KFN Kkr Financial Holdings Llc

SAN FRANCISCO, Feb. 13 /PRNewswire-FirstCall/ -- KKR Financial Corp. (NYSE:KFN) ("KFN" or the "Company") today announced its results for the fourth quarter and year ended December 31, 2006. Highlights of KKR Financial Corp.'s performance include: * Distribution of $0.54 per common share declared for the quarter ended December 31, 2006. * Net income for the quarter ended December 31, 2006 of $37.4 million, or $0.47 per diluted common share. * Net income adjusted for share-based compensation, a non-GAAP financial measurement, for the quarter ended December 31, 2006 of $44.5 million, or $0.55 per diluted common share. * REIT taxable income, a non-GAAP financial measurement, for the quarter ended December 31, 2006 of $37.9 million, or $0.47 per diluted common share. * Investment portfolio totaled $17.1 billion as of December 31, 2006 as compared to $17.6 billion as of September 30, 2006 and $15.0 billion as of December 31, 2005. KFN reported net income for the fourth quarter and year ended December 31, 2006 of $37.4 million and $135.3 million, respectively, or $0.47 and $1.71 per diluted common share, respectively. Current quarter and annual results compare with net income of $22.0 million and $55.1 million, respectively, or $0.28 and $0.92 per diluted common share, respectively, for the quarter and year ended December 31, 2005. Net income includes share-based compensation expense for the quarter and year ended December 31, 2006 of $7.1 million and $29.2 million, respectively, or $0.09 and $0.37 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 and year ended December 31, 2006 totaled $44.5 million and $164.5 million, respectively, or $0.55 and $2.08 per diluted common share, respectively. Net income adjusted for share-based compensation is an important non-GAAP financial measurement 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 quarter and year ended December 31, 2006 totaled $37.9 million and $154.3 million, respectively, or $0.47 and $1.95 per diluted common share, respectively. REIT taxable income for the fourth quarter excludes taxable income of approximately $0.16 per diluted common share attributable to certain of the Company's CLO subsidiaries which have a November 30 rather than December 31 year-end for tax purposes. The non-GAAP financial measurement of REIT taxable income is important because the Company is structured as a real estate investment trust, or REIT, and the Internal Revenue Code of 1986, as amended, or 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 common stockholders so as to comply with the rules set forth in the Code. Attached to this release is a schedule reconciling REIT taxable income to GAAP net income. Investment Portfolio As of December 31, 2006, the Company's investment portfolio totaled $17.1 billion as compared to $17.6 billion as of September 30, 2006 and $15.0 billion as of December 31, 2005. As of December 31, 2006, the estimated fair value of the Company's investment portfolio exceeded the aggregate amortized cost of its investment portfolio by $4.7 million and, as of the same date, the Company had unrealized gains totaling $50.8 million related to its cash flow hedges, as defined under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In comparison, the aggregate amortized cost of the Company's investment portfolio exceeded the estimated fair value of its investment portfolio by $15.8 million and $54.1 million as of September 30, 2006 and December 31, 2005, respectively, and as of the same dates the Company had unrealized gains totaling $53.9 million and $45.6 million, respectively, related to its cash flow hedges. As of December 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 $17.3 million and the weighted average amortized cost, as a percentage of aggregate par value, of the investment portfolio was 99.90%. The Company invested $1.3 billion and $7.8 billion during the quarter and year ended December 31, 2006, respectively, compared