KFN Kkr Financial Holdings Llc

SAN FRANCISCO, Aug. 7 /PRNewswire-FirstCall/ -- KKR Financial Holdings LLC (NYSE:KFN) ("KFN" or the "Company") today announced its results for the second quarter ended June 30, 2008. Highlights of KKR Financial Holdings LLC's results include: -- Distribution of $0.40 per common share declared for the second quarter. -- For the second quarter ended June 30, 2008, GAAP net income totaled $37.6 million, or $0.26 per diluted common share and economic net income, a non-GAAP financial measurement, totaled $37.9 million, or $0.26 per diluted common share. Economic net income is the Company's net income adjusted to exclude share-based compensation expense. -- Elimination of all short-term debt during the quarter ended June 30, 2008. -- Sales of $422.0 million of investments with a weighted-average discount margin of 5.42% and purchases of $456.2 million of investments with a weighted-average discount margin of 8.41%. For the three and six months ended June 30, 2008, the Company reported GAAP net income totaling $37.6 million, or $0.26 per diluted common share, and $51.5 million, or $0.39 per diluted common share, respectively. GAAP net income for the three and six months ended June 30, 2007 totaled $53.0 million, or $0.65 per diluted common share, and $101.4 million, or $1.24 per diluted common share, respectively. For the three and six months ended June 30, 2008, economic net income, a non-GAAP financial measurement, totaled $37.9 million, or $0.26 per diluted common share, and $52.6 million, or $0.40 per diluted common share, respectively. Economic net income, a non-GAAP financial measurement, for the three and six months ended June 30, 2007 totaled $53.8 million, or $0.66 per diluted common share, and $108.1 million, or $1.32 per diluted common share, respectively. Economic net income is the Company's net income adjusted to exclude share-based compensation. A reconciliation of GAAP net income to economic net income is provided in Schedule IV. Distribution On August 7, 2008, the Company's Board of Directors declared a distribution of $0.40 per common share for the quarter ended June 30, 2008. The distribution is payable on August 29, 2008 to shareholders of record as of the close of business on August 15, 2008. Debt Transactions During the quarter ended June 30, 2008, the Company eliminated all short- term debt and as of June 30, 2008, the Company had no debt maturing in the next twelve months. In addition, during the quarter ended June 30, 2008, the Company retired $35.0 million of trust preferred securities at a weighted-average dollar price of 50.8 and recorded a gain from the transactions of $17.2 million. Economic Portfolio Activity During the quarter ended June 30, 2008, the Company began repositioning its portfolio to take advantage of opportunities in the market. During the quarter, the Company sold $422.0 million of investments with a weighted- average discount margin of 5.42%. Also during the quarter, the Company purchased $456.2 million of investments with a weighted-average discount margin of 8.41%. In addition, the Company received approximately $150.0 million of principal payments during the second quarter of 2008 on existing investments that the Company expects to generate incremental earnings from as it continues to invest at today's attractive market prices. Common Share Offering On April 8, 2008, the Company consummated a public offering of 34.5 million common shares at a price of $11.85 per common share. Net proceeds from the transaction before expenses totaled $384.3 million, which the Company will use for general corporate purposes. Leverage As of June 30, 2008, net economic leverage, a non-GAAP financial measurement, was 2.9x. The computation of net economic leverage is included in Schedule IV. Book Value Per Common Share The Company's GAAP book value per common share outstanding was $12.71 and $14.27 as of June 30, 2008 and December 31, 2007, respectively. Information for Investors: Conference Call and Webcast The Company will host a conference call and audio webcast to review its second quarter 2008 results on Thursday, August 7, 2008, at 5:00 p.m. EDT. The conference call can be accessed by dialing 877-397-0250 (Domestic) or 719-325-4879 (International); a pass code is not required. A replay will be available through Thursday, August 21, 2008 by dialing 888-203-1112 (Domestic) and 719-457-0820 (International) / pass code 7459334. Supplemental materials that will be discussed during the call, as well as a live webcast 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 webcast will be archived in the Investor Relations section of the Company's website. Note Regarding Use of Non-GAAP Financial Measurements The non-GAAP financial measurements referred to in this earnings release are provided as supplemental information, and should not be relied upon as alternative measures to GAAP. These non-GAAP financial measurements consist of items calculated by the Company on an "economic" basis, which includes the following: (i) presentation of the Company's proportionate share of certain structured finance vehicles where the Company holds a majority ownership interest (the "Joint CLOs") and consolidates such vehicles in accordance with GAAP and (ii) exclusion of share-based compensation in the calculation of economic net income or loss. The Company believes that the non-GAAP financial measurements presented in this earnings release provide useful information to investors by providing an understanding of the Company's financial condition and operating performance by which liquidity and periodic results, for purposes of evaluating the net income available for distributions to shareholders, can be assessed. About KKR Financial Holdings LLC KKR Financial Holdings LLC is a publicly traded specialty finance company that invests in multiple asset classes. KKR Financial Holdings LLC is externally managed by KKR Financial Advisors LLC, a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. (Fixed Income) LLC, which is a wholly-owned subsidiary of Kohlberg Kravis Roberts & Co. L.P. KKR Financial Holdings LLC is an affiliate of Kohlberg Kravis Roberts & Co. L.P. Additional information regarding KKR Financial Holdings LLC is available at http://www.kkrkfn.com/. 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 source new investments, 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 thousands, except per share information) For the For the For the For the three months three months six months six months ended ended ended ended June 30, June 30, June 30, June 30, 2008 2007 2008 2007 Net investment income: Securities interest income $34,788 $27,262 $74,597 $49,935 Loan interest income 184,550 146,435 401,087 277,812 Dividend income 1,092 965 1,908 1,940 Other interest income 4,998 5,674 16,074 8,251 Total investment income 225,428 180,336 493,666 337,938 Interest expense (128,037) (124,265) (282,102) (236,050) Interest expense to affiliates (19,707) (8,256) (47,525) (8,256) Provision for loan losses (10,000) - (10,000) - Net investment income 67,684 47,815 154,039 93,632 Other (loss) income: Net realized and unrealized (loss) gain on derivatives and foreign exchange (5,918) 6,481 (52,934) 13,619 Net realized and unrealized (loss) gain on investments (17,217) 26,739 (30,976) 33,764 Net realized and unrealized (loss) gain on residential mortgage- backed securities, residential mortgage loans, and residential mortgage-backed securities issued, carried at estimated fair value (5,594) 1,526 (14,772) (1,691) Net realized and unrealized gain on securities sold, not yet purchased 1,664 575 8,650 575 Gain on extinguishment of debt 17,225 - 17,225 - Other income 513 2,540 5,469 4,588 Total other (loss) income (9,327) 37,861 (67,338) 50,855 Non-investment expenses: Related party management compensation 10,387 15,114 19,546 34,413 General, administrative and directors expenses 5,752 3,991 10,274 10,252 Professional services 1,071 759 2,928 1,300 Loan servicing 2,391 2,939 4,960 6,023 Total non-investment expenses 19,601 22,803 37,708 51,988 Income from continuing operations before equity in income of unconsolidated affiliate and income tax expense 38,756 62,873 48,993 92,499 Equity in income of unconsolidated affiliate - 5,725 - 12,706 Income from continuing operations before income tax expense 38,756 68,598 48,993 105,205 Income tax expense (116) (83) (116) (859) Income from continuing operations 38,640 68,515 48,877 104,346 (Loss) income from discontinued operations (1,079) (15,544) 2,668 (2,951) Net income $37,561 $52,971 $51,545 $101,395 Net income per common share: Basic Income per share from continuing operations $0.26 $0.85 $0.38 $1.30 (Loss) income per share from discontinued operations - (0.19) 0.02 (0.04) Net income per share $0.26 $0.66 $0.40 $1.26 Diluted Income per share from continuing operations $0.26 $0.84 $0.37 $1.28 (Loss) income per share from discontinued operations - (0.19) 0.02 (0.04) Net income per share $0.26 $0.65 $0.39 $1.24 Weighted-average number of common shares outstanding: Basic 146,025 80,241 130,289 80,240 Diluted 146,749 81,933 130,964 81,805 Distributions declared per common share $0.40 $0.56 $0.90 $1.10 Schedule II KKR Financial Holdings LLC CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Amounts in thousands, except share information) As of As of June 30, December 31, 2008 2007 Assets Cash and cash equivalents $189,008 $524,080 Restricted cash and cash equivalents 730,303 1,067,797 Securities available-for-sale, $1,087,747 and $1,346,247 pledged as collateral as of June 30, 2008 and December 31, 2007, respectively 1,117,788 1,359,541 Corporate loans, net of allowance for loan losses of $35,000 and $25,000 as of June 30, 2008 and December 31, 2007, respectively 8,708,005 8,634,208 Residential mortgage-backed securities, at estimated fair value, $72,668 and $117,833 pledged as collateral as of June 30, 2008 and December 31, 2007, respectively 115,652 131,688 Residential mortgage loans, at estimated fair value 3,394,996 3,921,323 Corporate loans held for sale 66,652 - Derivative