KFN Kkr Financial Holdings Llc

SAN FRANCISCO, May 10 /PRNewswire-FirstCall/ -- KKR Financial Corp. (NYSE:KFN) ("KFN" or the "Company") today announced its results for the first quarter of 2006. Highlights of KKR Financial Corp.'s performance include: * Distribution of $0.45 per common share declared for the quarter ended March 31, 2006. * Book value of $21.20, an increase of 3.0% from December 31, 2005, and a 5.4% increase from September 30, 2005. * Net income for the quarter ended March 31, 2006 of $30.4 million, or $0.38 per diluted common share. * Net income adjusted for share-based compensation, a non-GAAP financial measurement, for the quarter ended March 31, 2006 of $37.2 million, or $0.47 per diluted common share. * REIT taxable income, a non-GAAP financial measurement, for the quarter ended March 31, 2006 of $47.7 million, or $0.60 per diluted common share. * Investment portfolio of $15.4 billion as of March 31, 2006, a 2.7% increase from $15.0 billion as of December 31, 2005. * Weighted average cost of investment portfolio, as a percentage of par value, of 99.94% as of March 31, 2006, compared to 99.96% as of December 31, 2005. * Closed KKR Atlantic Funding Trust, the Company's second $5 billion asset-backed commercial paper conduit. * Issued $50.0 million of 30-year trust preferred securities at par with an initial fixed interest rate based on ten-year LIBOR plus 2.45%. * Closed and funded the Company's fifth private equity investment totaling $50.9 million. The Company's aggregate private equity portfolio totaled $101.0 million as of quarter-end. * Subsequent to quarter-end, committed to a $40.0 million private equity co-investment on a pari passu basis with Kohlberg Kravis Roberts & Co. L.P. in Capmark Financial Group Inc. KKR Financial Corp. ("KFN" or the "Company") reported net income for the first quarter ended March 31, 2006 of $30.4 million, or $0.38 per diluted common share. Current quarter results compare with net income of $6.1 million, or $0.15 per diluted common share, for the quarter ended March 31, 2005. The change from 2005 to 2006 is primarily attributable to the increase in our investment portfolio since March 31, 2005. Net income includes share-based compensation expense for the quarter ended March 31, 2006 totaling $6.8 million, or $0.09 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 March 31, 2006 totaled $37.2 million, or $0.47 per diluted common share. Net income adjusted for share-based compensation is an important non-GAAP measure because it is an indicative measurement of cash flow generated from operations that is available to make distributions to common stockholders. REIT taxable income, a non-GAAP financial measurement, for the first quarter ended March 31, 2006 totaled $47.7 million, or $0.60 per diluted common share. The non-GAAP financial measurement of REIT taxable income is 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. Attached to this release is a schedule reconciling this measure to net income. The Company filed its Form 10-Q for the quarterly period ended March 31, 2006 with the Securities and Exchange Commission today, May 10, 2006. KFN 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. Investment Portfolio During the quarter ended March 31, 2006, the Company's investment portfolio increased by 2.7% from $15.0 billion as of December 31, 2005 to $15.4 billion as of March 31, 2006. As of March 31, 2006, the aggregate amortized cost of the Company's investment portfolio exceeded the estimated fair value of its investment portfolio by $63.6 million and, as of the same date, the Company had unrealized gains totaling $92.6 million related to its cash flow hedges, as defined under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In comparison, as of December 31, 2005, the aggregate amortized cost of the Company's investment portfolio exceeded the estimated fair value of its investment portfolio by $54.1 million and, as of the same date, the Company had unrealized gains totaling $45.6 million related to its cash flow hedges. As of March 31, 2006, the aggregate net unamortized purchase discount (i.e., the amount by which aggregate purchase discounts exceed aggregate purchase premiums on the Company's investment portfolio) related to the investment portfolio was $8.7 million and the weighted average amortized cost, as a percentage of aggregate par value, of the investment portfolio was 99.94%. Management has been able to maintain the aggregate amortized cost value of the investment portfolio below aggregate par value due to the Company's ability to make 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. Since the Company's formation, management has positioned the Company so as not to be negatively impacted by either an overall higher interest rate environment or a flatter, or inverted, interest rate curve environment by investing in floating rate and hybrid rate investments, which as of March 31, 2006 totaled 57.2% and 40.2% of the investment portfolio, respectively. Fixed rate loans and securities total 2.3% of the Company's investment portfolio as of March 31, 2006. Additionally, 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. The Company made $1.8 billion and $4.0 billion par amount of investments during the first quarter ended March 31, 2006 and 2005, respectively. 