KFN Kkr Financial Holdings Llc

SAN FRANCISCO, Nov. 14 /PRNewswire-FirstCall/ -- KKR Financial Corp. (NYSE:KFN) today announced its results for its fiscal year third quarter ended September 30, 2005. Highlights of the Company's performance during the period include: -- Distribution of $0.32 per common share declared for the quarter ended September 30, 2005, to stockholders of record on November 16, 2005, and payable on November 30, 2005. -- Net income for the quarter ended September 30, 2005 of $18.5 million, or $0.24 per diluted common share, an increase over net income for the quarter ended June 30, 2005 of $8.5 million, or $0.21 per diluted common share. Net income for the nine month period ended September 30, 2005 of $33.1 million or $0.62 per diluted common share. -- Net income adjusted for share-based compensation, a non-GAAP financial measurement, consisting of GAAP net income plus GAAP share-based compensation expense for the quarter ended September 30, 2005 of $25.9 million, or $0.33 per diluted common share. Net income adjusted for share-based compensation for the nine month period ended September 30, 2005 of $52.6 million or $0.98 per diluted common share. -- REIT taxable income, a non-GAAP financial measurement, for the quarter ended September 30, 2005 of $26.8 million, or $0.34 per diluted common share. REIT taxable income for the nine month period ended September 30, 2005 of $58.8 million or $1.10 per diluted common share. See attached Schedule II for reconciliation of GAAP net income to REIT taxable income. -- Investment portfolio of $12.5 billion as of September 30, 2005, a 76.1% increase compared to $7.1 billion as of June 30, 2005. -- Investment portfolio weighted average amortized cost, as a percentage of par value, of 99.95% as of September 30, 2005, compared to 99.82% as of June 30, 2005. -- Closed and launched KKR Pacific Funding Trust, the Company's first $5.0 billion asset-backed commercial paper facility, on September 30, 2005. -- Priced KKR Financial CLO 2005-2, Ltd., the Company's second $1 billion collateralized loan obligation transaction on October 6, 2005, and closed the transaction on November 3, 2005. -- On November 2, 2005, the independent Directors of the Company's Board of Directors approved the Company's recommendation to co-invest on a pari passu basis with Kohlberg Kravis Roberts & Co. L.P. in three separate private equity transactions. The Company's aggregate investment will total $42.5 million and the investments are scheduled to close during the fourth quarter. KKR Financial Corp. reported net income for the three month and nine month periods ended September 30, 2005 of $18.5 million and $33.1 million, respectively, or $0.24 and $0.62 per diluted common share, respectively. The results of operations for the quarter include a provision for loan losses totaling $1.3 million and a lease termination charge of $0.8 million. Current quarter results compare with a net loss of $3.4 million or $0.09 for the period from inception of the Company on August 12, 2004 through September 30, 2004, and represent an increase over net income for the quarter ended June 30, 2005, of $8.5 million or $0.21 per diluted common share. Net income includes share-based compensation expense for the three and nine month periods ended September 30, 2005, totaling $7.4 million and $19.5 million, respectively, or $0.09 and $0.36 per diluted common share, respectively. Net income adjusted for share-based compensation, a non-GAAP financial measurement consisting of GAAP net income plus GAAP share-based compensation expense, for the quarter ended September 30, 2005 totaled $25.9 million, or $0.33 per diluted common share. Net income adjusted for share-based compensation for the nine month period ended September 30, 2005 totaled $52.6 million or $0.98 per diluted common share. REIT taxable income, a non-GAAP financial measurement, for the three month and nine month periods ended September 30, 2005 totaled $26.8 million and $58.8 million, respectively, or $0.34 and $1.10 per diluted common share, respectively. See attached Schedule II for reconciliation of GAAP net income to REIT taxable income. For the period from inception of the Company on August 12, 2004 through September 30, 2004, the Company incurred a net loss of $3.4 million or a loss of $0.09 per diluted common share and a REIT taxable loss of $25.3 million or a loss of $0.64 per diluted common share. The Company filed its Form 10-Q for the quarterly period ended September 30, 2005, with the Securities and Exchange Commission today, November 14, 2005. KKR Financial encourages investors to carefully read the Company's Form 10-Q which contains condensed consolidated financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations. The Company will host a conference call and audio web cast to review its third quarter 2005 results on Tuesday, November 15, 2005, at 11:00 a.m. EDT. The conference call can be accessed by dialing 866-802-6730 (Domestic) or 913-643-4200 (International); a pass code is not required. A replay will be available through November 23, 2005 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 3945107. A live web cast of the call will be accessible on the Company's website, at http://www.kkrfinancial.com/, via a link from the Investor Relations section. A replay of the audio web cast will be archived in the Investor Relations section of the Company's website. Investment Portfolio During the three month period ended September 30, 2005, KKR Financial's investment portfolio increased by 76.1% from $7.1 billion as of June 30, 2005 to $12.5 billion as of September 30, 2005. For the nine month period ended September 30, 2005, the investment portfolio increased by 443.5% from $2.3 billion as of December 31, 2004. As of September 30, 2005, the aggregate amortized cost of the Company's investment portfolio exceeded the estimated fair value of its investment portfolio by $61.8 million and, as of the same date, the Company had unrealized gains totaling $23.9 million related to its cash flow hedges, as defined under SFAS No. 133. As of September 30, 2005, the aggregate net unamortized purchase discount (i.e., aggregate purchase discounts exceed aggregate purchase premiums on the Company's investment portfolio) related to the investment portfolio was $6.4 million and the weighted average amortized cost, as a percentage of aggregate par value, of the investment portfolio was 99.95% as of September 30, 2005, compared to 99.82% as of June 30, 2005. Management has been able to successfully maintain the aggregate amortized cost value of the investment portfolio below aggregate par value due to the Company's ability to purchase a substantial amount of its residential real estate, corporate, and commercial real estate investments in primary market transactions at a cost of par or below. Commencing on the date the Company made its first investment, management has sought to position the Company so as not to be negatively impacted by an overall higher interest rate environment or in a flatter, or potentially inverted, interest rate curve environment by investing in floating rate and hybrid rate investments, which as of September 30, 2005, totaled 51.3% and 47.2% of the investment portfolio, respectively. Fixed rate loans and securities total 1.5% of the Company's investment portfolio as of September 30, 2005. Equally important, the Company's adjustable rate residential loans and residential adjustable rate mortgage ("ARM") securities reset monthly and substantially all of its floating rate corporate and commercial real estate loans and securities reset at least quarterly. The Company has also fixed borrowings used to fund hybrid ARM security investments using interest rate swaps and interest rate corridors, which are accounted for as cash flow hedges under GAAP. KKR Financial purchased $6.5 billion and $11.9 billion par amount of investments during the three and nine month periods ended September 30, 2005, respectively. For the period from August 12, 2004 (Inception) through