KFN Kkr Financial Holdings Llc

SAN FRANCISCO, July 16 /PRNewswire-FirstCall/ -- KKR Financial Holdings LLC (NYSE:KFN) ("KFN" or the "Company") today announced its results for the second quarter of 2007. Highlights of KKR Financial Holdings LLC's performance include: -- Net income for the quarter ended June 30, 2007 of $53.0 million, or $0.66 per diluted common share. -- Net income adjusted for share-based compensation, a non-GAAP financial measurement, for the quarter ended June 30, 2007 of $53.8 million, or $0.67 per diluted common share. -- Closed KKR Financial CLO 2007-1, Ltd., a $3.5 billion secured financing transaction on May 22, 2007. Issued $2.4 billion of senior secured notes maturing in 2021 to investors at par with a weighted average coupon of three-month LIBOR plus 0.53% and issued $431.3 million of mezzanine and subordinated notes to affiliates. -- Issued $70.0 million of 30-year trust preferred securities at par with a coupon of three-month LIBOR plus 2.50%. -- Completed the conversion from a real estate investment trust to a limited liability company. KFN reported net income for the three and six months ended June 30, 2007 of $53.0 million and $101.4 million, respectively, or $0.66 and $1.26 per diluted common share, respectively. Results for the three and six months ended June 30, 2007 represent an increase of 51.9% and 55.3%, respectively, from net income for the three and six months ended June 30, 2006 of $34.9 million and $65.3 million, respectively, or $0.44 and $0.82 per diluted common share, respectively. Net income includes share-based compensation expense for the three and six months ended June 30, 2007 of $0.8 million and $6.7 million, respectively, or $0.01 and $0.09 per diluted common share, respectively. For the three and six months ended June 30, 2006, share-based compensation expense totaled $5.1 million and $11.9 million, or $0.06 and $0.15 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 six months ended June 30, 2007 totaled $53.8 million and $108.1 million, or $0.67 and $1.35 per diluted common share, respectively. Current period results represent an increase of 34.2% and 40.0%, respectively, from the three and six month periods ended June 30, 2006 of $40.1 million and $77.2 million, respectively, or $0.50 and $0.97 per diluted common share, respectively. Book Value Per Common Share The Company's book value per common share outstanding was $20.91 and $20.95 as of June 30, 2007 and March 31, 2007, respectively. Conversion Transaction On May 4, 2007, the Company completed a conversion transaction, pursuant to which KKR Financial Corp. became a subsidiary of the Company and each outstanding share of KKR Financial Corp.'s common stock was converted into one share of the Company's common shares, which are publicly traded on the New York Stock Exchange. The Company has not elected to be treated as a REIT for U.S. federal income tax purposes; however, the Company intends to be treated as a partnership, and not as an association or publicly traded partnership that is taxable as a corporation, for U.S. federal income tax purposes. KKR Financial CLO 2007-1, Ltd. The Company closed KKR Financial CLO 2007-1, Ltd., a $3.5 billion secured financing transaction, on May 22, 2007. The Company issued $2.4 billion of senior secured notes at par to investors with a weighted average coupon of three-month LIBOR plus 0.53% and issued $244.7 million of mezzanine notes and $186.6 million of subordinated notes to affiliates. The mezzanine notes have a weighted average coupon of three-month LIBOR plus 4.85%. The subordinated notes do not have a contractual coupon rate, but instead will receive a pro rata amount of the net distributions from KKR Financial CLO 2007-1, Ltd. The senior secured notes issued to investors consist of the following three classes of notes: (i) $1,849.0 million of Class A notes rated Aaa/AAA and bearing interest at three-month LIBOR plus 0.35%; (ii) $220.3 million of Class B notes rated Aa2/AA and bearing interest at three-month LIBOR plus 0.75%; and (iii) $299.3 million of Class C notes rated A2/A