the Company~~us with match-term financing on a non-mark-to-market and non-recourse basis. The CLO has a two-year reinvestment feature that allows principal proceeds of the collateral assets to be reinvested in qualifying replacement assets, subject to the satisfaction of certain conditions set forth in the indenture.

The following table outlines KREF 2018-FL1 collateral assets and respective borrowing (dollars in thousands):

~~(A)~~

~~Collateral assets represent 19.6% of the face amount of the Company's senior loans as of September~~

June 30, ~~2019. As of September 30, 2019, 100% of the Company's loans financed through the CLO are floating rate loans.~~2020

~~(B)~~Collateralized Loan Obligation

~~Yield on collateral assets is based on cash coupon. Financing cost includes amortization of deferred financing costs incurred in connection with the CLO.~~

Count		Outstanding Principal	Amortized Cost		Carrying Value		Wtd. Avg. Yield/Cost^(B)		Wtd. Avg. Term^(C)
~~(C)~~ Collateral assets^(A)	Loan term represents weighted-average final maturity, assuming extension options are exercised by the borrower. Repayments of CLO notes are dependent on timing of related collateral loan asset repayments post reinvestment period. The term of the CLO notes represents the rated final distribution date.	21	$	1,000,000	$	1,000,000	$	984,363	L + 2.8%	November 2023
Financing provided		1	810,000		806,645		806,645		L + 2.2%	June 2036

(A)Excluding $8.0 million cash, collateral assets represent 19.3% of the principal of the Company's senior loans as of June 30, 2020. As of June 30, 2020, 100% of the Company's loans financed through the CLO are floating rate loans.

(B)Yield on collateral assets is based on cash coupon. Financing cost includes amortization of deferred financing costs incurred in connection with the CLO.

(C)Loan term represents weighted-average final maturity, assuming extension options are exercised by the borrower. Repayments of CLO notes are dependent on timing of related collateral loan asset repayments post reinvestment period. The term of the CLO notes represents the rated final distribution date.

Loan Participations Sold

In connection with our investments in CRE loans, we finance certain investments through the syndication of a non-recourse, or limited-recourse, loan participation to an unaffiliated third party. Our presentation of the senior loan and related financing involved in the syndication depends upon whether GAAP recognized the transaction as a sale, though such differences in presentation do not generally impact our net stockholders’ equity or net income aside from timing differences in the recognition of certain transaction costs.

To the extent that GAAP recognizes a sale resulting from the syndication, we derecognize the participation in the senior/whole loan that we sold and continue to carry the retained portion of the loan as an investment. While we do not generally expect to recognize a material gain or loss on these sales, we would realize a gain or loss in an amount equal to the difference between

the net proceeds received from the third party purchaser and our carrying value of the loan participation we sold at time of sale. Furthermore, we recognize interest income only on the portion of the senior loan that we retain as a result of the sale.

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To the extent that GAAP does not recognize a sale resulting from the syndication, we do not derecognize the participation in the senior/whole loan that we sold. Instead, we recognize a loan participation sold liability in an amount equal to the principal of the loan participation syndicated less any unamortized discounts or financing costs resulting from the syndication. We continue to recognize interest income on the entire senior loan, including the interest attributable to the loan participation sold, as well as interest expense on the loan participation sold liability.

The following table details our loan participations sold (dollars in thousands):

June 30, 2020

Loan Participations Sold

Count

Principal Balance

Amortized Cost

Carrying Value

Yield/Cost^(A)

Guarantee

Term

Total loan

330,116

328,818

326,573

L + 2.5%

n.a.

July 2024

Vertical loan participation^(B)

65,000

64,978

L + 2.5%

n.a.

July 2024

September 30, 2019
Loan Participations Sold Count Principal Balance Carrying Value
Yield/Cost^(A)
Guarantee Term
Total loan 1 $ 287,768
$ 286,435
L + 3.3% n.a. June 2023
Pari passu loan syndication^(B)
1 65,000
65,000
L + 2.8% n.a. June 2023
(A) Our floating rate loans and related liabilities were indexed to one-month LIBOR. Our net interest rate exposure is in direct proportion to our net assets.

(B) During the six months ended June 30, 2020, KREF recorded $1.4 million of interest income and $1.4 million of interest expense, respectively, related to the total loan participations sold.


~~(A)~~	~~Our floating rate loans and related liabilities were indexed to one-month LIBOR. Our net interest rate exposure is in direct proportion to our net assets.~~


~~(B)~~	During the three and nine months ended September 30, 2019, we recorded $0.8 million and $1.2 million of interest income and $0.8 million and $1.2 million of interest expense related to the pari passu loan syndicated, but continued to be consolidated under GAAP.

Non-Consolidated Senior Interests

In certain instances, we finance our loans through the non-recourse sale of a senior loan interest that is not included in our condensed consolidated financial statements. These non-consolidated senior interests provide structural leverage for our net investments on a non-mark-to-market, matched-term basis, which are reflected in the form of mezzanine loans or other subordinate interests on our balance sheets and in our statements of income.

The following table details the subordinate interests retained on our balance sheet and the related non-consolidated senior interests (dollars in thousands):

June 30, 2020

Non-Consolidated Senior Interests

Count

Principal Balance

Carrying Value

Yield/Cost^(A)

Guarantee

Term

Total loan

179,500

n.a.

L + 2.7%

n.a.

June 2024

Senior participation

143,600

n.a.

L + 1.6%

n.a.

June 2024

Subordinate interests retained

35,900

September 30, 2019
Non-Consolidated Senior Interests Count Principal Balance Carrying Value
Yield/Cost^(A)
Guarantee Term
Total loan 1 $ 179,500
n.a. L + 2.7% n.a. June 2024
Senior participation 1 143,600
n.a. L + 1.6% n.a. June 2024
Subordinate interests retained 35,900

(A) Our floating rate loans and related liabilities were indexed to one-month LIBOR. Our net interest rate exposure is in direct proportion to our net assets.


