KFN Kkr Financial Holdings Llc

SAN FRANCISCO, May 3 /PRNewswire-FirstCall/ -- KKR Financial Corp. (NYSE:KFN) ("KFN" or the "Company") today announced its results for the first quarter of 2007. Highlights of KKR Financial Corp.'s performance include: -- Stockholders approved a restructuring transaction whereby the Company will convert from a real estate investment trust to a limited liability company. -- Distribution of an aggregate amount of $45.1 million for the quarter ended March 31, 2007 on the Company's common stock. -- Net income for the quarter ended March 31, 2007 of $48.4 million, or $0.60 per diluted common share. -- Net income adjusted for share-based compensation, a non-GAAP financial measurement, for the quarter ended March 31, 2007 of $54.3 million, or $0.68 per diluted common share. -- REIT taxable income, a non-GAAP financial measurement, for the quarter ended March 31, 2007 of $66.0 million, or $0.82 per diluted common share. -- Investment portfolio totaled $16.1 billion as of March 31, 2007 as compared to $17.1 billion as of December 31, 2006. KFN reported net income for the quarter ended March 31, 2007 of $48.4 million, or $0.60 per diluted common share. Current quarter results represent an increase of 59% from $30.4 million, or $0.38 per diluted common share for the quarter ended March 31, 2006. Net income includes share-based compensation expense for the quarter ended March 31, 2007 totaling $5.8 million and for the quarter ended March 31, 2006 totaling $6.8 million, or $0.08 and $0.09 per diluted common share, respectively. Net income adjusted for share-based compensation, a non-GAAP financial measurement consisting of GAAP net income plus GAAP share-based compensation expense, for the quarter ended March 31, 2007 totaled $54.3 million, or $0.68 per diluted common share. Current quarter results represent an increase of 46% from net income adjusted for share-based compensation of $37.2 million for the quarter ended March 31, 2006. 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 quarter ended March 31, 2007 totaled $66.0 million, or $0.82 per diluted common share. For the quarter ended March 31, 2006, REIT taxable income totaled $47.7 million or $0.60 per diluted common share. REIT taxable income for the quarter ended March 31, 2007 includes 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 a 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 REIT and the Internal Revenue Code of 1986, as amended, or the Code, requires that the Company pay substantially all of its taxable income in the form of distributions to its stockholders. REIT taxable income is 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. 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, 2007 with the Securities and Exchange Commission today, May 3, 2007. 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. Conversion Transaction On May 3, 2007, the Company's shareholders approved a restructuring transaction (the "Conversion Transaction") whereby KKR Financial Corp., currently a publicly traded Maryland corporation, will become a subsidiary of a recently formed Delaware limited liability company that will be publicly traded. The Delaware limited liability company, named KKR Financial Holdings LLC, will not be taxed as a REIT, but is expected to be treated as a pass-through entity for U.S. federal income tax purposes. The Conversion Transaction will result in each share of currently issued and outstanding KKR Financial Corp. common stock being converted into an equal number of limited liability company shares in KKR Financial Holdings LLC. The Company expects that the Conversion Transaction will be consummated on May 4, 2007. Investment Portfolio As of March 31, 2007, the Company's investment portfolio totaled $16.1 billion as compared to $17.1 billion as of December 31, 2006. As of March 31, 2007, the Company's unrealized gains and losses from its residential mortgage investments are included in income while the Company's net aggregate unrealized gains from its investments in corporate loans and securities held through consolidated and unconsolidated subsidiaries and its interest rate derivatives designated as cash flow hedges as defined under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, are not included in income and totaled $110.4 million as compared to $118.2 million as of December 31, 2006. These amounts exclude the Company's investments in non-marketable equity securities, which are carried at cost. The Company invested $0.4 billion during the quarter ended March 31, 2007, compared to $1.9 billion during the quarter ended March 31, 2006. 