to $3.7 billion and $15.6 billion during the quarter and year ended December 31, 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) Quarter ended Quarter ended December 31, December 31, 2006 2005 Par Par Amount % Amount % Securities: Residential ARM Securities $262,350 20.9% $1,292,554 35.1% Residential Hybrid ARM Securities Corporate Debt Securities 79,000 6.3 159,000 4.3 Commercial Real Estate Debt Securities 32,000 2.6 23,356 0.6 Total Securities Principal Balance 373,350 29.8 1,474,910 40.0 Loans: Residential ARM Loans 39,469 3.2 779,300 21.2 Residential Hybrid ARM Loans - - 830,072 22.6 Corporate Loans 824,826 65.9 444,475 12.1 Commercial Real Estate Loans 15,000 1.1 150,929 4.1 Total Loans Principal Balance 879,295 70.2 2,204,776 60.0 Grand Total Principal Balance $1,252,645 100.0% $3,679,686 100.0% Year ended Year ended December 31, December 31, 2006 2005 Par Par Amount % Amount % Securities: Residential ARM Securities $4,080,156 52.4% $2,918,325 18.7% Residential Hybrid ARM Securities - - 2,935,532 18.8 Corporate Debt Securities 586,516 7.6 557,820 3.6 Commercial Real Estate Debt Securities 32,000 0.4 85,671 0.6 Total Securities Principal Balance 4,698,672 60.4 6,497,348 41.7 Loans: Residential ARM Loans 165,021 2.1 2,172,771 13.9 Residential Hybrid ARM Loans - - 4,547,632 29.2 Corporate Loans 2,888,684 37.1 1,870,849 12.0 Commercial Real Estate Loans 32,000 0.4 493,129 3.2 Total Loans Principal Balance 3,085,705 39.6 9,084,381 58.3 Grand Total Principal Balance $7,784,377 100.0% $15,581,729 100.0% The table above excludes purchases of marketable equity securities of $4.7 million (purchase cost) and $40.4 million (purchase cost) and purchases of non-marketable equity securities of $3.9 million (purchase cost) and $121.5 million (purchase cost) during the quarter and year ended December 31, 2006, respectively. The table above also excludes purchases of marketable equity securities of $3.6 million (purchase cost) and $28.3 million (purchase cost) and purchases of non-marketable equity securities of $52.5 million (purchase cost) and $52.5 million (purchase cost) during the quarter and year ended December 31, 2005, respectively. Distribution On February 1, 2007, the Company's Board of Directors declared a distribution of $0.54 per common share for the quarter ended December 31, 2006, which is payable on February 28, 2007 to stockholders of record on February 15, 2007. Because the distribution was declared subsequent to December 31, 2006, the aggregate distribution payable of $43.5 million is not reflected in the Company's consolidated balance sheet as of December 31, 2006. Book Value Per Common Share The Company's book value per common share was $21.42 and $21.16 as of December 31, 2006 and September 30, 2006, respectively, exclusive of the distribution declared subsequent to the end of the fourth quarter of 2006 of $0.54 and the third quarter of 2006 of $0.52. The Company's book value per common share as of December 31, 2006 and September 30, 2006 computed on a pro forma basis inclusive of distributions declared subsequent to the respective quarter ended, was $20.88 and $20.64, respectively. Proposed Restructuring The Company's Board of Directors has approved a restructuring transaction whereby KFN will convert from a REIT to a limited liability company. The restructuring transaction is subject to stockholder approval and, if approved, it is expected that the restructuring will be completed by June 30, 2007. The proposed restructuring transaction will result in each share of currently issued and outstanding KKR Financial Corp. stock being exchanged for a limited liability company interest in KKR Financial Holdings LLC. On February 9, 2007, the Company filed a preliminary proxy statement/prospectus with the Securities and Exchange Commission on Form S-4 for the proposed restructuring. Information for Investors: Conference Call and Webcast The Company will host a conference call and audio webcast to review its fourth quarter and annual 2006 results on Wednesday, February 14, 2007, at 11 a.m. EST. The conference call can be accessed by dialing 800-289-0518 (Domestic) or 913-981-5532 (International); a pass code is not required. A replay will be available through February 28, 2007 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 4443262. A live web cast of the call will be accessible on the Company's website, at http://www.kkrkfn.