~~(A)~~	~~Our floating rate loans and related liabilities were indexed to one-month LIBOR. Our net interest rate exposure is in direct proportion to our net assets.~~

Convertible Notes

We may issue convertible debt to take advantage of favorable market conditions. In May 2018, we issued $143.75 million of 6.125% Convertible Notes due on May 15, 2023. The Convertible Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018. The Convertible Notes mature on May 15, 2023, unless earlier repurchased or converted. Refer to Notes 2 and 6 to our condensed consolidated financial statements for additional discussion of our Convertible Notes.

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Borrowing Activities

The following tables provide additional information regarding our borrowings (dollars in thousands):


			Nine Months Ended
			September 30, 2019									Six Months Ended June 30, 2020
	Outstanding Face Amount at September 30, 2019		Average Daily Amount Outstanding^(A)		Maximum Amount Outstanding		Weighted Average Daily Interest Rate			Outstanding Principal at June 30, 2020		Average Daily Amount Outstanding^(A)		Maximum Amount Outstanding		Weighted Average Daily Interest Rate
Wells Fargo	$	425,134	$	435,749	$	512,298	4.2	%	Wells Fargo	$	469,259	$	468,457	$	469,259	2.5	%
Morgan Stanley	354,377		356,615		615,161		4.4		Morgan Stanley	418,605		407,832		418,605		2.7
Goldman Sachs	245,740		262,639		342,368		4.4		Goldman Sachs	199,942		215,596		225,266		3.2
Term Loan Facility									Term Loan Facility	984,851		912,918		984,851		2.5
KREF Lending V	875,455		836,296		875,455		4.2		KREF Lending V	900,000		893,595		900,000		2.9
Warehouse Facility									Warehouse Facility	57,616		49,200		57,616		2.0
BMO Facility	142,267		123,904		142,267		4.1		BMO Facility	82,268		93,147		142,267		2.7
Revolver	130,000		63,609		250,000		4.5		Revolver	50,000		147,940		335,000		2.6
Term Loan Facility	877,648		835,629		958,666		3.9
Total/Weighted Average	$	3,050,621	$	2,370,596			4.2	%	Total/Weighted Average	$	3,162,541					2.7	%

(A) Represents the average for the period the facility was outstanding.


	Average Daily Amount Outstanding^(A)
	Three Months Ended
	June 30, 2020		March 31, 2020
Wells Fargo	$	468,461	$	468,452
Morgan Stanley	413,207		402,457
Goldman Sachs	208,057		223,135
Term Loan Facility	967,050		858,787
KREF Lending V	899,195		887,995
Warehouse Facility	50,156		45,417
BMO Facility	82,267		104,026
Revolver	195,769		100,110

(A) Represents the average for the period the debt was outstanding.

Average Daily Amount Outstanding^(A)
Three Months Ended
September 30, 2019 June 30, 2019 March 31, 2019
Wells Fargo $ 425,134
$ 391,527
$ 491,314
Morgan Stanley 401,613
395,960
270,835
Goldman Sachs 210,010
273,668
305,286
KREF Lending V 841,628
713,669
—
BMO Facility 142,267
128,320
100,667
Revolver 93,804
69,341
27,123
Term Loan Facility 933,375
849,273
721,915

~~(A) Represents the average for the period the debt was outstanding.~~

Covenants—Each of our repurchase facilities, Term Lending Agreement, Warehouse Facility and our Revolver contain customary terms and conditions, including, but not limited to, negative covenants relating to restrictions on our operations with respect to our status as a REIT, and financial covenants, such as:

•an interest income to interest expense ratio covenant (1.5 to 1.0);

•a minimum consolidated tangible net worth covenant (75.0% of the aggregate net cash proceeds of any equity issuances made and any capital contributions received by us and KKR Real Estate Finance Holdings L.P. (our "Operating Partnership") or up to approximately ~~$880.2~~$880.2 million, depending on the agreement;

•a cash liquidity covenant (the greater of $10.0 million or 5.0% of our recourse indebtedness);

•a total indebtedness covenant (75.0% of our total assets, net of VIE liabilities);

As of ~~September~~June 30, ~~2019,~~2020, we were in compliance with the covenants of our financing facilities.

Guarantees—In connection with each master repurchase agreement, our Operating Partnership has entered into a limited guarantee in favor of each lender, under which our Operating Partnership guarantees the obligations of the borrower under the respective master repurchase agreement (i) in the case of certain defaults, up to a maximum liability of 25.0% of the then-outstanding repurchase price of the eligible loans, participations or securities, as applicable, or (ii) up to a maximum liability of 100.0% in the case of certain "bad boy" defaults. The borrower in each case is a special purpose subsidiary of the Company.

In connection with our Term Lending Agreement, our Operating Partnership entered into a guarantee in favor of Morgan Stanley Mortgage Capital Holdings LLC, in its capacity as the Administrative Agent, under which our Operating Partnership guarantees the obligations of the KREF Lending V LLC under the agreement. The guarantee includes; in the case of certain defaults, up to a maximum liability of 25.0% of the then outstanding aggregate repurchase price under the agreement, and

liability to indemnify the Administrative Agent against losses related to "bad boy" acts. In addition, the guarantee includes certain full recourses in the case of bankruptcy of the KREF Lending V LLC.

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In connection with our BMO Facility, our Operating Partnership entered into a guarantee in favor of BMO Harris Bank, N.A., in its capacity as the Administrative Agent and Lender, under which our Operating Partnership guarantees the obligations of the Company's borrower entity, under the agreement. The guarantee includes; in the case of certain defaults, up to a maximum liability of 25.0% of the then current outstanding payment obligations under the agreement, and liability to indemnify the Administrative Agent and Lender against losses related to "bad boy" acts. In addition, the guarantee includes certain full recourse insolvency-related trigger events.