September 30, 2004, the Company purchased $22.0 million par amount of investments. The table below summarizes investment portfolio purchases for the periods indicated and includes the par amount, or face amount, of the securities and loans that were purchased. Investment Portfolio Purchases (Amounts in thousands) Three month Nine month August 12, 2004 period ended period ended (Inception) through September 30, 2005 September 30, 2005 September 30, 2004 Par Amount % Par Amount % Par Amount % (Unaudited) Securities: Residential ARM Securities $886,566 13.5% $1,625,771 13.7% $-- --% Residential Hybrid ARM Securities -- -- 2,935,532 24.7 -- -- Corporate Debt Securities 180,315 2.8 398,820 3.3 -- -- Commercial Real Estate Debt Securities 52,315 0.8 62,315 0.5 12,000 54.5 Total 1,119,196 17.1 5,022,438 42.2 12,000 54.5 Loans: Residential ARM Loans 956,970 14.6 1,393,471 11.7 -- -- Residential Hybrid ARM Loans 3,717,560 56.9 3,717,560 31.2 -- -- Corporate Loans 509,673 7.8 1,426,374 12.0 10,000 45.5 Commercial Real Estate Loans 235,450 3.6 342,200 2.9 -- -- Total 5,419,653 82.9 6,879,605 57.8 10,000 45.5 Grand Total $6,538,849 100.0% $11,902,043 100.0% $22,000 100.0% The table above excludes purchases of $24.7 million of common and preferred stock during the nine month period ended September 30, 2005, and $0 during the period from August 12, 2004 (Inception) through September 30, 2004. There were no purchases of common or preferred stock during the three-month period ended September 30, 2005. As set forth in the table above, for the three month period ended September 30, 2005, the Company purchased $3.7 billion par amount of Residential Hybrid ARM Loans. Under currently promulgated GAAP, the Company is required to account for the $3.7 billion as loans, notwithstanding the fact that the Company purchased the investment in the form of rated securities. Schedule VII summarizes the ratings distribution of the Company's portfolio of Residential Hybrid ARM loans. Distribution On November 2, 2005, the Company's Board of Directors declared a distribution of $0.32 per common share for the quarter ended September 30, 2005, to shareholders of record on November 16, 2005, and payable on November 30, 2005. Because the distribution was declared subsequent to September 30, 2005, the aggregate distribution amount of $25.7 million is not reflected in the Company's consolidated balance sheet as of September 30, 2005. The Company's distribution for the quarter, that was declared on November 2, 2005, totaled $25.7 million. REIT taxable income, a non-GAAP financial measurement, totaled $26.8 million for the quarter and net income adjusted for share-based compensation, a non-GAAP financial measurement, totaled $25.9 million for the quarter. The non-GAAP financial measurements of REIT taxable income and net income adjusted for share-based compensation are important because the Company is structured as a REIT and the Internal Revenue Code requires that the Company pay substantially all of its taxable income in the form of distributions to its stockholders. REIT taxable income is critical in the determination of the amount of the minimum distributions that the Company must pay to its stockholders so as to comply with the rules set forth in the Internal Revenue Code. Net income adjusted for share-based compensation is an important non-GAAP measure as share-based compensation represents the largest non-cash reconciling item between reported GAAP income and taxable income. Accordingly, net income adjusted for share-based compensation is an important measurement used by management to assess the amount of cash available to distribute to stockholders. Book Value per Common Share The Company's book value per common share was $20.11 as of September 30, 2005, exclusive of the distribution declared on November 2, 2005. The Company's book value was $19.79 per common share computed on a pro forma basis as of September 30, 2005, inclusive of the distribution declared on November 2, 2005, compared to $20.31 