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 with the objective of generating competitive 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 managed by KKR Financial Advisors LLC, 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. Schedule I KKR Financial Corp. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (amounts in For the For the For the For the thousands, three months three months year ended year ended except per share December 31, December 31, December 31, December 31, information) 2006 2005 2006 2005 Net investment income: Securities interest income $122,212 $65,675 $404,957 $186,510 Loan interest income 136,248 110,804 533,037 206,663 Dividend income 916 969 3,656 3,421 Other interest income 1,999 1,322 8,387 3,335 Total investment income 261,375 178,770 950,037 399,929 Interest expense (210,658) (133,456) (741,680) (279,718) Provision for loan losses -- (200) -- (1,500) Net investment income 50,717 45,114 208,357 118,711 Other income: Net realized and unrealized gain on derivatives and foreign exchange 630 149 4,448 113 Net realized gain on investments 5,665 1,236 10,585 4,117 Fee and other income 2,781 1,599 5,722 3,330 Total other income 9,076 2,984 20,755 7,560 Non-investment expenses: Related party management compensation 17,321 17,721 65,298 50,791 Professional services 2,313 1,504 4,904 4,121 Loan servicing expense 3,408 3,144 14,750 5,143 Insurance expense 200 267 909 975 Directors expenses 405 352 1,486 1,071 General and administrative expenses 3,478 1,838 11,191 5,945 Total non-investment expenses 27,125 24,826 98,538 68,046 Income before equity in income of unconsolidated affiliate and income tax expense 32,668 23,272 130,574 58,225 Equity in income of unconsolidated affiliate 4,808 -- 5,722 -- Income before income tax expense 37,476 23,272 136,296 58,225 Income tax expense 79 1,263 964 3,144 Net income $37,397 $22,009 $135,332 $55,081 Net income per common share: Basic $0.47 $0.28 $1.73 $0.93 Diluted $0.47 $0.28 $1.71 $0.92 Weighted-average number of common shares outstanding: Basic 78,784 77,675 78,166 58,998 Diluted 80,250 78,787 78,948 60,087 Distributions declared per common share $0.52 $0.32 $1.86 $0.97 Schedule II KKR Financial Corp. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (amounts in thousands, December 31, December 31, except share information) 2006 2005 Assets Cash and cash equivalents $5,125 $16,110 Restricted cash and cash equivalents 138,065 80,223 Securities available-for-sale, $8,336,448 and $5,910,399 pledged as collateral as of December 31, 2006 and December 31, 2005, respectively 8,500,636 6,149,506 Loans, net of allowance for loan losses of $1,500 as of December 31, 2006 and December 31, 2005 8,442,021 8,846,341 Derivative assets 63,433 58,898 Interest receivable 84,048 59,993 Principal receivable 4,540 7,108 Non-marketable equity securities 166,323 52,500 Investment in unconsolidated affiliate 104,035 - Other assets 56,951 19,861 Total assets $17,565,177 $15,290,540 Liabilities Repurchase agreements $4,457,089 $9,761,258 Collateralized loan obligation senior secured notes 2,252,500 1,500,000 Asset-backed secured liquidity notes 8,705,601 2,008,069 Secured revolving credit facility 34,710 54,000 Secured demand loan 41,658 40,511 Junior subordinated notes 257,743 - Payable for securities purchases - 196,315 Accounts payable, accrued expenses and other liabilities 45,237 45,925 Accrued interest payable 36,991 21,415 Related party payable 6,901 3,673 Income tax liability 601 2,763 Derivative liabilities 2,715 1,465 Total liabilities 15,841,746 