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, 2007 March 31, 2006 Par % Par % Amount Amount Securities: Residential ARM Securities $-- --% $1,063,776 56.2% Corporate Debt Securities 34,000 9.2 127,769 6.8 Marketable Equity Securities 17,728 4.9 10,375 0.5 Non-Marketable Equity Securities 7,500 2.1 50,936 2.7 Total Securities Principal Balance 59,228 16.2 1,252,856 66.2 Loans: Residential ARM Loans 17,706 4.9 99,498 5.3 Corporate Loans 287,687 78.9 538,883 28.5 Total Loans Principal Balance 305,393 83.8 638,381 33.8 Grand Total Principal Balance $364,621 100.0% $1,891,237 100.0% Distribution On May 3, 2007, the Company's Board of Directors declared a distribution of an aggregate amount of $45.1 million for the quarter ended March 31, 2007 on the Company's common stock. The distribution is payable on May 31, 2007 to stockholders of record as of the close of business on May 17, 2007. However, assuming that the Conversion Transaction is consummated on May 4, 2007, the Company's sole common stockholder after that date will be KKR Financial Holdings LLC and this cash distribution will therefore be paid to KKR Financial Holdings LLC. Accordingly, the Company expects that the board of directors of KKR Financial Holdings LLC will declare a cash distribution in the same aggregate amount payable on May 31, 2007 to the holders of its common shares as of the close of business on May 17, 2007. Based on the number of shares of KKR Financial Holdings LLC that the Company expects will be issued in the Conversion Transaction, the Company expects that Holdings will pay a distribution of $0.56 on each of its common shares on May 31, 2007. Adoption of Fair Value Option The Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities -- Including an amendment of FASB Statement No. 115 ("SFAS No. 159") as of January 1, 2007 and elected to implement fair value accounting for its investments in residential mortgage loans and residential mortgage-backed securities. The Company recorded a transition adjustment loss to accumulated deficit of $55.7 million as of January 1, 2007 to reflect the cumulative effect of the adoption of the fair value option for the Company's residential mortgage investments. This adjustment reflects a reclassification of $21.5 million of unrealized losses included in other comprehensive income to accumulated deficit. Accordingly, this adjustment resulted in a net decrease of stockholders' equity by $34.2 million, or $0.42 per common share outstanding. Book Value Per Common Share The Company's book value per common share was $20.95 and $21.42 as of March 31, 2007 and December 31, 2006, respectively, exclusive of the distribution expected to be declared subsequent to the end of the first quarter of 2007 of $0.56 per common share and the distribution declared subsequent to the end of the fourth quarter of 2006 of $0.54 per common share. The Company's book value per common share excludes net unrealized gains from its corporate loan investments, which are carried at amortized cost, held by consolidated and unconsolidated subsidiaries totaling $31.9 million, or $0.40 per common share outstanding as of March 31, 2007 and $26.1 million, or $0.32 per common share outstanding as of December 31, 2006. Information for Investors: Conference Call and Webcast KKR Financial Holdings LLC will host a conference call and audio webcast to review its first quarter 2007 results on Friday, May 4, 2007, at 11 a.m. EDT. The conference call can be accessed by dialing 800-753-0420 (Domestic) or 913-981-5554 (International); a pass code is not required. A replay will be available through May 18, 2007 by dialing 888-203-1112 (Domestic) and 719-457- 0820 (International) / pass code 4380335. 