KFN Kkr Financial Holdings Llc

SAN FRANCISCO, Nov. 8 /PRNewswire-FirstCall/ -- KKR Financial Corp. (NYSE:KFN) ("KFN" or the "Company") today announced its results for the third quarter of 2006. Highlights of KKR Financial Corp.'s performance include: -- Distribution of $0.52 per common share declared for the quarter ended September 30, 2006. -- Net income for the quarter ended September 30, 2006 of $32.6 million, or $0.41 per diluted common share. -- Net income adjusted for share-based compensation, a non-GAAP financial measurement, for the quarter ended September 30, 2006 of $42.8 million, or $0.54 per diluted common share. -- REIT taxable income, a non-GAAP financial measurement, for the quarter ended September 30, 2006 of $27.1 million, or $0.34 per diluted common share. During the quarter ended September 30, 2006, REIT taxable income was reduced by $14.2 million, or $0.18 per diluted common share as a result of the vesting of 625,000 shares of restricted common stock granted to the Manager and 28,321 shares of restricted common stock granted to members of the Company's Board of Directors in July 2005. -- Investment portfolio totaled $17.6 billion as of September 30, 2006, a 10.7% increase from $15.9 billion as of June 30, 2006. -- Issued $150.0 million of 30-year trust preferred securities at par with $100.0 million with a floating rate coupon of three-month LIBOR plus 2.35%, and $50.0 million with an initial fixed interest rate coupon based on ten-year LIBOR plus 2.25%. To date, the Company has issued $250.0 million of trust preferred securities. -- Closed KKR Financial CLO 2006-1, Ltd., the Company's third $1.0 billion collateral loan obligation transaction on September 19, 2006. Issued $727.5 million of senior secured notes maturing in 2018 to investors at par with a weighted average coupon of three-month LIBOR plus 0.36%. -- Closed a three-year secured revolving credit facility totaling $800 million with the option to increase the facility to $900 million so long as no default or event of default has occurred. KFN reported net income for the three and nine months ended September 30, 2006 of $32.6 million and $97.9 million, respectively, or $0.41 and $1.25 per diluted common share, respectively. Current period results compare with net income of $18.5 million and $33.1 million, respectively, or $0.24 and $0.62 per diluted common share, respectively, for the three and nine months ended September 30, 2005. Net income increased 76.2% and 195.8%, respectively, for the three and nine month periods ended September 30, 2006 compared to the same periods in the prior year. The change from 2005 to 2006 is primarily attributable to the increase in the Company's investment portfolio subsequent to September 30, 2005. Net income includes share-based compensation expense for the three and nine months ended September 30, 2006 totaling $10.2 million and $22.1 million, respectively, or $0.13 and $0.28 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 three and nine months ended September 30, 2006 totaled $42.8 million and $120.0 million, respectively, or $0.54 and $1.53 per diluted common share, respectively. 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 third quarter ended September 30, 2006 totaled $27.1 million, or $0.34 per diluted common share. During the quarter ended September 30, 2006, REIT taxable income was reduced by $14.2 million, or $0.18 per diluted common share as a result of the vesting of 625,000 shares of restricted common stock granted to the Manager and 28,321 shares of restricted common stock granted to members of the Company's Board of Directors in July 2005. REIT taxable income, without the adjustment for the impact of the vesting of the restricted common stock, totaled $0.52 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 REIT 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 September 30, 2006 with the Securities and Exchange Commission today, November 8, 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 period ended September 30, 2006, the Company's investment portfolio, including investments held for sale, increased by 17.3% from $15.0 billion as of December 31, 2005 to $17.6 billion as of September 30, 2006. As of September 30, 2006, the aggregate amortized cost of the Company's investment portfolio exceeded the estimated fair value of its investment portfolio by $15.8 million and, as of the same date, the Company had unrealized gains totaling $53.9 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 September 30, 