With respect to our Revolver, amounts borrowed are full recourse to certain guarantor wholly-owned subsidiaries of the Company.

In connection with our HSBC Warehouse Facility, our Operating Partnership entered into a guarantee in favor of HSBC Bank USA, National Association, in its capacity as the Administrative Agent and Lender, under which our Operating Partnership guarantees the obligations of the Company's borrower entity, under the agreement. The guarantee includes; in the case of certain defaults, up to a maximum liability of 25.0% of the then current outstanding payment obligations under the agreement, and liability to indemnify the Administrative Agent and Lender against losses related to "bad boy" acts. In addition, the guarantee includes certain full recourse insolvency-related trigger events.

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Results of Operations

The following table summarizes the changes in our results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands, except per share data):


	For the Three Months Ended June 30,						Increase (Decrease)						For the Six Months Ended June 30,				Increase (Decrease)
	2020		2019		Dollars		Percentage		2020		2019		Dollars		Percentage
Net Interest Income
Interest income	$	67,219	$	62,944	$	4,275	6.8	%	$	138,298	$	127,695	$	10,603	8.3	%
Interest expense	30,563		37,089		(6,526)		(17.6)		69,645		71,931		(2,286)		(3.2)
Total net interest income	36,656		25,855		10,801		41.8		68,653		55,764		12,889		23.1
Other Income

Income (loss) from equity method investments	297		868		(571)		(65.8)		(1,604)		1,993		(3,597)		(180.5)
Change in net assets related to CMBS consolidated variable interest entities	—		(1,551)		1,551		100.0		—		(1,209)		1,209		100.0
Other income	196		671		(475)		(70.8)		556		1,153		(597)		(51.8)
Total other income (loss)	493		(12)		505		4,208.3		(1,048)		1,937		(2,985)		(154.1)

Operating Expenses
General and administrative	4,046		2,781		1,265		45.5		7,813		5,142		2,671		51.9
Provision for credit losses, net	(1,366)		—		(1,366)		(100.0)		53,908		—		53,908		100.0
Management fees to affiliate	4,218		4,288		(70)		(1.6)		8,517		8,575		(58)		(0.7)
Incentive compensation to affiliate	1,249		1,145		104		9.1		2,855		2,098		757		36.1
Total operating expenses	8,147		8,214		(67)		(0.8)		73,093		15,815		57,278		362.2
Income (Loss) Before Income Taxes, Preferred Dividends and Redemption Value Adjustment	29,002		17,629		11,373		64.5		(5,488)		41,886		(47,374)		(113.1)
Income tax expense	77		280		(203)		(72.5)		159		289		(130)		(45.0)
Net Income (Loss)	28,925		17,349		11,576		66.7		(5,647)		41,597		(47,244)		(113.6)



Preferred Stock Dividends and Redemption Value Adjustment	335		(32)		367		1,146.9		927		(489)		1,416		289.6
Net Income (Loss) Attributable to Common Stockholders	$	28,590	$	17,381	$	11,209	64.5	%	$	(6,574)	$	42,086	$	(48,660)	(115.6)	%

Net Income (Loss) Per Share of Common Stock
Basic	$	0.52	$	0.30	$	0.22	73.3	%	$	(0.12)	$	0.73	$	(0.85)	(116.4)	%
Diluted	$	0.52	$	0.30	$	0.22	73.3	%	$	(0.12)	$	0.73	$	(0.85)	(116.4)	%
Dividends Declared per Share of Common Stock	$	0.43	$	0.43	$	—	—	%	$	0.86	$	0.86	$	—	—	%

For the Three Months Ended September 30, Increase (Decrease) For the Nine Months Ended September 30, Increase (Decrease)
2019 2018 Dollars Percentage 2019 2018 Dollars Percentage
Net Interest Income
Interest income $ 74,223
$ 51,895
$ 22,328
43.0 % $ 201,918
$ 123,952
$ 77,966
62.9 %
Interest expense 45,596
23,337
22,259
95.4
117,527
52,825
64,702
122.5
Total net interest income 28,627
28,558
69
0.2
84,391
71,127
13,264
18.6
Other Income
(Loss) gain on sale of investments (429 ) —
(429 ) 100.0
(2,759 ) 13,000
(15,759 ) (121.2 )
Change in net assets related to CMBS consolidated variable interest entities 544
379
165
43.5
1,665
2,460
(795 ) (32.3 )
Income from equity method investments 1,321
747
574
76.8
3,314
2,084
1,230
59.0
Other income 853
476
377
79.2
2,006
1,239
767
61.9
Total other income (loss) 2,289
1,602
687
42.9
4,226
18,783
(14,557 ) (77.5 )

Operating Expenses
General and administrative 2,704
1,653
1,051
63.6
7,846
6,002
1,844
30.7
Management fees to affiliate 4,280
4,164
116
2.8
12,855
12,016
839
7.0
Incentive compensation to affiliate —
3,286
(3,286 ) 100.0
2,098
3,286
(1,188 ) (36.2 )
Total operating expenses 6,984
9,103
(2,119 ) (23.3 ) 22,799
21,304
1,495
7.0
Income (Loss) Before Income Taxes, Noncontrolling Interests and Preferred Dividends 23,932
21,057
2,875
13.7
65,818
68,606
(2,788 ) (4.1 )
Income tax expense (benefit) 77
85
(8 ) (9.4 ) 366
227
139
61.2
Net Income (Loss) 23,855
20,972
2,883
13.7
65,452
68,379
(2,927 ) (4.3 )
Redeemable Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture —
—
—
—
—
63
(63 ) (100.0 )
Net Income (Loss) Attributable to KKR Real Estate Finance Trust Inc. and Subsidiaries 23,855
20,972
2,883
13.7
65,452
68,316
(2,864 ) (4.2 )
Preferred Stock Dividends and Redemption Value Adjustment 238
151
87
57.6
(251 ) 395
(646 ) (163.5 )
Net Income (Loss) Attributable to Common Stockholders $ 23,617
$ 20,821
$ 2,796
13.4 % $ 65,703
$ 67,921
(2,218 ) (3.3 )%

