SAN FRANCISCO, April 23, 2014 /PRNewswire/
-- KKR Financial Holdings LLC (NYSE:KFN) ("KFN" or the
"Company") today announced its results for the first quarter ended
March 31, 2014.
First-Quarter 2014 Highlights
- Net income available to common shareholders for the first
quarter ended March 31, 2014 totaled
$101.3 million, or $0.49 per diluted common share, compared to
$91.6 million, or $0.46 per diluted common share, for the
prior-year period.
- Adjusting to exclude provisions for loan losses, total
other income, and management incentive fees, the Company earned
$41.3 million, or $0.20 per diluted common share, for the quarter
ended March 31, 2014, compared to
$45.6 million, or $0.23 per diluted common share, for the
prior-year
period.1
- Run-rate cash earnings per share were $0.16 per common share, compared with
$0.17 for the quarter ended
December 31, 2013.1
- Total net cash earnings per share, which include the impact of
realized cash gains on investments and incentive fees paid to the
Company's manager, were $0.15 per
common share, compared with $0.25 for
the quarter ended December 31,
2013.1
- Book value per common share was $10.83 as of March 31,
2014, up from $10.58 as of
December 31, 2013 and $10.16 as of March 31,
2013.
- The Board of Directors has not declared a quarterly
distribution, pending results of the Company's April 30, 2014 special meeting of shareholders to
approve its proposed merger with KKR & Co. L.P. (NYSE:KKR)
("KKR").
For the three months ended March 31,
2014, the Company reported net income available to common
shareholders of $101.3 million, or
$0.49 per diluted common share,
compared to $91.6 million, or
$0.46 per diluted common share, for
the prior-year period.
The Company's first-quarter 2014 results included total revenues
of $140.6 million, total investment
costs and expenses of $73.8 million,
total other income of $72.8 million,
and total other expenses of $31.5
million. Comparatively, KFN's first quarter 2013
results reflected total revenues of $140.5
million, total investment costs and expenses of $81.0 million, total other income of $74.2 million, and total other expenses of
$34.8 million. In
addition, the Company expensed a $6.9
million distribution on its perpetual preferred shares for
the first quarter of 2014, compared with a $6.7 million partial-period distribution in the
same quarter of 2013, during which the shares were
issued.
Total revenues of $140.6
million for the first quarter of 2014 were in line with the
prior-year period. This resulted from a
combination of a $20.2 million
increase in oil and gas revenues, stemming from a higher level of
production from a larger portfolio than in the prior-year period as
the Company continued to fund pre-existing commitments to deploy
capital, and a $19.2 million decline
in loan and securities interest income to $93.9 million. The decline in
loan and securities interest income was primarily attributable to
(a) an $8.6 million decline in
scheduled and prepayment-related discount accretion from the
Company's loan portfolio, which was held closer to par at
March 31, 2014 than at March 31, 2013; (b) a $5.4
million decline in loan interest income stemming from a
reduction in the annualized weighted average interest rate being
earned on the Company's loan portfolio, which was partially offset
by modest year-over-year growth in Company's loan portfolio; and
(c) a $4.1 million decline in corporate debt securities interest
income, driven in combination by material reductions in the
interest rate earned on, and the prepayment-related discount
accretion generated by, the Company's high-yield bond holdings
during the first quarter of 2014 relative to the first quarter of
2013.
Total investment costs and expenses of $73.8 million for the first quarter of 2014
represented a decline of approximately 9% from the prior-year
period. This was primarily due to the recording
of a provision for loan losses of $11.1
million for the first quarter of 2013 as compared to no
provision being recorded for the current period.
In addition, interest expense and interest expense to affiliates
declined by $4.6 million, primarily
driven by a write-off of $4.0 million
of previously capitalized costs related to termination of
conversion rights on the Company's 7.500% convertible senior notes
in the first quarter of 2013. However, expenses
associated with the Company's oil and gas portfolio increased by
approximately $9.5 million from the
prior-year period, substantially in connection with increased
depletion, depreciation, and amortization expense generated by a
higher level of production from a larger portfolio than in the
prior-year period.
Total other income of $72.8
million for the first quarter of 2014 resulted largely from
mark-to-market gains on the Company's assets during the period, but
reflected a decrease of approximately 2% from the prior-year period
predominantly comprising a $17.0
million decline in net realized and unrealized gains on
investments as well as a $5.2 million
decline in other income. Favorably, no net loss
on extinguishment of debt was recorded for the first quarter of
2014, compared with a $20.3 million
loss taken in the prior-year period in connection with the
Company's termination of conversion rights on its 7.500%
convertible senior notes due 2017.