and bearing interest at three-month LIBOR plus 1.45%. Trust Preferred Securities During June 2007, the Company issued $72.2 million of junior subordinated notes to KKR Financial Capital Trust VI (the "Trust"), an entity the Company formed for issuing trust preferred securities and through which the Company received $70.0 million in gross proceeds through the Trust's issuance of trust preferred securities to unaffiliated investors in June 2007. Interest is payable quarterly at a floating rate equal to three-month LIBOR plus 2.50%. Information for Investors: Conference Call and Webcast The Company will host a conference call and audio webcast to review its second quarter 2007 results on Tuesday, July 17, 2007, at 9:30 a.m. EDT. The conference call can be accessed by dialing 800-562-8369 (Domestic) or 913-312- 1299 (International); a pass code is not required. A replay will be available through July 31, 2007 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 5425778. 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 Holdings LLC KKR Financial Holdings LLC is a specialty finance company that uses leverage with the objective of generating competitive risk-adjusted returns. The Company seeks to achieve its investment objective by investing in (i) corporate loans and debt securities, (ii) marketable equity securities and (iii) non-marketable equity securities. The Company also makes opportunistic investments in other asset classes from time to time, including investments in residential and commercial mortgage loans and securities. KKR Financial Holdings LLC is not currently reinvesting funds in residential real estate-related investments as those investments pay down in the ordinary course but may choose to do so if new residential real estate- related investments meet its return requirements. In addition, KKR Financial Holdings LLC is considering other alternatives to reducing its residential real estate-related investments, including selling all or a portion of its residential real estate-related investments through asset sales or sales or other dispositions of the common stock of KKR Financial Corp. KKR Financial Holdings LLC is a Delaware limited liability company and was organized on January 17, 2007. KKR Financial Holdings LLC is the successor to KKR Financial Corp., a Maryland Corporation. KKR Financial Corp. was originally incorporated in the State of Maryland on July 7, 2004 and elected to be treated as a real estate investment trust ("REIT") for U.S. federal income tax purposes. On May 4, 2007, KKR Financial Holdings LLC completed a restructuring transaction, pursuant to which KKR Financial Corp. became a subsidiary of KKR Financial Holdings LLC and each outstanding share of KKR Financial Corp.'s common stock was converted into one of KKR Financial Holdings LLC's common shares, which are publicly traded on the New York Stock Exchange. KKR Financial Holdings LLC has not elected to be treated as a REIT for U.S. federal income tax purposes; however, KKR Financial Holdings LLC intends to be treated as a partnership, and not as an association or publicly traded partnership that is taxable as a corporation, for U.S. federal income tax purposes. KKR Financial Advisors LLC, a wholly owned subsidiary of KKR Financial LLC, manages the Company pursuant to a management agreement. KKR Financial Holdings LLC, KKR Financial LLC, 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 Holdings LLC 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, availability of financing, maintenance of sufficient liquidity, and other risks disclosed from time to time in the Company's filings with the SEC. Schedule I KKR Financial Holdings LLC CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (amounts in For the three For the three For the six For the six thousands, months ended months ended months ended months ended except per share June 30, June 30, June 30, June 30, information) 2007 2006 2007 2006 Net investment income: Securities interest income $114,294 $94,010 $229,902 $173,974 Loan interest income 148,993 130,098 282,735 255,204 Dividend income 