Net Income (Loss) Per Share of Common Stock
Basic $ 0.41
$ 0.37
$ 0.04
10.8 % $ 1.14
$ 1.26
$ (0.12 ) (9.5 )%
Diluted $ 0.41
$ 0.37
$ 0.04
10.8 % $ 1.14
$ 1.25
$ (0.11 ) (8.8 )%
Dividends Declared per Share of Common Stock $ 0.43
$ 0.43
$ —
— % $ 1.29
$ 1.26
$ 0.03
2.4 %

Net Interest Income

Net interest income increased by ~~$0.1~~$10.8 million and ~~$13.3~~$12.9 million, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, compared to the three and six months ended June 30, 2019. This increase was primarily due to the increase in our interest income as a result of continuing capital deployment and the benefit from attractive in-the-money LIBOR floors (when LIBOR floors exceed spot LIBOR) during the six months ended June 30, 2020. The weighted-average principal balance of our loan portfolio increased by $1.1 billion and $1.2 billion, respectively, for the three and six months ended June 30, 2020, compared to the corresponding periods in ~~2018, primarily due to increased~~2019. The increase in interest income ~~as the principal balance of the Company's loan portfolio increased by $1.8 billion from September 30, 2018 to September 30, 2019. This increase~~ was partially offset by ~~increased~~the incremental interest expense ~~resulting~~incurred from ~~interest~~additional borrowings on ~~amounts outstanding under~~ our ~~debt obligations used~~financing facilities to ~~finance investments in commercial loans, which~~fund loan originations and higher leverage. The weighted-average principal balance of our borrowings increased by ~~$1.7~~$1.1 billion and $1.1 billion, respectively, for the three and six months ended June 30, 2020, compared to ~~September~~the corresponding periods in 2019. In addition, we benefited from in-the-money LIBOR floors in our loans during the six months ended June 30, ~~2018. We~~2020 as 98% of our loan portfolio is subject to a LIBOR floor of 0.95% or higher while 5% of total outstanding financing is subject to a LIBOR floor greater than 0.0%.

Table of Contents

In addition, we recognized ~~$4.1~~$4.5 million and ~~$14.6~~8.9 million of deferred loan fees and origination discounts accreted into interest income, respectively, during the three and

~~nine~~ six months ended ~~September~~June 30, ~~2019, respectively,~~2020, as ~~compared~~compared to ~~$4.0~~$4.1 million and ~~$7.2~~$10.5 million during the corresponding periods in ~~2018.~~ 2019. During the six months ended June 30, 2020, we also recognized a non-recurring exit fee income of $2.8 million.

We also recorded ~~$4.0~~$5.4 million and ~~$12.1~~$10.8 million of deferred financing costs amortization into interest expense, respectively, during the three and ~~nine~~six months ended ~~September~~June 30, ~~2019, respectively,~~2020, as compared to ~~$1.9~~$4.1 million and ~~$4.3~~$8.1 million during the corresponding periods in ~~2018.~~2019.

Other Income

~~Total~~Total other income ~~increased~~decreased by ~~$0.7~~$3.0 million during the ~~three~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the ~~three~~six months ended ~~September~~June 30, ~~2018.~~2019. This ~~increase~~decrease was primarily due to a ~~$0.6~~$3.8 million ~~increase in income earned~~unrealized mark-to-market loss from our RECOP I equity method investment ~~and an increase of $0.1~~during the six months ended June 30, 2020, as compared to a $1.2 million ~~of other income from non-recurring CMBS fees. The increase was partially offset by a net~~ loss ~~of $0.4 million resulting from the sale of our remaining~~on CMBS B-Piece investments during the ~~three~~six months ended ~~September~~June 30, ~~2019, as compared to an unrealized loss of $0.2~~2019.

Operating Expenses

Total operating expenses increased by $57.3 million during the ~~corresponding period in 2018.~~

~~Total other income decreased by $14.6 million during the nine~~six months ended ~~September~~June 30, ~~2019,~~2020, as compared to the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019. This ~~decrease~~increase was primarily due to (i) a ~~$13.0~~$53.9 million ~~gain from the sale of CMBS B-Pieces~~provision for credit losses in ~~April 2018, partially offset by~~connection with adopting ASU 2016-03 on January 1, 2020, (ii) a ~~$2.1~~$0.9 million unrealized loss recorded during the nine months ended September 30, 2018, compared to a $2.8 million loss from the sale of our remaining CMBS B-Piece investments recorded during the nine months ended September 30, 2019. Additionally, net interest income from our CMBS B-Pieces decreased from $4.6 million during the nine months ended September 30, 2018 to $1.7 million during the nine months ended September 30, 2019, driven by the sale of CMBS B-Piece investments in April 2018. Income from RECOP I equity method investment also increased by $1.2 million during the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018.

