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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