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 $12.1 million and the weighted average amortized cost, as a percentage of aggregate par value, of the investment portfolio was 99.92%. Since the Company's formation, management has positioned the Company so as not to be materially 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 September 30, 2006 totaled 63.0% and 32.3% of the investment portfolio, respectively. Fixed rate loans and securities total 3.4% of the Company's investment portfolio as of September 30, 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 invested $3.0 billion and $6.5 billion during the three and nine months ended September 30, 2006, respectively, compared to $6.5 billion and $11.9 billion during the three and nine months ended September 30, 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 September 30, September 30, 2006 2005 Par Amount % Par Amount % Securities: Residential ARM Securities $1,953,539 64.7% $886,566 13.5% Residential Hybrid ARM Securities -- -- -- -- Corporate Debt Securities 167,500 5.6 180,315 2.8 Commercial Real Estate Debt Securities -- -- 52,315 0.8 Total Securities Principal Balance 2,121,039 70.3 1,119,196 17.1 Loans: Residential ARM Loans -- -- 956,970 14.6 Residential Hybrid ARM Loans -- -- 3,717,560 56.9 Corporate Loans 877,356 29.1 509,673 7.8 Commercial Real Estate Loans 17,000 0.6 235,450 3.6 Total Loans Principal Balance 894,356 29.7 5,419,653 82.9 Grand Total Principal Balance $3,015,395 100.0% $6,538,849 100.0% Nine months ended Nine months ended September 30, September 30, 2006 2005 Par Amount % Par Amount % Securities: Residential ARM Securities $3,817,806 58.5% $1,625,771 13.7% Residential Hybrid ARM Securities -- -- 2,935,532 24.7 Corporate Debt Securities 507,516 7.7 398,820 3.3 Commercial Real Estate Debt Securities -- -- 62,315 0.5 Total Securities Principal Balance 4,325,322 66.2 5,022,438 42.2 Loans: Residential ARM Loans 125,552 1.9 1,393,471 11.7 Residential Hybrid ARM Loans -- -- 3,717,560 31.2 Corporate Loans 2,063,858 31.6 1,426,374 12.0 Commercial Real Estate Loans 17,000 0.3 342,200 2.9 Total Loans Principal Balance 2,206,410 33.8 6,879,605 57.8 Grand Total Principal Balance $6,531,732 100.0% $11,902,043 100.0% The table above excludes purchases of $8.5 million (purchase cost) of marketable equity securities and $26.0 million (purchase cost) of non- marketable equity securities during the three months ended September 30, 2006, and $35.7 million (purchase cost) of marketable equity securities and $117.6 million (purchase cost) of non-marketable equity securities during the nine months ended September 30, 2006. The table also excludes purchases of $24.7 million (purchase cost) of marketable equity securities during the nine months ended September 30, 2005, respectively. There were no purchase of either marketable or non-marketable equity securities during the three months ended September 30, 2005. Distribution On November 2, 2006, the Company's Board of Directors declared a distribution of $0.52 per common share for the quarter ended September 30, 2006, to stockholders of record on November 16, 2006, and payable on November 30, 2006. Because the distribution was declared subsequent to September 30, 2006, the aggregate distribution payable of $41.8 million is not reflected in the Company's consolidated balance sheet as of September 30, 2006. Book Value Per Common Share The Company's book value per common share was $21.16 and $20.59 as of September 30, 2006 and December 31, 2005, respectively, exclusive of the distributions declared subsequent to the end of the third quarter of 2006 of $0.52 and the fourth quarter of 2005 of $0.40. The Company's book value per common share as of September 30, 2006 and December 31, 2005, computed on a pro forma basis inclusive of distributions declared subsequent to the respective quarter ended, was $20.64 and $20.19, respectively. Trust Preferred Securities During August 2006, the Company formed KKR Financial Capital Trust III ("Trust III") for the sole purpose of issuing trust preferred securities. On August 10, 2006, Trust III issued preferred securities to unaffiliated investors for gross proceeds of $85.0 million and common securities to the Company of $2.6 million. Interest is payable quarterly at a floating rate equal to three-month LIBOR plus 2.35%. The trust preferred securities can be called at par on or after five years. During September 2006, the Company formed both KKR Financial Capital Trust IV ("Trust IV") and KKR Financial Capital Trust V ("Trust V") for the sole