~~Operating Expenses~~

Total operating expenses decreased by $2.1 million during the three months ended September 30, 2019, as compared to the three months ended September 30, 2018. This decrease was primarily driven by the fact that we did not recognize Manager incentive compensation during the three months ended September 30, 2019, as compared to $3.3 million recognized during the corresponding period in 2018. The decrease in total operating expenses was partially offset by an increase in non-cash stock-based compensation expense, ~~of $0.7~~(iii) a $0.8 million ~~during the three months ended September 30, 2019, over the $0.3 million recognized during the three months ended September 30, 2018.~~

~~Total operating expenses increased by $1.5 million during the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018. This~~ increase ~~was primarily driven by an additional~~in Manager incentive compensation, and (iv) $1.5 million in ~~non-cash stock-based compensation expense during~~non-recurring dead deal costs for the ~~nine~~six months ended ~~September~~June 30, ~~2019, over~~2020.

We did not have a provision for loan credit losses prior to January 1, 2020. Upon the ~~$1.6~~adoption of ASU 2016-13 on January 1, 2020, we recorded a $15.0 million ~~recognized during~~cumulative-effect adjustment to our accumulated deficit. During the ~~nine~~six months ended ~~September~~June 30, ~~2018. The increase in total operating expenses was partially offset by a decrease of $1.2~~2020, we recorded an incremental $53.9 million in ~~incentive compensation recognized during the nine months ended September 30, 2019, compared~~credit loss provision due to the ~~corresponding period~~adverse change in ~~2018.~~the economic outlook due to the COVID pandemic.

The following table provides additional information regarding total operating expenses (dollars in thousands):


	Three Months Ended
	June 30, 2020		March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019
Professional services	$	566	$	764	$	765	$	711	$	839
Operating and other costs	2,106		1,396		894		953		899
Stock-based compensation	1,374		1,607		1,017		1,040		1,043
Total general and administrative expenses	4,046		3,767		2,676		2,704		2,781
Provision for credit losses, net	(1,366)		55,274		—		—		—
Management fees to affiliate	4,218		4,299		4,280		4,280		4,288
Incentive compensation to affiliate	1,249		1,606		1,174		—		1,145
Total operating expenses	$	8,147	$	64,946	$	8,130	$	6,984	$	8,214

COVID-19 Impact

The significant and wide-ranging response of international, federal, state and local public health and governmental authorities to the COVID-19 pandemic in regions across the United States and the world, including the imposition of quarantines, “stay-at-home” orders and similar mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations, and the volatile economic, business and financial market conditions resulting therefrom, are expected to negatively impact our business, financial performance and operating results in later periods of 2020. Although we are uncertain of the potential full magnitude or duration of the business and economic impacts from the unprecedented public health efforts to contain and combat the spread of COVID-19, we will likely experience material deterioration in our financial performance and operating results, revenues, cash flow and/or profitability in one or more of the remaining periods in 2020 (in addition to the second quarter) compared to the corresponding prior-year periods and compared to our expectations at the beginning of our 2020 fiscal year. Further discussion of the potential impacts on our business from the COVID-19 pandemic is provided below in the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Three Months Ended
September 30, 2019 June 30, 2019 March 31, 2019 December 31, 2018 September 30, 2018
Professional services $ 711
$ 839
$ 546
$ 604
$ 666
Operating and other costs 953
899
824
819
692
Stock-based compensation 1,040
1,043
991
387
295
Total general and administrative expenses 2,704
2,781
2,361
1,810
1,653
Management fees to affiliate 4,280
4,288
4,287
4,330
4,164
Incentive compensation to affiliate —
1,145
953
1,470
3,286
Total operating expenses $ 6,984
$ 8,214
$ 7,601
$ 7,610
$ 9,103

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Liquidity and Capital Resources

Overview

We have capitalized our business to date primarily through the issuance and sale of our common stock, borrowings from Non-Mark-to-Market Financing Sources⁽¹⁾, borrowings from three master repurchase agreements, and issuance and sale of convertible notes. Our ~~primary liquidity needs include:~~Non-Mark-to Market Financing Sources, which accounted for 73% of our ~~ongoing commitments~~total secured financing (excluding our corporate Revolver) as of June 30, 2020, are not subject to ~~repay the principal and interest~~credit or capital markets mark-to-market provisions. The remaining 27% of our secured borrowings, which are comprised of three master repurchase agreements, are only subject to credit marks. We did not receive any margin calls on our ~~borrowings and pay other financing costs; financing our assets; meeting future funding obligations; making distributions~~master repurchase agreements to ~~our stockholders; funding our operations, which includes making payments to our Manager in accordance with the management agreement; and other general business needs.~~date, nor do we expect any at this time.

Our primary sources of liquidity ~~and capital sources have been derived from net proceeds from equity issuances, net advances from~~include cash on our ~~secured~~consolidated balance sheet of $127.3 million, available borrowings under our financing ~~agreements, inclusive of our revolver, net proceeds from collateralized loan obligations, net proceeds from issuance of convertible notes and~~arrangements using existing collateral totaling $18.8 million, cash flows from ~~operations.~~operations, and $285.0 million available on our corporate revolver. Our corporate revolver is secured by corporate level guarantees and does not include asset-based collateral. We may seek additional sources of liquidity from syndicated financing, other borrowings (including borrowings not related to a specific investment) and future offerings of equity and debt securities. ~~In addition, we may apply~~

Our primary liquidity needs include our ~~existing cash~~ongoing commitments to repay the principal and ~~cash equivalents~~interest on our borrowings and ~~cash flows from~~pay other financing costs, financing our assets, meeting future funding obligations, making distributions to our stockholders, funding our operations that includes making payments to ~~any liquidity~~our Manager in accordance with the management agreement, and other general business needs. ~~As of September 30, 2019, our cash and cash equivalents were $74.5 million.~~

We ~~recently implemented~~are continuing to monitor the COVID-19 pandemic and its impact on our operating partners, financing sources, borrowers and their tenants, and the economy as a ~~new cash management strategy~~whole. The magnitude and duration of the COVID-19 pandemic, and its impact on our operations and liquidity, are uncertain and continue to ~~minimize cash drag as~~evolve in the United States and globally. To the extent that our ~~loans payoff, while enhancing~~operating partners, financing sources, borrower’s and their tenants continue to be impacted by the COVID-19 pandemic, or by the other risks disclosed in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K, it would have a material adverse effect on our liquidity and ~~execution readiness on new loan originations. In connection with such strategy, we acquired $94.0 million of investment grade available-for-sale CMBS securities in October 2019.~~capital resources.