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 Months Ended Three Months Ended March 31, 2006 March 31, 2005 Par Amount % Par Amount % Securities: Residential ARM Securities $1,063,776 58.1% $665,782 16.7% Residential Hybrid ARM Securities -- -- 2,636,492 66.0 Corporate Debt Securities 127,769 7.0 112,005 2.8 Commercial Real Estate Debt Securities -- -- 10,000 0.2 Total 1,191,545 65.1 3,424,279 85.7 Loans: Residential ARM Loans 99,498 5.4 246,720 6.2 Corporate Loans 538,883 29.5 324,551 8.1 Total 638,381 34.9 571,271 14.3 Grand Total $1,829,926 100.0% $3,995,550 100.0% The table above excludes purchases of $10.4 million of marketable equity securities and $50.9 million of non-marketable equity securities during the quarter ended March 31, 2006 and $15.9 million of marketable equity securities during the quarter ended March 31, 2005. Distribution On May 3, 2006, the Company's Board of Directors declared a distribution of $0.45 per common share for the quarter ended March 31, 2006, to stockholders of record on May 17, 2006, and payable on May 31, 2006. Because the distribution was declared subsequent to March 31, 2006, the aggregate distribution payable of $36.2 million is not reflected in the Company's consolidated balance sheet as of March 31, 2006. Book Value Per Common Share The Company's book value per common share was $21.20 and $20.59 as of March 31, 2006 and December 31, 2005, respectively, exclusive of the distributions declared subsequent to the end of the first quarter of 2006 of $0.45 and the fourth quarter of 2005 of $0.40. The Company's book value per common share as of March 31, 2006 and December 31, 2005, computed on a pro forma basis inclusive of distributions declared subsequent to the respective quarter ended, was $20.75 and $20.19, respectively. KKR Atlantic Funding Trust On March 30, 2006, the Company closed KKR Atlantic Funding Trust, its second $5.0 billion asset-backed secured liquidity note facility. This facility provides the Company with an alternative source of funding its investments in residential mortgage loans and mortgage-backed securities by issuing asset-backed secured liquidity notes that are rated A-1+, P-1, and F1+, by Standard & Poor's Ratings Services, Moody's Investors Service Inc., and Fitch Inc., respectively. Trust Preferred Securities During March 2006, the Company formed KKR Financial Capital Trust I for the sole purpose of issuing trust preferred securities. On March 28, 2006, KKR Financial Capital Trust I issued preferred securities to unaffiliated investors for gross proceeds of $50.0 million. Interest is payable quarterly at a fixed rate of 7.635% (ten-year LIBOR plus 2.45%) per annum through March 2016 and thereafter at a floating rate equal to three-month LIBOR plus 2.65%. Private Equity Investments During the first quarter of 2006, the Company closed and funded a 6 billion yen, or $50.9 million, private equity investment in a conglomerate based in Asia. A condition to the Company's participation in the transaction was a requirement that the Company enter into a non-disclosure agreement which prohibits the Company from releasing the name of the investee company. During May 2006, the Company committed to make a private equity co- investment on a pari passu basis with Kohlberg Kravis Roberts & Co. L.P. totaling $40.0 million in Capmark Financial Group Inc ("Capmark"). Capmark, formerly known as GMAC Commercial Holding Corp., is an industry leader in real estate finance, investments and services. Information for Investors: Conference Call and Webcast The Company will host a conference call and audio web cast to review its first quarter 2006 results on Thursday, May 11, 2006, at 11:00 a.m. EDT. The conference call can be accessed by dialing 888-802-2278 (Domestic) or 913-312-1264 (International); a pass code is not required. A replay will be available through May 25, 2006 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 8165334. 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. About KKR Financial Corp. KKR Financial Corp. 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) marketable and non-marketable 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 SEC. 