Total other expenses of $31.5
million for the first quarter of 2014 declined by
approximately 10% from the prior-year period.
This resulted predominantly from a decrease in related-party
management compensation of $2.7
million, largely comprising a $4.3
million reduction in incentive fees paid to the Company's
manager in connection with quarterly performance partially offset
by a $1.8 million increase in
management fees paid to the manager.
Book Value
Book value per common share increased to $10.83 as of March 31,
2014 from $10.58 as of
December 31, 2013.
The increase was predominantly driven by first-quarter net income
available to common shareholders of $0.49 per diluted common
share. Partially offsetting this were (a) an
increase in the Company's accumulated other comprehensive loss, a
component of shareholders' equity, of $0.03 per diluted common share, resulting from
decreases in the value of certain interest rate swaps designated as
cash flow hedges and securities available for sale, and (b)
distributions of $0.22 per share paid
to common shareholders during the quarter.
Distribution
The Board of Directors has not declared a quarterly distribution
on its common shares in light of the Company's April 30, 2014 special meeting of shareholders to
approve its proposed merger with KKR.
Should the merger be approved, it is expected that the Company's
common shareholders will be common unitholders of KKR in advance of
the expected record date related to KKR's next anticipated
quarterly distribution. As such, they would
receive a quarterly distribution from KKR in lieu of a quarterly
KFN distribution. KKR will report its
first-quarter earnings, including any distribution payable to
common unitholders, on April 24,
2014.
In the event that the merger is not approved by common
shareholders of KFN, the board may reevaluate its decision not to
declare a quarterly distribution.
Supplemental Information
A slide presentation containing supplemental commentary about
the Company's financial results for the fiscal quarter ended
March 31, 2014 may be accessed
through the KFN Investor Relations section of the KKR website at
http://ir.kkr.com/kfn_ir/kfn_events.cfm.
From time to time the Company may use its website as a channel
of distribution of material company information.
Financial and other important information regarding the Company is
routinely posted on and accessible at the KFN
Investor Relations section of www.kkr.com, where you may also
enroll your email address to receive automatic email alerts and
other information about the Company.
About KKR Financial Holdings LLC
KKR Financial Holdings LLC is a specialty finance company with
expertise in a range of asset classes. KFN's core business strategy
is to leverage the proprietary resources of its manager with the
objective of generating both current income and capital
appreciation. KFN executes its core business strategy through its
majority-owned subsidiaries. KFN is externally managed by KKR
Financial Advisors LLC, a wholly-owned subsidiary of KKR Asset
Management LLC, which is a wholly-owned subsidiary of Kohlberg
Kravis Roberts & Co. L.P. Additional
information regarding KFN is available at http://www.kkr.com.
Additional Information Related to KFN's Proposed Merger with
KKR & Co. L.P.
In connection with the proposed transaction, KKR has filed
a registration statement on Form S-4 that includes a proxy
statement of KFN and that also constitutes a prospectus of KKR. KKR
and KFN also plan to file other relevant materials with the SEC.
Shareholders of KFN are urged to read the proxy
statement/prospectus contained in the registration statement and
other relevant materials because these materials contain important
information about the proposed transaction. These materials will be
made available to the shareholders of KFN at no expense to them.
The registration statement and other relevant materials, including
any documents incorporated by reference therein, may be obtained
free of charge at the SEC's website at
www.sec.gov or for free from KKR at
http://ir.kkr.com/ or by emailing
kfn.ir@kkr.com. You may also read and copy any
reports, statements and other information filed by KKR with the SEC
at the SEC public reference room at 100 F Street N.E., Room 1580,
Washington, D.C. 20549. Please
call the SEC at (800) 732-0330 or visit the SEC's website for
further information or its public reference room.
This document shall not constitute an offer to sell or the
solicitation of an offer to buy any securities, nor shall there be
any sale of securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to the registration or
qualification under the securities laws of any such jurisdiction.
No offering of securities shall be made, except
by means of a prospectus meeting the requirements of Section 10 of
the Securities Act of 1933, as amended.
KKR, KFN and their respective directors, executive
officers and employees may be deemed, under SEC rules, to be
participants in the solicitation of proxies from KFN's common
shareholders in respect of the proposed transaction.
Information regarding KFN's directors and
executive officers is available in KFN's Amendment No. 1 to its
Annual Report on Form 10-K, filed with the SEC on April 23, 2014. Information
regarding KKR's directors and executive officers is available in
KKR's Annual Report on Form 10-K for the fiscal year ended
December 31, 2013, filed with the SEC
on February 24, 2014.