To facilitate future offerings of equity, debt and other securities, we have in place an effective shelf registration statement (the “Shelf”) with the SEC. The amount of securities that may be issued pursuant to this Shelf is not to exceed $750.0 million. The securities covered by this Shelf include: (i) common stock, (ii) preferred stock, (iii) depository shares, (iv) debt securities, (v) warrants, (vi) subscription rights, (vii) and purchase contracts, and (viii) units. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering material, at the time of any offering. In February 2019, we entered into an equity distribution agreement with certain sales agents, pursuant to which we may sell, from time to time, up to an aggregate sales price of $100.0 million of our common stock, pursuant to a continuous offering program (the “ATM”), under the shelf. Sales of our common stock made pursuant to the ATM may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. We did not sell any shares of our common stock under the ATM ~~during the nine months ended September 30, 2019.~~to date.

See Notes 4, 5, 6 and 9 to our condensed consolidated financial statements for additional details regarding our secured financing agreements, collateralized loan obligations, convertible notes and stock activity.

(1) Comprised of term loan financing, term lending agreement, collateralized loan obligations, warehouse facility, asset specific financing, and non-consolidated senior interests.

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Debt-to-Equity Ratio and Total Leverage Ratio

The following table presents our debt-to-equity ratio and total leverage ratio:

~~September~~June 30, ~~2019~~2020

December 31, ~~2018~~2019

Debt-to-equity ratio^(A)

~~2.0x~~2.1x

~~1.1x~~1.9x

Total leverage ratio^(B)

~~3.6x~~4.0x

~~2.6x~~3.5x


~~(A)~~	(A) Represents (i) total outstanding debt agreements (excluding non-recourse term loan facility) and convertible notes, less cash to (ii) total permanent equity, in each case, at period end.


~~(B)~~	Represents (i) total outstanding debt agreements, convertible notes, loan participations sold (excluding pari passu loan syndications), non-consolidated senior interests and collateralized loan obligation, less cash to (ii) total stockholders’ equity, in each case, at period end.

(B) Represents (i) total outstanding debt agreements, convertible notes, loan participations sold (excluding vertical loan syndications), non-consolidated senior interests and collateralized loan obligation, less cash to (ii) total stockholders’ equity, in each case, at period end.

Sources of Liquidity

Our primary sources of liquidity include cash and cash equivalents and available borrowings under our secured financing agreements, inclusive of our ~~revolver.~~Revolver. Amounts available under these sources as of the date presented are summarized in the following table (dollars in thousands):


	June 30, 2020		December 31, 2019
Cash and cash equivalents^(A)	$	127,250	$	67,619
Available borrowings under master repurchase agreements	5,701		6,174
Available borrowings under term loan financing facility	9,499		41,364
Available borrowings under term lending agreement	—		15,922
Available borrowings under warehouse facility	—		—
Available borrowings under asset specific financing	3,611		2,592
Available borrowings under revolving credit agreements	285,000		250,000

	$	431,061	$	383,671

September 30, 2019 December 31, 2018
Cash and cash equivalents $ 74,517
$ 86,531
Available borrowings under master repurchase agreements 19,052
58,751
Available borrowings under term lending agreement 4,231
—
Available borrowings under asset specific financing 22,611
5,423
Available borrowings under revolving credit agreements 120,000
100,000
Available borrowings under term loan financing facility 29,784
33,637
$ 270,195
$ 284,342
(A) Includes $8.0 million held in CLO as of June 30, 2020.

In addition to our primary sources of liquidity, we have access to further liquidity through our ATM program and public offerings of debt and equity securities. Our existing loan portfolio also provides us with liquidity as loans are repaid or sold, in whole or in part, and the proceeds from repayment become available for us to invest.

Cash Flows

The following table sets forth changes in cash and cash equivalents for the ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (dollars in thousands):


	For the Nine Months Ended September 30,										For the Six Months Ended June 30,
	2019			2018			Increase (Decrease)				2020		2019
Cash Flows From Operating Activities	$	68,245		$	57,429		$	10,816		Cash Flows From Operating Activities	$	53,042	$	40,181
Cash Flows From Investing Activities	(1,077,904		)	(1,272,058		)	194,154			Cash Flows From Investing Activities	(177,790)		(822,900)
Cash Flows From Financing Activities	997,645			1,303,880			(306,235		)	Cash Flows From Financing Activities	184,379		878,920
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	$	(12,014	)	$	89,251		$	(101,265	)
Net Increase in Cash, Cash Equivalents, and Restricted Cash										Net Increase in Cash, Cash Equivalents, and Restricted Cash	$	59,631	$	96,201




	~~KKR Real Estate Finance Trust Inc.~~
	~~(Exact name of registrant as specified in its charter)~~
	~~Maryland~~				~~47-2009094~~
	~~(State or other jurisdiction of incorporation or organization)~~				~~(I.R.S. Employer Identification No.)~~


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2020		2019		2020		2019
Net Interest Income
Interest income	$	11,429	$	14,162	$	23,265	$	28,588
Interest expense^(A)	6,386		10,024		15,154		19,967
Net interest income	$	5,043	$	4,138	$	8,111	$	8,621



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Cash coupon	$	2,201	$	2,201	$	6,603	$	3,253
Discount and issuance cost amortization	349		349		1,037		512
Total interest expense	$	2,550	2,550		7,640		3,765