13,635,394 Stockholders' Equity Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued and outstanding at December 31, 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 December 31, 2006 and December 31, 2005, respectively 805 804 Additional paid-in-capital 1,670,330 1,639,996 Accumulated other comprehensive income 70,520 18,344 Accumulated deficit (18,224) (3,998) Total stockholders' equity 1,723,431 1,655,146 Total liabilities and stockholders' equity $17,565,177 $15,290,540 Schedule III KKR Financial Corp. SUMMARY FINANCIAL DATA (UNAUDITED) (amounts in Three Months Three Months Year Year thousands, Ended Ended Ended Ended except share December 31, December 31, December 31, December 31, information) 2006 2005 2006 2005 Net Income: $37,397 $22,009 $135,332 $55,081 Earnings per diluted common share $0.47 $0.28 $1.71 $0.92 Net Income + Share-Based Compensation (1): $44,505 $32,747 $164,517 $85,327 Net income, adjusted for share-based compensation, per diluted common share $0.55 $0.42 $2.08 $1.42 REIT Taxable Income (2): $37,885 $26,194 $154,341 $84,781 REIT taxable income per diluted common share $0.47 $0.33 $1.95 $1.41 Profitability Ratio Information (3): Return on stockholders' equity 8.7% 5.3% 7.9% 4.5% Return on assets 0.8% 0.6% 0.8% 1.0% Efficiency ratio 9.9% 13.7% 10.1% 16.7% Share Information: Common shares outstanding 80,465 80,374 80,465 80,374 Basic EPS common shares outstanding 78,784 77,675 78,166 58,998 Diluted EPS common shares outstanding 80,250 78,787 78,948 60,087 Investment Portfolio Information December 31, December 31, 2006 2005 Residential mortgage securities $7,536,196 $5,537,838 Residential loans 5,109,261 6,428,822 Total residential 12,645,457 11,966,660 Corporate securities 863,449 481,754 Corporate loans 3,225,567 1,897,277 Total corporate 4,089,016 2,379,031 Commercial real estate securities 32,023 82,912 Commercial real estate loans 108,693 521,742 Total commercial real estate 140,716 604,654 Marketable equity securities 68,968 47,002 Non-marketable equity securities 166,323 52,500 Total investment portfolio 17,110,480 15,049,847 Balance Sheet Information December 31, December 31, 2006 2005 Investment portfolio $17,110,480 $15,049,847 Total assets 17,565,177 15,290,540 Total borrowings 15,749,301 13,363,838 Total liabilities 15,841,746 13,635,394 Stockholders' equity 1,723,431 1,655,146 Book value per common share 21.42 20.59 Leverage 9.1x 8.1x Statement of Operations Information Three Months Three Months Year Year Ended Ended Ended Ended December 31, December 31, December 31, December 31, 2006 2005 2006 2005 Investment income $261,375 $178,770 $950,037 $399,929 Other income 9,076 2,984 20,755 7,560 Total income 270,451 181,754 970,792 407,489 Interest expense (210,658) (133,456) (741,680) (279,718) Provision for loan losses -- (200) -- (1,500) Share-based compensation expense (7,108) (10,738) (29,185) (30,246) Management compensation (10,322) (7,160) (36,679) (20,982) Loan servicing expense (3,408) (3,144) (14,750) (5,143) Other expenses (6,287) (3,784) (17,924) (11,675) Total non-investment expenses (27,125) (24,826) (98,538) (68,046) Equity in income of unconsolidated affiliate 4,808 -- 5,722 -- Income before income tax expense 37,476 23,272 136,296 58,225 Income tax expense (79) (1,263) (964) (3,144) Net income $37,397 $22,009 $135,332 $55,081 (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 including equity in income of unconsolidated affiliate. Schedule IV KKR Financial Corp. INVESTMENT PORTFOLIO BY INTEREST RATE TYPE AS OF DECEMBER 31, 2006 (UNAUDITED) (amounts in Portfolio thousands)(1)(2) Carrying Amortized Estimated Mix% by Value Cost Fair Value Fair Value Floating Rate: Residential ARM Loans $1,441,959 $1,441,959 $1,433,151 8.4% Residential ARM Securities 5,673,932 5,662,830 5,673,932 33.2 Corporate Loans 3,200,567 3,200,567 3,221,334 18.8 Corporate Debt Securities 357,696 344,650 357,696 2.1 Commercial Real Estate Loans 108,693 108,693 109,192 0.7 Total Floating Rate 