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 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. Schedule I KKR Financial Corp. and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (amounts in thousands, except per share information) For the three For the three months ended months ended March 31, 2007 March 31, 2006 Net investment income: Securities interest income $115,608 $79,964 Loan interest income 133,742 125,106 Dividend income 974 883 Other interest income 2,687 1,845 Total investment income 253,011 207,798 Interest expense (200,066) (156,563) Net investment income 52,945 51,235 Other income: Net unrealized gain on trading securities and loans carried at fair value 2,769 -- Net realized and unrealized gain on derivatives and foreign exchange 7,138 10 Net realized gain on investments 6,944 1,448 Fee and other income 2,048 215 Total other income 18,899 1,673 Non-investment expenses: Related party management compensation 19,299 14,440 Professional services 541 947 Loan servicing expense 3,263 3,996 Insurance expense 194 224 Directors expenses 320 373 General and administrative expenses 6,008 2,228 Total non-investment expenses 29,625 22,208 Income before equity in income of unconsolidated affiliate and income tax expense 42,219 30,700 Equity in income of unconsolidated affiliate 6,981 -- Income before income tax expense 49,200 30,700 Income tax expense 776 312 Net income $48,424 $30,388 Net income per common share: Basic $0.61 $0.39 Diluted $0.60 $0.38 Weighted-average number of common shares outstanding: Basic 78,768 77,675 Diluted 80,257 79,314 Distributions declared per common share $0.54 $0.40 Schedule II KKR Financial Corp. and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (amounts in thousands, except share information) March 31, December 31, 2007 2006 Assets Cash and cash equivalents $3,296 $5,125 Restricted cash and cash equivalents 291,117 138,065 Trading securities, $6,988,360 and $0 pledged as collateral as of March 31, 2007 and December 31, 2006, respectively 7,033,094 -- Securities available-for-sale, $734,108 and $8,336,435 pledged as collateral as of March 31, 2007 and December 31, 2006, respectively 880,340 8,500,636 Loans ($4,845,144 and $0 at fair value as of March 31, 2007 and December 31, 2006, respectively), net of allowance for loan losses of $0 and $1,500 as of March 31, 2007 and December 31, 2006, respectively 8,042,492 8,442,021 Derivative assets 49,387 63,433 Interest receivable 77,603 84,048 Principal receivable 8,201 4,540 Non-marketable equity securities 173,823 166,323 Investment in unconsolidated affiliate 128,813 104,035 Other assets 52,598 56,951 Total assets $16,740,764 $17,565,177 Liabilities Repurchase agreements $3,551,840 $4,457,089 Collateralized loan obligation senior secured notes 2,252,500 2,252,500 Asset-backed secured liquidity notes 8,822,785 8,705,601 Secured revolving credit facility 25,200 34,710 Secured demand loan 41,658 41,658 Junior subordinated notes 257,743 257,743 Accounts payable, accrued expenses and other liabilities 46,032 45,237 Accrued interest payable 42,163 36,991 Related party payable 10,221 6,901 Income tax liability 877 601 Derivative liabilities 3,811 2,715 Total liabilities 15,054,830 15,841,746 Stockholders' Equity Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued and outstanding at March 31, 2007 and December 31, 2006 -- -- Common stock, $0.01 par value, 250,000,000 shares authorized and 80,464,713 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively 805 805 Additional paid-in-capital 1,676,168 1,670,330 Accumulated other comprehensive income 77,940 70,520 Accumulated deficit (68,979) (18,224) Total stockholders' equity 1,685,934 1,723,431 Total liabilities and stockholders' equity $16,740,764 $17,565,177 Schedule III KKR Financial Corp. and Subsidiaries SUMMARY FINANCIAL DATA (UNAUDITED) (amounts in thousands, except share information) Three Months Three Months Ended Ended March 31,2007 March 31,2006 Net Income: $48,424 $30,388 Earnings per diluted common share $0.60 $0.38 Net Income + Share-Based Compensation (1): $54,262 $37,171 Net income, adjusted for share-based compensation, per diluted common share $0.68 $0.47 REIT Taxable Income (2): $65,989 $47,694 REIT taxable income per diluted common share $0.82 $0.60 Profitability Ratio Information (3): Return on equity 11.4% 7.4% Return on assets 1.1% 0.8% Efficiency ratio 10.6% 10.6% Share Information: Common shares outstanding 80,465 80,374 Basic EPS common shares outstanding 78,768 77,675 Diluted EPS common shares outstanding 80,257 79,314 Investment Portfolio Information March 31, December 31, 2007 2006 Residential mortgage securities $7,033,094 $7,536,196 Residential loans 4,845,144 5,109,261 Total residential 11,878,238 12,645,457 Corporate securities 759,228 863,449 Corporate loans 3,092,020 3,225,567 Total corporate 3,851,248 4,089,016 Commercial real estate securities 32,133 32,023 Commercial real estate loans 