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) For the Three For the Three Months Months (amounts in thousands, Ended Ended except per share amounts) March 31, March 31, 2006 2005 Net investment income: Securities interest income $79,964 $23,869 Loan interest income 125,106 10,888 Dividend income 883 534 Other interest income 1,845 255 Total investment income 207,798 35,546 Interest expense (156,563) (20,449) Net investment income 51,235 15,097 Other income: Net realized and unrealized gain on derivatives and foreign exchange 10 127 Net realized gain on investments 1,448 343 Fee and other income 215 368 Total other income 1,673 838 Non-investment expenses: Related party management compensation 14,440 8,008 Professional services 947 397 Loan servicing expense 3,996 267 Insurance expense 224 217 Directors expenses 373 199 General and administrative expenses 2,228 619 Total non-investment expenses 22,208 9,707 Income before income tax expense 30,700 6,228 Income tax expense 312 112 Net income $30,388 $6,116 Net income per common share: Basic $0.39 $0.15 Diluted $0.38 $0.15 Weighted-average number of common shares outstanding: Basic 77,675 39,796 Diluted 79,314 40,301 Distributions per common share $0.40 $-- Schedule II KKR Financial Corp. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (amounts in thousands, March 31, December 31, except share information) 2006 2005 Assets: Cash and cash equivalents $19,853 $16,110 Restricted cash and cash equivalents 127,673 80,223 Securities available-for-sale, $6,286,793 and $5,910,399 pledged as collateral as of March 31, 2006 and December 31, 2005, respectively 6,842,052 6,149,506 Loans, net of allowance of $1,500, as of March 31, 2006 and December 31, 2005 8,521,380 8,846,341 Derivative assets 103,428 58,898 Interest receivable 64,932 59,993 Principal receivable 4,513 7,108 Non-marketable equity securities 101,032 52,500 Other assets 30,676 19,861 Total assets $15,815,539 $15,290,540 Liabilities: Repurchase agreements $8,774,319 $9,761,258 Collateralized loan obligation senior secured notes 1,500,000 1,500,000 Asset-backed secured liquidity notes 3,033,868 2,008,069 Secured revolving credit facility 57,634 54,000 Secured demand loan 40,511 40,511 Junior subordinated notes 51,550 -- Payable for securities purchases 562,555 196,315 Accounts payable, accrued expenses and other liabilities 62,509 45,925 Accrued interest payable 21,777 21,415 Related party payable 5,180 3,673 Income tax liability 1,275 2,763 Derivative liabilities 544 1,465 Total liabilities 14,111,722 13,635,394 Stockholders' equity: Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued and outstanding at March 31, 2006 and December 31, 2005 -- -- Common stock, $0.01 par value, 250,000,000 shares authorized and 80,374,061 shares issued and outstanding at March 31, 2006 and December 31, 2005 804 804 Additional paid-in-capital 1,646,779 1,639,996 Accumulated other comprehensive income 61,994 18,344 Accumulated deficit (5,760) (3,998) Total stockholders' equity 1,703,817 1,655,146 Total liabilities and stockholders' equity $15,815,539 $15,290,540 Schedule III KKR Financial Corp. SUMMARY FINANCIAL DATA (UNAUDITED) Three Months Three Months Ended Ended (amounts in thousands, March 31, March 31, except per share amounts) 2006 2005 Net Income: $30,388 $6,116 Earnings per diluted common share $0.38 $0.15 Net Income + Share-Based Compensation (1): $37,171 $10,862 Net income, adjusted for share-based compensation, per diluted common share $0.47 $0.27 REIT Taxable Income (2): $47,694 $15,314 REIT taxable income per diluted common share $0.60 $0.38 Profitability Ratio Information (3): Return on equity 7.4% 3.3% Return on assets 0.8% 0.5% Efficiency ratio 10.6% 26.7% Share Information: Common shares outstanding 80,374 41,004 Basic EPS common shares outstanding 77,675 39,796 Diluted EPS common shares outstanding 79,314 40,301 Investment Portfolio Information March 31, December 31, 2006 2005 Residential mortgage securities $6,114,874 $5,537,838 Residential loans 6,142,324 6,428,822 Total residential 12,257,198 11,966,660 Corporate securities 600,879 481,754 Corporate loans 2,066,139 1,897,277 Total corporate 2,667,018 2,379,031 Commercial real estate securities 69,978 82,912 Commercial real estate loans 314,417 521,742 Total commercial real estate 384,395 604,654 Marketable equity securities 56,321 47,002 Total investment portfolio 15,364,932 14,997,347 Balance Sheet Information March 31, December 31, 2006 2005 Investment portfolio $15,364,932 $14,997,347 Non-marketable equity securities 101,032 52,500 Total assets 15,815,539 15,290,540 Total borrowings 13,457,882 13,363,838 Total liabilities 14,111,722 13,635,394 Stockholders' equity 1,703,817 1,655,146 Book value per common share 21.20 20.59 Leverage 7.9x 8.1x Three Months Three Months Ended Ended Statement of Operations Information March 31, March 31, 2006 2005 Investment income $207,798 $35,546 Other income 1,673 838 Total