per common share as of June 30, 2005, or a decrease of 2.6%. Total common shares outstanding as of September 30, 2005, totaled 80,374,063 compared to 78,470,742 as of June 30, 2005, or an increase of 2.4%. The increase in common shares outstanding during the quarter is a result of the grant of restricted common stock by the Compensation Committee of the Board of Directors during July 2005. KKR Pacific Funding Trust On September 30, 2005, the Company closed and launched KKR Pacific Funding Trust, the Company's first $5 billion asset-backed commercial paper facility. This facility will provide the Company with an alternative source of funding its residential real estate securities and loans by issuing secured liquidity notes that are rated A-1+, P-1, and F1+, by Standard and Poor's, Moody's Investors Service, and Fitch, Inc. KKR Financial CLO 2005-2, Ltd. The Company priced and closed KKR Financial CLO 2005-2, Ltd., the Company's second $1 billion collateralized loan obligation transaction on October 6, 2005, and November 3, 2005, respectively. The Company issued $695 million of Aaa/AAA rated senior notes at par with a coupon of 3-month LIBOR plus .26% and $57 million of A2/AA rated senior notes at par with a coupon of 3-month LIBOR plus .43%. The Company retained the following securities in the transaction: $64 million of Class C mezzanine notes rated A2/A, $64 million of Class D mezzanine notes rated Baa2/BBB-, $30 million of Class E mezzanine notes rated Ba2/BB-, $10 million of Class F mezzanine notes rated B2/B-, and $98.5 million of non-rated subordinated notes. The maturity date of the transaction is November 26, 2017. The Company closed its first $1 billion collateralized loan obligation transaction on March 30, 2005. Private Equity Co-Investments On November 2, 2005, the independent Directors of the Company's Board of Directors approved the Company's recommendation to co-invest on a pari passu basis with Kohlberg Kravis Roberts & Co. L.P. ("KKR") in three separate private equity transactions. The Company's aggregate investment will total $42.5 million and the investments are scheduled to close during the fourth quarter. The Company will be investing in the following transactions: -- Avago Technologies: The Company will be investing $12.5 million in the acquisition of Avago Technologies by KKR and Silver Lake Partners. Avago Technologies is comprised of the worldwide operations of the semiconductor products group of Agilent Technologies, Inc. -- Masonite International Corporation: The Company will be investing $20 million in the acquisition of Masonite International Corporation ("Masonite") by KKR. Masonite is the largest global manufacturer of doors and door components. -- Toys "R" Us, Inc.: The Company will be investing $10 million in the acquisition of Toys "R" Us, Inc. ("Toys "R" Us"). Toys "R" Us is being acquired by KKR, Bain Capital Partners LLC, and Vornado Realty Trust. Toys "R" Us is a worldwide specialty retailer of toys, baby products and children's apparel. Additional information regarding KKR and the above referenced transactions is available at KKR's website, http://www.kkr.com/. KKR Financial is a specialty finance company that invests in multiple asset classes and uses leverage to generate competitive leveraged risk- adjusted returns. The Company currently makes investments in the following asset classes: (i) residential mortgage loans and mortgage-backed securities; (ii) corporate loans and debt securities; (iii) commercial real estate loans and debt securities; (iv) asset-backed securities; and (v) equity securities. The Company also makes opportunistic investments in other asset classes from time to time. The Company was organized as a Maryland corporation on July 7, 2004, and commenced operations on August 12, 2004. The Company is structured as a real estate investment trust and KKR Financial Advisors LLC manages the Company pursuant to a management agreement. KKR Financial Corp. and KKR Financial Advisors LLC are affiliates of Kohlberg Kravis Roberts & Co. L.P. Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Although KKR Financial Corp. believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, the Company can give no assurance that its expectations will be attained. Factors that could cause actual results to differ materially from the Company's expectations include completion of pending investments, continued ability to originate new investments, the mix of originations and prepayment levels, the availability and cost of capital for future investments, competition within the specialty finance sector, economic conditions, credit loss experience, and other risks disclosed from time to time in the Company's filings with the Securities and Exchange Commission. Investor Contact Media Contact Laurie Poggi Roanne Kulakoff and Joseph Kuo KKR Financial LLC Kekst and Company 415-315-3718 212-521-4837 and 212-521-4863 Schedule I KKR Financial Corp. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ended Three Months Ended, Sept. 30, Sept. 30, June 30, 2005 2005 2005 % Change (in thousands, except per share amounts) Net investment income: Securities interest income $120,835 $50,917 $46,048 10.6% Loan interest income 95,859 63,869 21,101 202.7 Dividend income 2,452 985 933 5.6 Other interest income 2,013 816 943 (13.5) Total investment income 221,159 116,587 69,025 68.9 Interest expense (146,262) (77,532) (48,281) 60.6 Net investment income before provision for loan losses 74,897 39,055 20,744 88.3 Provision for loan losses (1,300) (1,300) -- -- Net investment income 73,597 37,755 20,744 82.0 Other income loss: Net realized and unrealized gain (loss) on derivatives and foreign exchange (36) 13 (176) 107.4 Net realized gain on investments 2,881 1,730 790 119.0 Fee and other income 1,731 136 1,245 (89.1) Total other income 4,576 1,879 1,859 1.1 Non-investment expenses: Management compensation to related party 33,070 14,331 10,731 33.5 Professional services 2,617 1,432 788 81.7 Loan servicing expense 1,999 1,369 362 278.2 Insurance expense 708 275 216 27.3 Directors expenses 719 368 152 142.1 General and administrative expenses 4,107 2,630 858 206.5 Total non-investment expenses 43,220 20,405 13,107 55.7 Income before income tax expense 34,953 19,229 9,496 102.5 Income tax expense 1,881 775 994 (22.0) Net income $33,072 $18,454 $8,502 117.1% Net income per common share: Basic $0.63 $0.24 $0.21 14.3% Diluted $0.62 $0.24 $0.21 14.3% Weighted-average number of common shares outstanding: Basic 52,681 77,486 40,212 92.7% Diluted 53,519 78,492 40,994 91.5% Distributions per common share $0.65 -- $0.40 (100.0)% Schedule II KKR Financial Corp. RECONCILIATION OF REPORTED GAAP NET INCOME (LOSS) TO TOTAL TAXABLE INCOME AND REIT TAXABLE INCOME (LOSS) (UNAUDITED) Estimated For the Estimated Estimated Period from For the Three For the Nine August 12, 2004 Months Ended Months Ended (Inception) through September 30, September 30, September 30, 2005 2005 2004 Per Per Per Amount Share Amount Share Amount Share (in thousands, except per share amounts) Reported net income (loss) $18,454 $0.24 $33,072 $0.62 $(3,430) $(0.09) Interest income and expense 48 0.00 145 0.00 -- -- Share-based compensation 7,428 0.09 19,509 0.36 (21,888) (0.55) Depreciation of property and equipment 144 0.00 274 0.01 (7) (0.00) Lease abandonment expense 795 0.01 795 0.01 -- -- Provision for loan losses 1,300 0.02 1,300 0.02 -- -- Losses on sales of assets to third parties (126) (0.00) (674) (0.01) -- -- Gains on sales of assets to affiliates 145 0.00 4,432 0.08 -- -- Realized and unrealized derivative losses (285) (0.01) (459) (0.01) -- -- Realized losses (gains) on foreign currency translations (203) (0.00) 2,332 0.05 -- -- Income tax expense 775 0.01 1,881 0.04 -- -- Total taxable income (loss)(1) 28,475 0.36 62,607 1.17 (25,325) (0.64) Undistributed taxable income of domestic taxable REIT subsidiary (1,709) (0.02) (3,781) (0.07) -- -- REIT taxable income (loss)(1) $26,766 $0.34 $58,826 $1.10 $(25,325) $(0.64) Weighted-average diluted common shares