purpose of issuing trust preferred securities. On September 15, 2006, Trust IV issued preferred securities to unaffiliated investors for gross proceeds of $15.0 million and common securities to the Company of $0.5 million. Interest is payable quarterly at a floating rate equal to three-month LIBOR plus 2.35%. The trust preferred securities can be called at par on or after five years. On September 29, 2006, Trust V issued preferred securities to unaffiliated investors for gross proceeds of $50.0 million and common securities to the Company of $1.6 million. Interest is payable quarterly at a fixed rate of 7.395% (ten-year LIBOR plus 2.25%) through October 2016 and thereafter at a floating rate equal to three-month LIBOR plus 2.25%. KKR Financial CLO 2006-1, Ltd. The Company closed KKR Financial CLO 2006-1, Ltd., the Company's third $1.0 billion collateralized loan obligation transaction, on September 19, 2006. The Company issued a total of $727.5 million of senior secured notes at par to investors. The senior notes issued to investors by CLO 2006-1 consist of the following five classes of notes: (i) $334.0 million of class A-1 senior notes rated Aaa/AAA bearing interest at three-month LIBOR plus 0.28%; (ii) $207.0 million of class A-2a senior notes rated Aaa/AAA bearing interest at three- month LIBOR plus 0.24%; (iii) $69.0 million of class A-2b senior notes rated Aa1/AAA bearing interest at three-month LIBOR plus 0.40%; (iv) $43.0 million of class B senior notes rated Aa2/AA bearing interest at three-month LIBOR plus 0.50%; and (v) $74.5 million of class C mezzanine notes rated A2/A bearing interest at three-month LIBOR plus 0.95%. The Company retained the following securities in the transaction: $12.5 million of class C mezzanine notes rated A2/A; $67.0 million of class D mezzanine notes rated Baa3/BBB; $48.0 million of class E mezzanine notes rated Ba3/BB; $18.0 million of class F mezzanine notes rated B3/B; $96.0 million of unrated junior notes; and $48.0 million of unrated subordinated notes. The maturity date of the transaction is August 25, 2018. Information for Investors: Conference Call and Webcast The Company will host a conference call and audio webcast to review its third quarter 2006 results on Thursday, November 9, 2006, at 11 a.m. EST. The conference call can be accessed by dialing 877-704-5385 (Domestic) or 913-312-1303 (International); a pass code is not required. A replay will be available through November 23, 2006 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 5394959. 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. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three For the three For the nine For the nine months ended months ended months ended months ended September 30, September 30, September 30, September 30, 2006 2005 2006 2005 (amounts in thousands, except per share information) Net investment income: Securities interest income $108,771 $50,917 $282,745 $120,835 Loan interest income 141,585 63,869 396,789 95,859 Dividend income 945 985 2,740 2,452 Other interest income 2,736 816 6,388 2,013 Total investment income 254,037 116,587 688,662 221,159 Interest expense (199,365) (77,532) (531,022) (146,262) Equity in income of unconsolidated affiliate 914 -- 914 -- Provision for loan losses -- (1,300) -- (1,300) Net investment income 55,586 37,755 158,554 73,597 Other income: Net realized and unrealized gain (loss) on derivatives and foreign exchange 509 13 3,818 (36) Net realized gain on investments 2,781 1,730 4,920 2,881 Fee and other income 2,268 136 2,941 1,731 Total other income 5,558 1,879 11,679 4,576 Non-investment expenses: Related party management compensation 19,759 14,331 47,977 33,070 Professional services 1,096 1,432 2,591 2,617 Loan servicing expense 3,626 1,369 11,342 1,999 Insurance expense 211 275 709 708 Directors expenses 333 368 1,081 719 General and administrative expenses 3,050 2,630 7,713 4,107 Total non- investment expenses 28,075 20,405 71,413 43,220 Income before income tax expense 33,069 19,229 98,820 34,953 Income tax expense 453 775 885 1,881 Net income $32,616 $18,454 $97,935 $33,072 Net income per common share: Basic $0.42 $0.24 $1.26 $0.63 Diluted $0.41 $0.24 $1.25 $0.62 Weighted-average number of common shares outstanding: Basic 78,463 77,486 77,957 52,681 Diluted 79,578 78,492 78,559 53,519 Distributions declared per common share $0.49 $-- $1.34 $0.65 Schedule II KKR Financial Corp. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (amounts in thousands, except share information) September 30, December 31, 2006 2005 Assets Cash and cash equivalents $2,302 $16,110 Restricted cash and cash equivalents 215,860 80,223 Securities available-for-sale, $8,226,780 and $5,910,399 pledged as collateral as of September 30, 2006 and December 31, 2005, respectively 8,727,159 6,149,506 Loans, net of allowance for loan losses of $1,500 as of September 30, 2006 and December 31, 2005 8,117,619 8,846,341 Loans held for sale 606,134 -- Derivative assets 67,207 58,898 Interest receivable 83,445 59,993 Principal receivable 24,162 7,108 Non-marketable equity securities 165,429 52,500 Investment in unconsolidated affiliate 40,204 -- Income tax receivable 861 -- Other assets 55,045 19,861 Total assets $18,105,427 $15,290,540 Liabilities Repurchase agreements $4,985,923 $9,761,258 Collateralized loan obligation senior secured notes 2,252,500 1,500,000 Asset-backed secured liquidity notes 8,190,682 2,008,069 Secured revolving credit facility 292,213 54,000 Secured demand loan 41,658 40,511 Junior subordinated notes 257,743 -- Payable for securities purchases 275,622 196,315 Accounts payable, accrued expenses and other liabilities 69,067 45,925 Accrued interest payable 27,410 21,415 Related party payable 6,226 3,673 Income tax liability 1,029 2,763 Derivative liabilities 2,948 1,465 Total liabilities 16,403,021 13,635,394 Stockholders' Equity Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued and outstanding at September 30, 2006 and December 31, 2005 -- -- Common stock, $0.01 par value, 250,000,000 shares authorized and 80,464,713 and 80,374,061 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively 805 804 Additional paid-in-capital 1,663,222 1,639,996 Accumulated other comprehensive income 52,159 18,344 Accumulated deficit (13,780) (3,998) Total stockholders' equity 1,702,406 1,655,146 Total liabilities and stockholders' equity $18,105,427 $15,290,540 Schedule III KKR Financial Corp. SUMMARY FINANCIAL DATA (UNAUDITED) Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2006 2005 2006 2005 (amounts in thousands, except share information) Net Income: $32,616 $18,454 $97,935 $33,072 Earnings per diluted common share $0.41 $0.24 $1.25 $0.62 Net Income + Share-Based Compensation (1): $42,767 $25,882 $120,012 $52,581 Net income, adjusted for share-based compensation, per diluted common share $0.54 $0.33 $1.53 $0.98 REIT Taxable Income (2): $27,075 $26,766 $116,455 $58,826 REIT taxable income per diluted common share $0.34 $0.34 $1.48 $1.10 Profitability Ratio Information (3): Return on equity 7.5% 4.5% 7.7% 4.2% Return on assets 0.8% 0.7% 0.8% 0.6% Efficiency ratio 10.8% 17.2% 10.2% 19.1% Share Information: Common shares outstanding 80,465 80,374 80,465 80,374 Basic EPS common shares outstanding 78,463 77,486 77,957 52,681 Diluted EPS common shares outstanding 79,578 78,492 78,559 53,519 September 30, December 31, 2006 2005 Investment Portfolio Information Residential mortgage securities $7,832,205 $5,537,838 Residential loans 5,388,574 6,428,822 Total residential 13,220,779 11,966,660 Corporate securities 828,261 481,754 Corporate loans 3,031,024 1,897,277 Total corporate 3,859,285 2,379,031 Commercial real estate securities -- 82,912 Commercial real estate loans 305,655 521,742 Total commercial real estate 305,655 604,654 Marketable equity securities 66,693 47,002 Non-marketable equity securities 165,429 52,500 Total investment portfolio 17,617,841 15,049,847 September 30, December 31, 2006 2005 Balance Sheet Information Investment portfolio $17,617,841 $15,049,847 Total assets 18,105,427 15,290,540 Total borrowings 16,020,719 13,363,838 Total liabilities 16,403,021 13,635,394 Stockholders' equity 1,702,406 1,655,146 Book value per common share 21.16 20.59 Leverage 9.4x 8.1x Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2006 2005 2006 2005 Statement of Operations Information Investment income $254,037 $116,587 $688,662 $221,159 Other income 5,558 1,879 11,679 4,576 Equity in income of unconsolidated affiliate 914 -- 914 -- Total income 254,951 118,466 701,255 225,735 Interest expense (199,365) (77,532) (531,022) (146,262) Provision for loan losses -- (1,300) -- (1,300) Share-based compensation expense (10,151) (7,428) (22,077) (19,509) Management compensation (9,716) (7,102) (26,357) (13,822) Loan servicing expense (3,626) (1,369) (11,342) (1,999) Other expenses (4,582) (4,506) (11,637) (7,890) Total non-investment expenses (28,075) (20,405) (71,413) (43,220) Income before income tax expense 33,069 19,229 98,820 34,953 Income tax expense (453) (775) (885) (1,881) Net income 32,616 18,454 97,935 