income 209,471 36,384 Interest expense (156,563) (20,449) Share-based compensation expense (6,783) (4,746) Management compensation (7,830) (3,336) Loan servicing expense (3,996) (267) Other expenses (3,599) (1,358) Total non-investment expenses (22,208) (9,707) Income before income tax expense 30,700 6,228 Income tax expense 312 112 Net income 30,388 6,116 (1) Non-GAAP financial measurement consisting of GAAP net income plus GAAP share-based compensation expense. (2) Non-GAAP financial measurement. (3) All ratios computed on an annualized basis. The efficiency ratio is defined as non-interest expense divided by total income. Schedule IV KKR Financial Corp. INVESTMENT PORTFOLIO BY INTEREST RATE TYPE AS OF MARCH 31, 2006 (UNAUDITED) Estimated Portfolio (amounts in Carrying Amortized Fair Mix % by thousands) (1)(2) Value Cost Value Fair Value Floating Rate: Residential ARM Loans $2,011,296 $2,011,296 $2,006,260 13.1% Residential ARM Securities 4,038,675 4,031,312 4,038,675 26.4 Corporate Loans 2,041,139 2,041,139 2,063,278 13.5 Corporate Debt Securities 320,177 313,801 320,177 2.1 Commercial Real Estate Loans 278,707 278,707 277,499 1.8 Commercial Real Estate Debt Securities 62,512 62,665 62,512 0.4 Total Floating Rate 8,752,506 8,738,920 8,768,401 57.3 Hybrid Rate: Residential Hybrid ARM Loans 4,131,028 4,131,028 4,082,764 26.8 Residential Hybrid ARM Securities 2,076,199 2,126,865 2,076,199 13.6 Total Hybrid Rate 6,207,227 6,257,893 6,158,963 40.4 Fixed Rate: Corporate Loans 25,000 25,000 25,000 0.2 Corporate Debt Securities 280,702 274,357 280,702 1.8 Commercial Real Estate Loans 35,710 35,710 35,154 0.2 Commercial Real Estate Debt Securities 7,466 7,150 7,466 0.1 Total Fixed Rate 348,878 342,217 348,322 2.3 Total $15,308,611 $15,339,030 $15,275,686 100.0% (1) The schedule excludes (i) marketable equity securities with a fair value of $56.3 million and amortized cost of $56.5 million, and (ii) non-marketable equity securities with a fair value of $101.0 million and amortized cost of $101.0 million as of March 31, 2006. As of March 31, 2006, the aggregate amortized cost value of the Company's investment portfolio exceeded the aggregate fair value of its portfolio by $63.6 million and, as of the same date, the Company had unrealized gains totaling $92.6 million related to its cash flow hedges, as defined under SFAS No. 133. As of March 31, 2006, the aggregate net unamortized purchase discount related to the Company's investment portfolio was $8.7 million. (2) The schedule summarizes the carrying value, amortized cost, and fair value of the Company's investment portfolio as of March 31, 2006, classified by interest rate type. Carrying value is the value that investments are recorded on the Company's consolidated balance sheet and is fair value for securities and amortized cost for loans. Estimated fair values set forth in the schedule are as of March 31, 2006 and are based on dealer quotes and/or nationally recognized pricing services and using management estimates for investment positions for which dealer quotes and/or nationally recognized pricing data is not available. Schedule V KKR Financial Corp. RECONCILATION OF REPORTED GAAP NET INCOME TO TOTAL TAXABLE INCOME AND REIT TAXABLE INCOME (UNAUDITED) Estimates for the For the three (in thousands, except three months ended months ended per share amounts) March 31, 2006 March 31, 2005 Amount Per Share Amount Per Share Reported net income $30,388 $0.38 $6,116 $0.15 Interest income and expense 2,093 0.03 110 -- Share-based compensation 6,783 0.09 4,746 0.12 Foreign currency translation (gains) and losses (374) -- 192 0.01 Gains on sales of investments to affiliates 888 0.01 4,253 0.11 Realized and unrealized derivative gains and losses 1,416 0.02 (488) (0.01) Book/tax year end difference adjustment for CLOs/CDOs 8,168 0.10 -- -- Other 204 -- 52 -- Income tax expense 312 -- 112 -- Total taxable income (1) $49,878 $0.63 $15,093 $0.38 Undistributed taxable (income) and loss of domestic taxable REIT subsidiary (2,184) (0.03) 221 -- REIT taxable income (loss)(1) $47,694 $0.60 $15,314 $0.38 Weighted-average diluted common shares outstanding during the period 79,314 40,301 (1) Total taxable income and REIT taxable income are non-GAAP financial measurements and do not purport to be an alternative to net income 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 excludes the undistributed taxable income of the Company's domestic taxable REIT subsidiary, which is not included in REIT taxable income 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, 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 of 1986, as amended. 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. DATASOURCE: KKR Financial Corp. 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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