10,782,847 10,758,699 10,795,305 63.2 Hybrid Rate: Residential Hybrid ARM Loans 3,667,302 3,667,302 3,647,783 21.3 Residential Hybrid ARM Securities 1,862,264 1,894,941 1,862,264 10.9 Total Hybrid Rate 5,529,566 5,562,243 5,510,047 32.2 Fixed Rate: Corporate Loans 25,000 25,000 25,000 0.1 Corporate Debt Securities 505,753 486,321 505,753 2.9 Commercial Real Estate Debt Securities 32,023 32,000 32,023 0.2 Total Fixed Rate 562,776 543,321 562,776 3.2 Marketable and Non-Marketable Equity Securities: Common and Preferred Stock 68,968 68,113 68,968 0.4 Non-Marketable Equity Securities 166,323 166,323 166,323 1.0 Total Marketable and Non-Marketable Equity Securities 235,291 234,436 235,291 1.4 Total $17,110,480 $17,098,699 $17,103,419 100.0 (1) As of December 31, 2006, the aggregate fair value of the Company's investment portfolio exceeded aggregate amortized cost of its portfolio by $4.7 million and, as of the same date, the Company had unrealized gains totaling $50.8 million related to its cash flow hedges, as defined under SFAS No. 133. As of December 31, 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 $17.3 million. (2) The schedule summarizes the carrying value, amortized cost, and fair value of the Company's investment portfolio as of December 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 December 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. RECONCILIATION OF REPORTED GAAP NET INCOME TO TOTAL TAXABLE INCOME AND REIT TAXABLE INCOME (UNAUDITED) Estimated Estimated for the Three for the three months ended months ended year ended Year ended December 31, December 31, December 31, December 31, 2006 2005 2006 2005 (amounts in thousands, except per share amounts) Per Per Per Per Amount Share Amount Share Amount Share Amount Share Reported net income $37,397 $0.47 $22,009 $0.28 $135,332 $1.71 $55,081 $0.92 Interest income and expense 3,047 0.04 3,419 0.05 5,509 0.07 3,564 0.06 Share- based compensa- tion 7,108 0.09 10,738 0.14 29,185 0.37 30,246 0.50 Vesting of restricted common stock -- -- -- -- (14,211) (0.18) (238) (0.00) Foreign currency translation gains -- -- (2,332) (0.03) (97) (0.00) -- -- Gains (losses) on sales of assets to affiliates -- -- (444) (0.01) 306 0.00 3,313 0.06 Realized and unrealized derivative gains and losses 3,682 0.04 (1,238) (0.02) 1,720 0.02 (1,697) (0.03) Book/tax difference adjustment for domestic taxable REIT subsid- iary 1,683 0.02 1,047 0.01 1,683 0.02 1,047 0.02 Book/tax difference adjustment for foreign taxable REIT subsid- iaries (13,111) (0.16) (8,892) (0.11) (2,189) (0.02) (8,892) (0.15) Provision for loan losses -- -- 200 0.00 -- -- 1,500 0.02 Lease abandonment expense (41) 0.00 -- -- 48 0.00 795 0.01 Other 530 0.00 123 0.00 1,035 0.01 398 0.01 Income tax expense 79 0.00 1,263 0.02 964 0.01 3,144 0.05 Total taxable income 40,374 0.50 25,893 0.33 159,285 2.01 88,261 1.47 Undistrib- uted taxable (income) loss of domestic taxable REIT subsid- iary (2,489) (0.03) 301 0.00 (4,944) (0.06) (3,480) (0.06) REIT taxable income $37,885 $0.47 $26,194 $0.33 $154,341 $1.95 $84,781 $1.41 Number of common shares outstanding: Weighted- average diluted common shares outstanding during the period 80,250 78,787 78,948 60,087 (1) 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 real estate investment trust, or REIT, and the Internal Revenue Code of 1986, as amended, or 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 important 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 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 other companies. Investor Contact Laurie Poggi KKR Financial LLC 415-315-3718 Media Contact Roanne Kulakoff and Joseph Kuo Kekst and Company 212-521-4837 and 212-521-4863 DATASOURCE: KKR Financial Corp. CONTACT: investor, Laurie Poggi of KKR Financial LLC, +1-415-315-3718; r media, Roanne Kulakoff, +1-212-521-4837, or Joseph Kuo, +1-212-521-4863, oth of Kekst and Company Web site: http://www.kkrfn.com/

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