33,072 (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 SEPTEMBER 30, 2006 (UNAUDITED) Carrying Amortized Estimated Portfolio Mix Value Cost Fair Value % by Fair Value (amounts in thousands) Floating Rate: Residential ARM Loans $1,591,073 $1,591,073 $1,585,833 9.0% Residential ARM Securities 5,912,596 5,897,061 5,912,596 33.6 Corporate Loans 2,969,867 2,969,867 2,982,141 17.0 Corporate Debt Securities 367,397 359,074 367,397 2.1 Commercial Real Estate Loans 226,768 226,768 226,768 1.3 Total Floating Rate 11,067,701 11,043,843 11,074,735 63.0 Hybrid Rate: Residential Hybrid ARM Loans 3,797,501 3,797,501 3,774,839 21.4 Residential Hybrid ARM Securities 1,919,609 1,954,577 1,919,609 10.9 Total Hybrid Rate 5,717,110 5,752,078 5,694,448 32.3 Fixed Rate: Corporate Loans 61,157 61,157 61,221 0.3 Corporate Debt Securities 460,864 449,175 460,864 2.6 Commercial Real Estate Loans 78,887 78,887 80,396 0.5 Total Fixed Rate 600,908 589,219 602,481 3.4 Marketable and Non-Marketable Equity Securities: Common and Preferred Stock 66,693 69,002 66,693 0.4 Non-Marketable Equity Securities 165,429 165,429 165,429 0.9 Total Marketable and Non-Marketable Equity Securities 232,122 234,431 232,122 1.3 Total $17,617,841 $17,619,571 $17,603,786 100.0% (1) As of September 30, 2006, the aggregate amortized cost value of the Company's investment portfolio exceeded the aggregate fair value of its portfolio by $15.8 million and, as of the same date, the Company had unrealized gains totaling $53.9 million related to its cash flow hedges, as defined under SFAS No. 133. As of September 30, 2006, the aggregate net unamortized purchase discount (i.e., the amount by which aggregate purchase discounts exceed the aggregate purchase premiums on the Company's investment portfolio) related to the Company's investment portfolio was $12.1 million. (2) The schedule summarizes the carrying value, amortized cost, and fair value of the Company's investment portfolio as of September 30, 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 September 30, 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. RECONCILIATION OF REPORTED GAAP NET INCOME TO TOTAL TAXABLE INCOME AND REIT TAXABLE INCOME (UNAUDITED) Estimated for the three months ended Three months ended September 30, 2006 September 30, 2005 Amount Per Share Amount Per Share (amounts in thousands, except per share amounts) Reported net income $32,616 $0.41 $18,454 $0.24 Interest income and expense (2,830) (0.04) 48 0.00 Share-based compensation 10,150 0.13 7,428 0.09 Vesting of restricted common stock (14,211) (0.18) -- -- Foreign currency translation (gains) and losses (124) 0.00 (203) 0.00 Tax gains on sales of assets to affiliates 2,729 0.03 19 0.00 Realized and unrealized derivative gains and losses (1,424) (0.02) (285) (0.01) Book/tax year end difference adjustment for CLOs/CDOs -- -- -- -- Provision for loan losses -- -- 1,300 0.02 Lease abandonment expense (19) 0.00 795 0.01 Other 183 0.01 144 0.00 Income tax expense 453 0.01 775 0.01 Total taxable income 27,523 0.35 28,475 0.36 Undistributed taxable (income) of domestic taxable REIT subsidiary (448) (0.01) (1,709) (0.02) REIT taxable income $27,075 $0.34 $26,766 $0.34 Number of common shares outstanding: Weighted-average diluted common shares outstanding during the period 79,578 78,492 Estimated for the nine months ended Nine months ended September 30, 2006 September 30, 2005 Amount Per Share Amount Per Share Reported net income $97,935 $1.25 $33,072 $0.62 Interest income and expense 2,462 0.03 145 0.00 Share-based compensation 22,077 0.28 19,509 0.36 Vesting of restricted common stock (14,211) (0.18) -- -- Foreign currency translation (gains) and losses (1,324) (0.02) 2,332 0.05 Tax gains on sales of assets to affiliates 4,287 0.05 3,758 0.07 Realized and unrealized derivative gains and losses (1,963) (0.02) (459) (0.01) Book/tax year end difference adjustment for CLOs/CDOs 8,168 0.10 -- -- Provision for loan losses -- -- 1,300 0.02 Lease abandonment expense 89 0.00 795 0.01 Other 506 0.01 274 0.04 Income tax expense 885 0.01 1,881 0.04 Total taxable income 118,911 1.51 62,607 1.17 Undistributed taxable (income) of domestic taxable REIT subsidiary (2,456) (0.03) (3,781) (0.07) REIT taxable income $116,455 $1.48 $58,826 $1.10 Number of common shares outstanding: Weighted-average diluted common shares outstanding during the period 78,559 53,519 (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 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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