884 912 1,858 1,795 Other interest income 5,960 1,807 8,647 3,652 Total investment income 270,131 226,827 523,142 434,625 Interest expense (218,475) (175,094) (418,541) (331,657) Net investment income 51,656 51,733 104,601 102,968 Other income: Net unrealized loss on trading securities and loans carried at fair value (16,821) - (14,052) - Net realized and unrealized gain on derivatives and foreign exchange 6,481 3,299 13,619 3,309 Net realized gain on investments 26,752 691 33,696 2,139 Fee and other income 2,540 458 4,588 673 Total other income 18,952 4,448 37,851 6,121 Non-investment expenses: Related party management compensation 15,114 13,778 34,413 28,218 Professional services 806 548 1,347 1,495 Loan servicing expense 3,126 3,720 6,389 7,716 Insurance expense 192 274 386 498 Directors expenses 285 375 605 748 General and administrative expenses 3,756 2,436 9,764 4,664 Total non-investment expenses 23,279 21,131 52,904 43,339 Income before equity in income of unconsolidated affiliate and income tax expense 47,329 35,050 89,548 65,750 Equity in income of unconsolidated affiliate 5,725 - 12,706 - Income before income tax expense 53,054 35,050 102,254 65,750 Income tax expense 83 119 859 431 Net income $52,971 $34,931 $101,395 $65,319 Net income per common share: Basic $0.67 $0.45 $1.29 $0.84 Diluted $0.66 $0.44 $1.26 $0.82 Weighted-average number of common shares outstanding: Basic 78,770 77,675 78,769 77,675 Diluted 80,462 79,410 80,334 79,237 Distributions declared per common share $0.56 $0.45 $1.10 $0.85 Schedule II KKR Financial Holdings LLC CONSOLIDATED BALANCE SHEETS (UNAUDITED) (amounts in thousands, June 30, December 31, except share information) 2007 2006 Assets Cash and cash equivalents $23,481 $5,125 Restricted cash and cash equivalents 713,219 138,065 Trading securities, $6,530,082 and $0 pledged as collateral as of June 30, 2007 and December 31, 2006, respectively 6,587,422 - Securities available-for-sale, $1,180,412 and $8,336,435 pledged as collateral as of June 30, 2007 and December 31, 2006, respectively 1,438,966 8,500,636 Loans ($4,565,474 and $0 at fair value as of June 30, 2007 and December 31, 2006, respectively), net of allowance for loan losses of $0 and $1,500 as of June 30, 2007 and December 31, 2006, respectively 9,817,232 8,442,021 Derivative assets 80,786 63,433 Interest receivable 104,694 84,048 Principal receivable 26,315 4,540 Non-marketable equity securities 173,823 166,323 Investment in unconsolidated affiliate - 104,035 Other assets 111,105 56,951 Total assets $19,077,043 $17,565,177 Liabilities Repurchase agreements $2,393,138 $4,457,089 Collateralized loan obligation senior secured notes 4,621,000 2,252,500 Collateralized loan obligation junior secured notes to affiliates 431,293 - Asset-backed secured liquidity notes 8,942,827 8,705,601 Secured revolving credit facility 156,531 34,710 Secured demand loan 41,658 41,658 Junior subordinated notes 329,908 257,743 Accounts payable, accrued expenses and other liabilities 355,950 45,237 Accrued interest payable 50,229 36,991 Related party payable 11,186 6,901 Income tax liability 500 601 Securities sold, not yet purchased 58,491 - Derivative liabilities 1,805 2,715 Total liabilities 17,394,516 15,841,746 Stockholders' Equity Preferred stock, $0.01 par value, 50,000,000 shares authorized and none issued and outstanding at June 30, 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 June 30, 2007 and December 31, 2006, respectively 805 805 Additional paid-in-capital 1,677,022 1,670,330 Accumulated other comprehensive income 65,768 70,520 Accumulated deficit (61,068) (18,224) Total stockholders' equity 1,682,527 1,723,431 Total liabilities and stockholders' equity $19,077,043 $17,565,177 Schedule III KKR Financial Holdings LLC SUMMARY FINANCIAL DATA (UNAUDITED) (amounts in Three Months Three Months Six Months Six Months thousands, Ended Ended Ended Ended except share June 30, June 30, June 30, June 30, information) 2007 2006 2007 2006 Net Income: $52,971 $34,931 $101,395 $65,319 Earnings per diluted common share $0.66 $0.44 $1.26 $0.82 Net Income + Share- Based Compensation (1): $53,825 $40,074 $108,087 $77,245 Net income, adjusted for share-based compensation, per diluted common share $0.67 $0.50 $1.35 $0.97 Profitability Ratio Information (2): Return on equity 12.4% 8.1% 11.9% 7.8% Return on assets 1.2% 0.9% 1.2% 0.8% Efficiency ratio 7.9% 9.1% 9.2% 9.8% Share Information: Common shares outstanding 80,465 80,374 80,465 80,374 Basic EPS weighted- average common shares outstanding 78,770 77,675 78,769 77,675 Diluted EPS weighted- average common shares outstanding 80,462 79,410 80,334 79,237 Investment Portfolio Information June 30, December 31, 2007 2006 Residential mortgage securities $6,587,422 $7,536,196 Residential loans 4,565,474 5,109,261 Total residential 11,152,896 12,645,457 Corporate securities 1,339,076 863,449 Corporate loans 5,137,004 3,225,567 Total corporate 6,476,080 4,089,016 Commercial real estate securities 31,609 32,023 Commercial real estate loans 114,754 108,693 Total commercial real estate 146,363 140,716 Marketable equity securities 68,281 68,968 Non-marketable equity securities 173,823 166,323 Total investment portfolio 18,017,443 17,110,480 Balance Sheet Information June 30, December 31, 2007 2006 Investment portfolio $18,017,443 $17,110,480 Total assets 19,077,043 17,565,177 Total borrowings 16,916,355 15,749,301 Total liabilities 17,394,516 15,841,746 Stockholders' equity 1,682,527 1,723,431 Book value per common share 20.91 21.42 Leverage 10.1x 9.1x (1) Non-GAAP financial measurement consisting of GAAP net income plus GAAP share-based compensation expense. (2) All ratios computed on an annualized basis. The efficiency ratio is defined as non-interest expense divided by total income. Schedule IV KKR Financial Holdings LLC INVESTMENT PORTFOLIO BY INTEREST RATE TYPE AS OF JUNE 30, 2007 (UNAUDITED) (amounts in Portfolio thousands)(1)(2) Carrying Amortized Estimated Mix % by Value Cost Fair Value Fair Value Floating Rate: Residential ARM Loans $1,172,530 $1,190,441 $1,172,530 6.5% Residential ARM Securities 4,850,890 4,843,801 4,850,890 26.9 Corporate Loans 5,071,211 5,071,211 5,085,623 28.2 Corporate Debt Securities 266,365 262,450 266,365 1.5 Commercial Real Estate Loans 114,754 114,754 115,357 0.6 Total Floating Rate 11,475,750 11,482,657 11,490,765 63.7 Hybrid Rate: Residential Hybrid ARM Loans 3,392,944 3,427,884 3,392,944 18.8 Residential Hybrid ARM Securities 1,736,532 1,762,488 1,736,532 9.6 Total Hybrid Rate 5,129,476 5,190,372 5,129,476 28.4 Fixed Rate: Corporate Loans 65,793 65,793 66,993 0.4 Corporate Debt Securities 1,072,711 1,074,421 1,072,711 5.9 Commercial Real Estate Debt Securities 31,609 32,000 31,609 0.1 Total Fixed Rate 1,170,113 1,172,214 1,171,313 6.4 Marketable and Non-Marketable Equity Securities: Common and Preferred Stock 68,281 65,694 68,281 0.4 Non-Marketable Equity Securities 173,823 173,823 201,605 1.1 Total Marketable and Non-Marketable Equity Securities 242,104 239,517 269,886 1.5 Total $18,017,443 $18,084,760 $18,061,440 100.0% (1) The schedule excludes securities sold, not yet purchased totaling $58.5 million as of June 30, 2007 and for which the Company had an unrealized gain of $0.4 million. (2) The schedule summarizes the carrying value, amortized cost, and fair value of the Company's investment portfolio as of June 30, 2007, classified by interest rate type. Carrying value is the value that investments are recorded on the Company's consolidated balance sheet and is estimated fair value for residential mortgage loans and securities, other than non-marketable equity securities, and amortized cost for corporate loans, commercial real estate loans, and non- marketable equity securities. Estimated fair values set forth in the schedule are as of June 30, 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 are not available. 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 Holdings LLC CONTACT: Laurie Poggi of KKR Financial LLC, +1-415-315-3718; Roanne Kulakoff, +1-212-521-4837, or Joseph Kuo, +1-212-521-4863, both of Kekst and Company Web site: http://www.kkrkfn.com/

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