105,328 108,693 Total commercial real estate 137,461 140,716 Marketable equity securities 88,979 68,968 Non-marketable equity securities 173,823 166,323 Total investment portfolio 16,129,749 17,110,480 Balance Sheet Information March 31, December 31, 2007 2006 Investment portfolio $16,129,749 $17,110,480 Total assets 16,740,764 17,565,177 Total borrowings 14,951,726 15,749,301 Total liabilities 15,054,830 15,841,746 Stockholders' equity 1,685,934 1,723,431 Book value per common share 20.95 21.42 Leverage 8.9x 9.1x Three Months Three Months Ended Ended March 31, March 31, Statement of Operations Information 2007 2006 Investment income $253,011 $207,798 Other income 18,899 1,673 Total income 271,910 209,471 Interest expense (200,066) (156,563) Share-based compensation expense (5,838) (6,783) Management compensation (13,567) (7,830) Loan servicing expense (3,263) (3,996) Other expenses (6,957) (3,599) Total non-investment expenses (29,625) (22,208) Equity in income of unconsolidated affiliate 6,981 -- Income before income tax expense 49,200 30,700 Income tax expense (776) (312) Net income $48,424 $30,388 (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. and Subsidiaries INVESTMENT PORTFOLIO BY INTEREST RATE TYPE AS OF MARCH 31, 2007 (UNAUDITED) (amounts in thousands)(1) Portfolio Carrying Amortized Estimated Mix % by Value Cost Fair Value Fair Value Floating Rate: Residential ARM Loans $1,294,678 $1,311,889 $1,294,678 8.0% Residential ARM Securities 5,229,852 5,218,304 5,229,852 32.4 Corporate Loans 3,067,020 3,067,020 3,090,999 19.1 Corporate Debt Securities 266,917 258,004 266,917 1.7 Commercial Real Estate Loans 105,328 105,328 106,118 0.6 Total Floating Rate 9,963,795 9,960,545 9,988,564 61.8 Hybrid Rate: Residential Hybrid ARM Loans 3,550,466 3,569,558 3,550,466 21.9 Residential Hybrid ARM Securities 1,803,242 1,832,947 1,803,242 11.2 Total Hybrid Rate 5,353,708 5,402,505 5,353,708 33.1 Fixed Rate: Corporate Loans 25,000 25,000 24,570 0.2 Corporate Debt Securities 492,311 468,738 492,311 3.0 Commercial Real Estate Debt Securities 32,133 32,000 32,133 0.2 Total Fixed Rate 549,444 525,738 549,014 3.4 Marketable and Non-Marketable Equity Securities: Common and Preferred Stock 88,979 84,561 88,979 0.6 Non-Marketable Equity Securities 173,823 173,823 173,823 1.1 Total Marketable and Non-Marketable Equity Securities 262,802 258,384 262,802 1.7 Total $16,129,749 $16,147,172 $16,154,088 100.0% (1) The schedule summarizes the carrying value, amortized cost, and fair value of the Company's investment portfolio as of March 31, 2007, 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 residential mortgage loans and amortized cost for corporate and commercial real estate loans. Estimated fair values set forth in the schedule are as of March 31, 2007 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. and Subsidiaries RECONCILIATION OF REPORTED GAAP NET INCOME TO TOTAL TAXABLE INCOME AND REIT TAXABLE INCOME (UNAUDITED) Estimated for the Estimated for the three months ended three months ended March 31, 2007 March 31, 2006 (amounts in thousands, Per Per except per share amounts) Amount Share Amount Share Reported net income $48,424 $0.60 $30,388 $0.38 Book/tax differences adjustment for residential mortgage portfolio (374) -- 2,093 0.03 Share-based compensation 5,838 0.07 6,783 0.09 Vesting of restricted common stock (140) -- -- -- Foreign exchange gains and losses 1 -- (374) -- Gains on sales of assets to and among taxable REIT subsidiaries 364 0.01 888 0.01 Realized and unrealized derivative gains and losses (430) (0.01) 1,416 0.02 Book/tax differences adjustment for foreign taxable REIT subsidiaries 13,205 0.16 8,168 0.10 Other (204) -- 204 -- Income tax expense 776 0.01 312 -- Total taxable income 67,460 0.84 49,878 0.63 Undistributed taxable income of domestic taxable REIT subsidiary (1,471) (0.02) (2,184) (0.03) REIT taxable income $65,989 $0.82 $47,694 $0.60 Number of common shares outstanding: Weighted average diluted common shares outstanding during the period 80,257 79,314 (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 their 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 of 1986, as amended, or the 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 of other companies. 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 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.kkrfn.com/

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