outstanding during the period 78,492 53,519 39,796 (1) Total taxable income (loss) and REIT taxable income (loss) are non-GAAP financial measurements and do not purport to be an alternative to net income (loss) determined in accordance with GAAP as a measure of operating performance or to cash flows from operating activities determined in accordance with GAAP as a measure of liquidity. Total taxable income is the aggregate amount of taxable income generated by the Company and by its domestic and foreign taxable REIT subsidiaries. REIT taxable income (loss) excludes the undistributed taxable income of the Company's domestic taxable REIT subsidiary, which is not included in REIT taxable income (loss) until distributed to the Company. There is no requirement that the Company's domestic taxable REIT subsidiary distribute its earnings to the Company. REIT taxable income (loss), however, includes the taxable income of the Company's foreign taxable REIT subsidiaries because the Company will generally be required to recognize and report its taxable income on a current basis. These non-GAAP financial measurements are important to the Company because the Company is structured as a REIT and the Internal Revenue Code requires that the Company pay substantially all of its taxable income in the form of distributions to its stockholders. The non-GAAP financial measurements of total taxable income and REIT taxable income are critical in the determination of the amount of the minimum distributions that the Company must pay to its stockholders so as to comply with the rules set forth in the Internal Revenue Code. Because not all companies use identical calculations, this presentation of total taxable income and REIT taxable income may not be comparable to other similarly titled measures prepared and reported by of other companies. Schedule III KKR Financial Corp. CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) % Change from September 30, 2005 (amounts in thousands) Sept. 30, June 30, Dec. 31, June 30, Dec. 31, 2005 2005 2004 2005 2004 Assets: Cash and cash equivalents $62,078 $14,435 $7,219 330.1% 759.9% Restricted cash and cash equivalents 83,286 31,465 1,321 164.7 6,204.8 Securities available- for-sale 419,066 373,362 167,058 40.8 214.6 Securities available- for-sale, pledged as collateral 4,877,621 4,683,901 1,484,222 1.9 221.5 Loans, net of allowance of $1,300, $0, and $0, as of September 30, 2005, June 30, 2005, and December 31, 2004, respectively 7,221,803 2,042,124 682,757 253.6 957.7 Derivative assets 35,445 9,899 223 258.1 15,794.6 Interest receivable 46,118 22,074 2,694 108.9 1611.9 Principal receivable 284 421 -- (32.5) -- Deferred tax asset -- -- 228 -- -- Other assets 22,306 2,672 1,618 734.8 1,278.6 Total assets $12,768,007 $7,180,353 $2,347,340 77.8% 443.9% Liabilities: Repurchase agreements $10,231,010 $4,771,756 $1,558,274 114.4% 556.6 CLO senior notes payable 773,000 696,448 -- 11.0 -- Demand loan 40,511 40,511 27,875 -- 45.3 Accounts payable, accrued expenses and other liabilities 75,640 46,989 1,157 61.0 6,437.6 Distribution payable -- 16,400 -- (100.0) -- Accrued interest payable 25,097 10,274 771 144.3 3,155.1 Payable to manager and related party liabilities 3,413 1,717 1,765 98.8 93.4 Income tax liability 1,654 878 -- 88.4 -- Derivative liabilities 1,089 1,660 750 (34.4) 45.2 Total liabilities 11,151,414 5,586,633 1,590,592 99.6% 601.1% Stockholders' equity: Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued and outstanding at September 30, 2005, June 30, 2005, and December 31, 2004 -- -- -- -- -- Common stock, $0.01 par value, 250,000,000 shares authorized and 80,374,063, 78,470,742, and 41,004,492 shares issued and outstanding at September 30, 2005, June 30, 2005, and December 31, 2004, respectively 804 785 410 2.4 96.1 Additional paid-in- capital 1,675,379 1,635,721 779,740 2.4 114.9 Deferred compensation (46,120) (13,780) (18,413) 234.7 150.5 Accumulated other comprehensive income (loss) (13,182) (10,264) 1,720 28.4 (866.4) Accumulated deficit (288) (18,742) (6,709) (98.5) (95.7) Total stockholders' equity 1,616,593 1,593,720 756,748 1.4% 113.6% Total liabilities and stockholders' equity $12,768,007 $7,180,353 $2,347,340 77.8% 443.9% Schedule IV KKR Financial Corp. SUMMARY FINANCIAL DATA (UNAUDITED) (amounts in Nine thousands, Months Ended Three Months Ended, except per Sept. 30, Sept. 30, June 30, share amounts) 2005 2005 2005 % Change Net Income: $33,072 $18,454 $8,502 117.1% Earnings per diluted common share $0.62 $0.24 $0.21 14.3 Net income + Share-Based Compensation(1): $52,581 $25,882 $15,836 63.4 Net income, adjusted for share-based compensation, per diluted common share $0.98 $0.33 $0.39 (15.4) REIT Taxable Income(2): $58,826 $26,766 $16,895 58.4 REIT taxable income per diluted common share $1.10 $0.34 $0.41 (17.1) Profitability Ratio Information(3): Return on equity 4.2% 4.5% 4.6% (2.2) Return on assets 0.6% 0.7% 0.5% 40.0 Efficiency ratio 19.1% 17.2% 18.5% (7.0) Share Information: Common shares outstanding 80,374 80,374 78,471 2.4 Basic EPS common shares outstanding 52,681 77,486 40,212 92.7 Diluted EPS common shares outstanding 53,519 78,492 40,994 91.5 Distributions per common share $0.65 $-- $0.40 (100.0) Investment Portfolio Information: Residential mortgage securities $4,815,307 $4,815,307 $4,767,392 1.0 Residential loans 5,211,508 5,211,508 649,036 703.0 Total residential 10,026,815 10,026,815 5,416,428 85.1 Corporate securities 356,335 356,335 214,746 65.9 Corporate loans 1,620,468 1,620,468 1,237,611 30.9 Total corporate 1,976,803 1,976,803 1,452,357 36.1 Commercial real estate securities 71,925 71,925 22,049 226.2 Commercial real estate loans 391,127 391,127 155,477 151.6 Total commercial real estate 463,052 463,052 177,526 160.8 Preferred and common stocks 53,120 53,120 53,076 0.1 Total investment portfolio 12,519,790 12,519,790 7,099,387 76.4 Balance Sheet Information: Investment portfolio $12,519,790 $12,519,790 $7,099,387 76.3 Total assets 12,768,007 12,768,007 7,180,353 77.8 Total borrowings 11,044,521 11,044,521 5,508,715 100.5 Total liabilities 11,151,414 11,151,414 5,586,633 99.6 Stockholders' equity 1,616,593 1,616,593 1,593,720 1.4 Book value per common share 20.11 20.11 20.31 (1.0) Leverage 6.8x 6.8x 3.5x 94.3 Statement of Operations Information: Investment income $221,159 $116,587 $69,025 68.9 Other income 4,576 1,879 1,859 1.1 Total income 225,735 118,466 70,884 67.1 Interest expense (146,262) (77,532) (48,281) 60.6 Provision for loan losses (1,300) (1,300) -- -- Share-based compensation expense (19,509) (7,428) (7,334) 1.3 Management fees (13,822) (7,102) (3,383) 109.9 Loan servicing expense (1,999) (1,369) (362) 278.9 Other expenses (7,890) (4,506) (2,028) 122.2 Total non-investment expenses (43,220) (20,405) (13,107) 55.7 Income before income tax expense 34,953 19,229 9,496 102.5 Income tax expense (1,881) (775) (994) (22.0) Net income 33,072 18,454 8,502 117.1% (1) Non-GAAP financial measurement consisting of GAAP net income plus GAAP share-based compensation expense. (2) Non-GAAP financial measurement. See attached Schedule II for reconciliation of GAAP net income to total taxable income and REIT taxable income. (3) All ratios computed on an annualized basis. The efficiency ratio is defined as non-interest expense divided by total revenue. Schedule V KKR Financial Corp. INVESTMENT PORTFOLIO BY INTEREST RATE TYPE AS OF SEPTEMBER 30, 2005 (UNAUDITED) Portfolio Estimated Mix% Carrying Amortized Fair by Fair Value Cost Value Value (amounts in thousands) Floating Rate Residential ARM Loans $1,579,769 $1,579,769 $1,576,220 12.7% Residential ARM Securities 2,532,718 2,529,423 2,532,718 20.3 Corporate Loans 1,595,468 1,595,468 1,611,569 13.0 Corporate Debt Securities 250,853 252,282 250,853 2.0 Commercial Real Estate Loans 355,586 355,586 355,925 2.9 Commercial Real Estate Debt Securities 52,045 51,995 52,045 0.4 Total Floating Rate 6,366,439 6,364,523 6,379,330 51.3 Hybrid Rate: Residential Hybrid ARM Loans 3,631,739 3,631,739 3,593,785 28.9 Residential Hybrid ARM Securities 