Additional information regarding the interests
of such potential participants in the proposed transaction will be
included in the definitive proxy statement/prospectus to be filed
with the SEC in connection with the proposed transaction.
These documents may be obtained free of charge
from the SEC's website at www.sec.gov and
KFN's website at
http://ir.kkr.com/kfn_ir/kfn_sec.cfm.
Forward-Looking Statements
Some of the matters discussed in this document may
constitute forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements
relate to expectations, beliefs, projections, future plans and
strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts.
The forward-looking statements are based on
KFN's beliefs, assumptions and expectations of its future
performance, taking into account all information currently
available to it. These beliefs, assumptions and
expectations can change as a result of many possible events or
factors, not all of which are known to KFN or are within either of
their control. The following factors, among
others, could cause actual results to vary from the forward-looking
statements: the ability of the parties to
satisfy the conditions precedent and consummate the proposed merger
of KKR and KFN, the timing of consummation of the proposed merger,
the ability of the parties to secure any required shareholder or
regulatory approvals in a timely manner or on the terms desired or
anticipated, the ability to achieve anticipated benefits and
savings, KKR's decisions with respect to distributions on its
common units, risks related to disruption of management's attention
due to the pending merger, operating results and businesses
generally, the outcome of any legal proceedings related to the
proposed merger and the general risks associated with the business
of KFN, including the general volatility of the capital markets,
terms and deployment of capital, volatility of the KFN share price,
changes in the asset management industry, interest rates or the
general economy, underperformance of KFN's assets and investments
and decreased ability to raise funds and the degree and nature of
KFN's competition. KFN does not undertake any
obligation to update any forward-looking statements to reflect
circumstances or events that occur after the date on which such
statements were made except as required by law.
Additional information about risk factors
affecting KFN is available in KFN's Annual Report on Form 10-K for
the fiscal year ended December 31,
2013, filed with the SEC on February
27, 2014, and other filings with the SEC, which are
available at www.sec.gov.
Schedule
I
|
KKR Financial
Holdings LLC and Subsidiaries
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
(Amounts in
thousands, except per share information)
|
|
|
|
|
For the three
months ended
March 31, 2014
|
|
For the three
months ended
March 31, 2013
|
|
Revenues
|
|
|
|
|
|
Loan interest
income
|
|
$
|
84,294
|
|
$
|
98,261
|
|
Securities interest
income
|
|
9,601
|
|
14,862
|
|
Oil and gas
revenue
|
|
44,028
|
|
23,805
|
|
Other
|
|
2,667
|
|
3,522
|
|
Total
revenues
|
|
140,590
|
|
140,450
|
|
Investment costs
and expenses
|
|
|
|
|
|
Interest
expense
|
|
47,245
|
|
41,880
|
|
Interest expense to
affiliates
|
|
—
|
|
9,917
|
|
Provision for loan
losses
|
|
—
|
|
11,068
|
|
Oil and gas
production costs
|
|
10,834
|
|
7,908
|
|
Oil and gas
depreciation, depletion and amortization
|
|
15,542
|
|
8,988
|
|
Other
|
|
149
|
|
1,288
|
|
Total investment
costs and expenses
|
|
73,770
|
|
81,049
|
|
Other
income
|
|
|
|
|
|
Net realized and
unrealized gain on investments
|
|
77,764
|
|
94,727
|
|
Net realized and
unrealized loss on derivatives and foreign exchange
|
|
(8,370)
|
|
(8,852)
|
|
Net loss on
restructuring and extinguishment of debt
|
|
—
|
|
(20,269)
|
|
Other
income
|
|
3,446
|
|
8,614
|
|
Total other
income
|
|
72,840
|
|
74,220
|
|
Other
expenses
|
|
|
|
|
|
Related party
management compensation
|
|
25,617
|
|
28,306
|
|
General,
administrative and directors expenses
|
|
3,903
|
|
4,794
|
|
Professional
services
|
|
1,938
|
|
1,727