assets 28,436 18,737 Interest and principal receivable 111,038 162,465 Non-marketable equity securities 20,079 20,084 Reverse repurchase agreements - 69,840 Other assets 78,459 86,504 Assets of discontinued operations - 3,049,758 Total assets $14,560,416 $19,046,025 Liabilities Repurchase agreements $- $2,808,066 Collateralized loan obligation senior secured notes 7,549,318 5,948,610 Collateralized loan obligation junior secured notes to affiliates 525,420 525,420 Secured revolving credit facility 378,306 167,024 Secured demand loan - 24,151 Convertible senior notes 300,000 300,000 Junior subordinated notes 293,826 329,908 Subordinated notes to affiliates 80,000 152,574 Residential mortgage-backed securities issued, at estimated fair value 3,204,392 3,169,353 Accounts payable, accrued expenses and other liabilities 13,392 7,390 Accrued interest payable 97,749 114,035 Accrued interest payable to affiliates 55,375 44,121 Related party payable 5,439 9,694 Securities sold, not yet purchased 22,890 100,394 Derivative liabilities 116,880 56,663 Liabilities of discontinued operations - 3,644,083 Total liabilities 12,642,987 17,401,486 Shareholders' Equity Preferred shares, no par value, 50,000,000 shares authorized and none issued and outstanding at June 30, 2008 and December 31, 2007 - - Common shares, no par value, 250,000,000 shares authorized, and 150,843,151 and 115,248,990 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively - - Paid-in-capital 2,551,800 2,167,156 Accumulated other comprehensive loss (202,586) (157,245) Accumulated deficit (431,785) (365,372) Total shareholders' equity 1,917,429 1,644,539 Total liabilities and shareholders' equity $14,560,416 $19,046,025 Schedule III KKR Financial Holdings LLC ECONOMIC INVESTMENT PORTFOLIO AS OF JUNE 30, 2008 (UNAUDITED) (amounts in thousands) (1) Amortized Cost Estimated Portfolio Mix% Fair Value by Fair Value Corporate loans (2) (3) $6,924,449 $6,467,907 84.1% Corporate securities (3) 1,004,765 871,315 11.3 Residential mortgage-backed securities (4) 368,278 315,175 4.1 Marketable equity securities 28,154 17,666 0.2 Non-marketable equity securities 20,079 20,079 0.3 Total $8,345,725 $7,692,142 100.0% ------------------------------- (1) The table excludes securities sold, not yet purchased with a cost of $27.2 million and an estimated fair value of $22.9 million. (2) Total loans exclude the allowance for loan losses of $35.0 million and include loans held for sale with an estimated fair value of $48.6 million. (3) Represents corporate loans and securities adjusted to reflect the Company's proportionate share of its investment of the Joint CLOs as further described above in the note regarding use of non-GAAP financial measurements. GAAP corporate loans and securities have an amortized cost of $8.8 billion and $1.3 billion, respectively, and estimated fair value of $8.2 billion and $1.1 billion, respectively. (4) Represents residential mortgage-backed securities with a cost of $134.5 million and an estimated fair value of $115.7 million, plus the net difference between residential mortgage loans (cost of $3.7 billion and estimated fair value of $3.4 billion) and residential mortgage-backed securities issued (cost of $3.4 billion and estimated fair value of $3.2 billion) plus $8.9 million of real estate owned, which is included in other assets on the consolidated balance sheet. Schedule IV KKR Financial Holdings LLC RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASUREMENTS (UNAUDITED) Economic Net Income The reconciliation of economic net income to GAAP net income for the three and six months ended June 30, 2008 and 2007 is as follows: For the For the For the For the three months three months six months six months ended ended ended ended June 30, June 30, June 30, June 30, (amounts in thousands) 2008 2007 2008 2007 Economic net income $37,934 $53,825 $52,558 $108,087 Share-based compensation (373) (854) (1,013) (6,692) GAAP net income $37,561 $52,971 $51,545 $101,395 Net Economic Leverage The computation of net economic leverage as of June 30, 2008 is as follows: (amounts in thousands) Economic borrowings: Collateralized loan obligation senior secured notes $5,983,917 Secured revolving credit facility 378,306 Convertible senior notes 300,000 Total economic borrowings excluding junior subordinated notes 6,662,223 Less: Economic unrestricted cash (189,008) Total economic debt excluding junior subordinated notes and economic unrestricted cash (A) $6,473,215 Total economic shareholders' equity $1,960,705 Economic junior subordinated notes 293,826 Total economic shareholders' equity including economic junior subordinated notes (B) $2,254,531 Net economic leverage (A)/(B) 2.9x Investor Contact: Laurie Poggi Kohlberg Kravis Roberts & Co. L.P. 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: Investors, Laurie Poggi of Kohlberg Kravis Roberts & Co. L.P., +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 Holdings LLC Web site: http://www.kkrkfn.com/

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