2,282,589 2,321,383 2,282,589 18.3 Total Hybrid Rate 5,914,328 5,953,122 5,876,374 47.2 Fixed Rate: Corporate Loans 25,000 25,000 25,000 0.2 Corporate Debt Securities 105,482 106,060 105,482 0.8 Commercial Real Estate Loans 35,541 35,541 35,890 0.3 Commercial Real Estate Debt Securities 19,880 19,786 19,880 0.2 Total Fixed Rate 185,903 186,387 186,252 1.5 Total $12,466,670 $12,504,032 $12,441,956 100.0% (1) The schedule excludes common and preferred stock with a fair value of $53.1 million and an amortized cost of $52.8 million as of September 30, 2005. As of September 30, 2005, the aggregate amortized cost value of the Company's investment portfolio exceeded the aggregate fair value of its portfolio by $61.8 million and, as of the same date, the Company had unrealized gains totaling $23.9 million related to its cash flow hedges, as defined under SFAS No. 133. As of September 30, 2005, the aggregate net unamortized purchase discount related to the Company's investment portfolio was $6.4 million. (2) The schedule summarizes the carrying value, amortized cost, and fair value of the Company's investment portfolio as of September 30, 2005, classified by interest rate type. Carrying value is the value that investments are recorded on the Company's consolidated balance sheets and is fair value for securities and amortized cost for loans. Estimated fair values set forth in the schedule are as of September 30, 2005 and are based on dealer quotes and/or nationally recognized pricing services. Schedule VI KKR Financial Corp. SECURITIES PORTFOLIO BY RATINGS AS OF SEPTEMBER 30, 2005 (UNAUDITED) Commercial Preferred Residential Residential Corporate Real and ARM Hybrid ARM Debt Estate Common Total Securities Securities Securities Securities Stock Securities (amounts in thousands) Aaa/AAA $2,470,157 $2,258,394 $-- $-- $-- $4,728,551 Aa1/AA+ -- -- -- -- -- -- Aa2/AA 21,497 28,327 -- -- -- 49,824 Aa3/AA- -- -- -- -- -- -- A1/A+ -- -- -- -- -- -- A2/A 15,498 17,944 -- -- -- 33,442 A3/A- -- -- -- -- -- -- Baa1/BBB+ -- -- -- -- -- -- Baa2/BBB 10,999 6,379 60,619 12,000 -- 89,997 Baa3/BBB- -- 2,434 24,833 26,488 -- 53,755 Ba1/BB+ -- -- 55,261 20,000 -- 75,261 Ba2/BB 4,668 3,612 7,500 5,000 11,158 31,938 Ba3/BB- -- -- 45,000 -- -- 45,000 B1/B+ -- -- 30,720 -- 24,040 54,760 B2/B 2,796 2,042 45,711 -- -- 50,549 B3/B- -- -- 55,638 -- -- 55,638 Caa1/CCC+ -- -- 15,000 -- -- 15,000 Caa2/CCC -- -- 18,060 -- -- 18,060 Caa3/CCC- and lower -- -- -- 8,293 -- 8,293 NR 3,808 2,251 -- -- 17,628 23,687 Total (1) $2,529,423 $2,321,383 $358,342 $71,781 $52,826 $5,333,755 (1) Amounts are amortized cost. Schedule VII KKR Financial Corp. LOAN PORTFOLIO BY RATINGS AS OF SEPTEMBER 30, 2005 (UNAUDITED) Securitized Securitized Commercial Residential Residential Unsecuritized Real ARM Hybrid ARM Residential Corporate Estate Total Loans Loans ARM Loans Loans Loans Loans (amounts in thousands) Aaa/AAA $1,146,795 $3,491,652 $-- $-- $-- $4,638,447 Aa1/AA+ -- 36,185 -- -- -- 36,185 Aa2/AA 27,216 43,924 -- -- -- 71,140 Aa3/AA- -- -- -- -- -- -- A1/A+ 9,878 -- -- -- -- 9,878 A2/A 2,409 24,393 -- -- -- 26,802 A3/A- -- -- -- -- -- -- Baa1/BBB+ 5,927 -- -- -- -- 5,927 Baa2/BBB 1,548 14,782 -- -- -- 16,330 Baa3/BBB- -- -- -- -- -- -- Ba1/BB+ 5,927 -- -- 24,663 -- 30,590 Ba2/BB 860 6,903 -- 226,235 -- 233,998 Ba3/BB- -- -- -- 323,208 -- 323,208 B1/B+ -- -- -- 499,805 -- 499,805 B2/B 3,479 4,023 -- 301,920 -- 309,422 B3/B- -- -- -- 130,558 -- 130,558 Caa1/CCC+ -- -- -- 5,000 50,000 55,000 Caa2/CCC -- -- -- 16,138 -- 16,138 Caa3/CCC- and lower -- -- -- -- -- -- NR 6,145 9,877 $369,585 92,941 341,127 819,675 Total (1) $1,210,184 $3,631,739 $369,585 $1,620,468 $391,127 $7,223,103 (1) Amounts are amortized cost. DATASOURCE: KKR Financial LLC CONTACT: investors, Laurie Poggi of KKR Financial LLC, +1-415-315-3718; or media, Roanne Kulakoff, +1-212-521-4837, or Joseph Kuo, +1-212-521-4863, both of Kekst and Company, for KKR Financial LLC Web site: http://www.kkrfinancial.com/

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