	September 30, 2019			December 31, 2018
Face value	$	143,750		$	143,750
Deferred financing costs	(3,719		)	(4,486		)
Unamortized discount	(1,306		)	(1,576		)
Net book value	$	138,725		$	137,688


	June 30, 2020		December 31, 2019
Principal	$	143,750	$	143,750
Deferred financing costs	(2,949)		(3,460)
Unamortized discount	(1,035)		(1,215)
Net book value	$	139,766	$	139,075



	September 30, 2019			December 31, 2018^(A)
Assets
Cash and cash equivalents	$	74,517		$	86,531
Commercial mortgage loans, held-for-investment, net	5,077,038			4,001,820
Equity method investments, at fair value	37,230			30,734
Accrued interest receivable	17,929			16,178
Other assets	4,720			3,596
Commercial mortgage loans held in variable interest entities, at fair value	—			1,092,986
Total Assets	$	5,211,434		$	5,231,845

Liabilities and Equity
Liabilities
Secured financing agreements, net	$	3,038,591		$	1,951,049
Collateralized loan obligation, net	802,692			800,346
Convertible notes, net	138,725			137,688
Loan participations sold, net	65,000			85,465
Accounts payable, accrued expenses and other liabilities	3,241			4,529
Dividends payable	24,972			25,097
Accrued interest payable	9,447			7,516
Due to affiliates	4,695			4,712
Variable interest entity liabilities, at fair value	—			1,080,255
Total Liabilities	4,087,363			4,096,657

Commitments and Contingencies (Note 11)

Temporary Equity
Redeemable preferred stock	2,102			2,846

Permanent Equity
Preferred stock, 50,000,000 authorized (1 share with par value of $0.01 issued and outstanding as of September 30, 2019 and December 31, 2018)	—			—
Common stock, 300,000,000 authorized (57,423,911 and 57,596,217 shares with par value of $0.01 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively)	574			576
Additional paid-in capital	1,166,016			1,163,845
Accumulated deficit	(8,663		)	(225		)
Repurchased stock, 1,862,689 and 1,649,880 shares repurchased as of September 30, 2019 and December 31, 2018, respectively	(35,958		)	(31,854		)
Total KKR Real Estate Finance Trust Inc. stockholders’ equity	1,121,969			1,132,342
Total Permanent Equity	1,121,969			1,132,342
Total Liabilities and Equity	$	5,211,434		$	5,231,845



						Weighted Average
Loan Type	Outstanding Face Amount		Carrying Value		Loan Count	Floating Rate Loan %^(A)		Coupon^(A)		Life (Years)^(B)
September 30, 2019
Loans held-for-investment
Senior loans^(C)	$	5,064,968	$	5,036,519	36	100.0	%	5.3	%	3.8
Mezzanine loans	41,400		40,519		2	86.7		9.6		4.1
	$	5,106,368	$	5,077,038	38	99.9	%	5.3	%	3.8
December 31, 2018
Loans held-for-investment
Senior loans^(C)	$	3,970,856	$	3,946,086	33	100.0	%	6.0	%	3.7
Mezzanine loans	55,857		55,734		8	53.0		12.0		4.1
	$	4,026,713	$	4,001,820	41	99.3	%	6.0	%	3.7



	Held-for-Investment			Held-for-Sale		Total
Balance at December 31, 2018	$	4,001,820		$	—	$	4,001,820
Purchases and originations, net^(A)	2,316,756			—		2,316,756
Proceeds from sales and principal repayments^(B)	(1,256,193		)	—		(1,256,193		)
Accretion of loan discount and other amortization, net^(C)	14,655			—		14,655
Balance at September 30, 2019	$	5,077,038		$	—	$	5,077,038



Balance as of December 31, 2018	$	1,951,049
Principal borrowings	2,745,759
Principal repayments	(1,660,814		)
Deferred debt issuance costs	(5,528		)
Amortization of deferred debt issuance costs	8,123
Balance as of September 30, 2019	$	3,038,589


~~(A)~~	Includes $0.9 million and $2.5 million of deferred financing costs amortization for the three and nine months ended September 30, 2019, respectively. KREF's unamortized deferred financing costs related to KREF 2018-FL1 were $7.3 million as of September 30, 2019.


~~(A)~~	~~Floating rate loans and related liabilities are indexed to one-month LIBOR. KREF's net interest rate exposure is in direct proportion to its interest in the net assets of the senior loan.~~


~~(C)~~	As of December 31, 2018, the loan participation sold was subject to partial recourse of $10.0 million, which amount may be reduced to zero upon achievement of certain property performance metrics. Such loan was fully paid off in January 2019.



	September 30, 2019		December 31, 2018
Trusts' Assets
Commercial mortgage loans held in variable interest entities, at fair value^(A)	$	—	$	1,092,986
Accrued interest receivable	—		4,005

Trusts' Liabilities
Variable interest entity liabilities, at fair value^(B)	—		1,080,255
Accrued interest payable	—		3,818


Pricing Date	Shares Issued	Net Proceeds
























As of December 31, 2015	13,636,416	$	272,728

February 2016	2,000,000	40,000
May 2016	3,000,138	57,130
June 2016^(A)	21,838	—
August 2016	5,500,000	109,875
As of December 31, 2016	24,158,392	479,733

February 2017	7,386,208	147,662
April 2017	10,379,738	207,595
May 2017- Initial Public Offering	11,787,500	219,356
As of December 31, 2017	53,711,838	1,054,346
August 2018	5,000,000	98,326
November 2018	500,000	9,351
As of December 31, 2018	59,211,838	1,162,023


~~(A)~~	KREF did not receive any proceeds with respect to 21,838 shares of common stock issued to certain current and former employees of, and non-employee consultants to, KKR and third-party investors in the private placement completed in March 2016, in accordance with KREF's Stockholders Agreement dated as of March 29, 2016.


			Amount
Declaration Date	Record Date	Payment Date	Per Share		Total
2020
March 16, 2020	March 31, 2020	April 15, 2020	$	0.43	$	24,010
June 15, 2020	June 30, 2020	July 15, 2020	$	0.43	$	23,861
					$	47,871
2019
March 18, 2019	March 29, 2019	April 12, 2019	$	0.43	$	24,761
June 14, 2019	June 28, 2019	July 15, 2019	$	0.43	$	24,688
					$	49,449


	Restricted Stock Units	Weighted Average Grant Date Fair Value Per RSU^(A)
Unvested as of December 31, 2019	641,214	$	20.02
Granted	18,052	14.40
Vested	(59,551)	20.42
Forfeited/ cancelled	(1,239)	19.26
Unvested as of June 30, 2020	598,476	$	19.81



	Restricted Stock Units		Weighted Average Grant Date Fair Value Per RSU^(A)
Unvested as of December 31, 2018	459,179		$	19.33
Granted	12,832		20.26
Vested	(59,740	)	20.51
Forfeited/ cancelled	(4,861	)	19.70
Unvested as of September 30, 2019	407,410		$	19.18


~~(A)~~	~~The grant-date fair value is based upon the last sale price of KREF’s common stock at the date of grant.~~



	June 30, 2020		December 31, 2019
Management fees	$	4,218	$	4,280

Expense reimbursements and other	710		1,637

	$	4,928	$	5,917



	September 30,		December 31,
	2019		2018
Management fees	$	4,280	$	4,330
Expense reimbursements and other	415		382
	$	4,695	$	4,712


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Management fees	$	4,218	$	4,288	$	8,517	$	8,575
Incentive compensation	1,249		1,145		2,855		2,098
Expense reimbursements and other^(A)	386		420		685		785
	$	5,853	$	5,853	$	12,057	$	11,458



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Management fees	$	4,280	$	4,164	$	12,855	$	12,016
Incentive compensation	—		3,286		2,098		3,286
Expense reimbursements and other^(A)	275		37		1,060		767
	$	4,555	$	7,487	$	16,013	$	16,069


							Fair Value
	Principal Balance^(A)		Amortized Cost^(B)		Carrying Value^(C)		Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents	$	127,250	$	127,250	$	127,250	$	127,250	$	—	$	—	$	127,250

Commercial mortgage loans, held-for-investment, net^(D)	5,142,525		5,113,531		5,051,132		—		—		5,025,185		5,025,185
Equity method investments	33,606		33,606		33,606		—		—		33,606		33,606
	$	5,303,381	$	5,274,387	$	5,211,988	$	127,250	$	—	$	5,058,791	$	5,186,041

Liabilities
Secured financing agreements, net	$	3,162,541	$	3,152,652	$	3,152,652	$	—	$	—	$	3,162,541	$	3,162,541
Collateralized loan obligation, net	810,000		806,645		806,645		—		—		794,465		794,465
Convertible notes, net	143,750		139,766		139,766		138,953		—		—		138,953
Loan participations sold, net	65,000		64,978		64,978		—		—		64,978		64,978
	$	4,181,291	$	4,164,041	$	4,164,041	$	138,953	$	—	$	4,021,984	$	4,160,937


~~(A)~~	~~The principal balance of commercial mortgage loans excludes premiums and unamortized discounts.~~


~~(B)~~	The carrying value of commercial mortgage loans is presented net of $29.3 million unamortized origination discounts and deferred nonrefundable fees. The carrying value of secured financing agreements is presented net of $12.0 million unamortized debt issuance costs. The carrying value of collateralized loan obligations is presented net of $7.3 million unamortized debt issuance costs.


~~(C)~~	Includes $1.0 billion of CLO loan participations as of September 30, 2019. Includes senior loans for which KREF syndicated a pari passu loan participation that was not treated as a sale under GAAP, with a carrying value and a fair value of $65.0 million as of September 30, 2019.


~~(A)~~	~~Amounts primarily consist of changes in accrued interest.~~



	Fair Value		Valuation Methodologies	Unobservable Inputs^(A)	Weighted Average^(B)	Range
Assets^(C)
Commercial mortgage loans, held-for-investment, net	$	5,086,211	Discounted cash flow	Discount rate	5.7%	4.0% - 12.6%
				Loan-to-value ratio^(D)	N/A	N/A
	$	5,086,211
Liabilities^(E)
Collateralized loan obligation, net	$	811,119	Discounted cash flow	Yield	2.7%	2.5% - 3.9%
	$	811,119


~~(A)~~	~~An increase (decrease) in the valuation input results in a decrease (increase) in value.~~


~~(B)~~	(B) Represents the average of the input value, weighted by the unpaid principal balance of the financial instrument.


~~(C)~~	KREF carries a $37.0 million investment in an aggregator vehicle alongside RECOP I (Note 8) at its pro rata share of the aggregator's net asset value, which management believes approximates fair value.


~~(E)~~	Does not include $65.0 million of parri passu loan syndication which was syndicated at par value and included in “Loan participation sold, net” in the accompanying Condensed Consolidated Balance Sheet.


~~(A)~~	(A) Represents net income attributable to common stockholders.


~~(A)~~	Includes $0.1 million non-cash redemption value adjustment of our Special Non-Voting Preferred Stock for the three months ended September 30, 2019. Includes ($0.2) million non-cash redemption value adjustment of our Special Non-Voting Preferred Stock and $2.2 million of unrealized loss on junior-most bonds of CMBS ("CMBS B-Pieces") for the three months ended June 30, 2019.