|
|
Total other
expenses
|
|
31,458
|
|
34,827
|
|
Income before income
taxes
|
|
108,202
|
|
98,794
|
|
Income tax
expense
|
|
19
|
|
458
|
|
Net
income
|
|
$
|
108,183
|
|
$
|
98,336
|
|
|
|
|
|
|
|
Preferred share
distributions
|
|
6,891
|
|
6,738
|
|
Net income
available to common shareholders
|
|
$
|
101,292
|
|
$
|
91,598
|
|
|
|
|
|
|
|
Net income per common
share:
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.49
|
|
$
|
0.46
|
|
|
|
|
|
|
|
Weighted-average
number of common shares outstanding:
|
|
|
|
|
|
Basic
|
|
204,236
|
|
197,153
|
|
Diluted
|
|
204,236
|
|
197,153
|
|
|
|
|
|
|
|
Distributions
declared per common share
|
|
$
|
0.22
|
|
$
|
0.26
|
|
Schedule
II
|
KKR Financial
Holdings LLC
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
(Amounts in
thousands, except share information)
|
|
|
|
|
March 31,
2014
|
|
December 31,
2013
|
|
Assets
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
185,073
|
|
$
|
157,167
|
|
Restricted cash and cash
equivalents
|
|
835,660
|
|
350,385
|
|
Securities
|
|
557,757
|
|
573,312
|
|
Corporate loans, net (includes $233,927 and $237,480
measured at estimated fair value and $510,687 and $279,748 loans
held for sale as of March 31, 2014 and December 31, 2013,
respectively)
|
|
6,202,732
|
|
6,466,720
|
|
Equity investments, at estimated fair value ($83,187
and zero pledged as collateral as of March 31, 2014 and
December 31, 2013, respectively)
|
|
285,988
|
|
181,212
|
|
Oil and gas properties, net
|
|
427,672
|
|
400,369
|
|
Interests in joint ventures and
partnerships
|
|
516,375
|
|
436,241
|
|
Derivative assets
|
|
27,053
|
|
30,224
|
|
Interest and principal receivable
|
|
33,036
|
|
33,570
|
|
Other assets
|
|
90,983
|
|
87,998
|
|
Total assets
|
|
$
|
9,162,329
|
|
$
|
8,717,198
|
|
Liabilities
|
|
|
|
|
|
Collateralized loan
obligation secured notes
|
|
$
|
5,711,885
|
|
$
|
5,249,383
|
|
Credit
facilities
|
|
49,889
|
|
125,289
|
|
Senior
notes
|
|
362,302
|
|
362,276
|
|
Junior subordinated
notes
|
|
283,517
|
|
283,517
|
|
Accounts payable,
accrued expenses and other liabilities
|
|
50,858
|
|
58,215
|
|
Accrued interest
payable
|
|
21,898
|
|
23,575
|
|
Related party
payable
|
|
18,018
|
|
5,574
|
|
Derivative
liabilities
|
|
84,876
|
|
81,635
|
|
Total
liabilities
|
|
6,583,243
|
|
6,189,464
|
|
Shareholders'
equity
|
|
|
|
|
|
Preferred shares, no
par value, 50,000,000 shares authorized and 14,950,000 issued and
outstanding as of both March 31, 2014 and December 31,
2013
|
|
—
|
|
—
|
|
Common shares, no par
value, 500,000,000 shares authorized, and 204,824,159 shares issued
and outstanding as of both March 31, 2014 and December 31,
2013
|
|
—
|
|
—
|
|
Paid-in-capital
|
|
3,315,958
|
|
3,315,117
|
|
Accumulated other
comprehensive loss
|
|
(21,372)
|
|
(15,652)
|
|
Accumulated
deficit
|
|
(715,500)
|
|
(771,731)
|
|
Total
shareholders' equity
|
|
2,579,086
|
|
2,527,734
|
|
Total liabilities
and shareholders' equity
|
|
$
|
9,162,329
|
|
$
|
8,717,198
|
|
Schedule
III
|
|
KKR Financial
Holdings LLC
|
|
RECONCILIATION OF
GAAP TO NON-GAAP FINANCIAL MEASUREMENTS (UNAUDITED):
|
|
ADJUSTED RUN-RATE
EARNINGS
|
|
(Amounts in
thousands, except per share information)
|
|
|
|
|
|
Adjusted run-rate
earnings is a non-GAAP measure adjusting net income available to
common shareholders to exclude the impact of loan loss provisions,
total other income, and management incentive fees. Management
believes this supplemental disclosure may be helpful to common
shareholders in assessing the recurring earnings of the Company
exclusive of items occurring with less consistency, such as
mark-to-market gains embedded in total other income.
|
|
|
|
|
|
|
|
For the three months ended March 31,
2014
|
|
For the three months ended December 31,
2013
|
|
For the three months ended March 31,
2013
|
|
|
Revenues
|
|
$
|
140,590
|
|
$
|
139,510
|
|
$
|
140,450
|
|
|
Investment costs and
expenses
|
|
|
(73,770)
|
|
(81,586)
|
|
(81,049)
|
|
|
Other
income
|
|
|
72,840
|
|
33,244
|
|
74,220
|
|
|
Other
expenses
|
|
|
(31,458)
|
|
(22,259)
|
|
(34,827)
|
|
|
Income tax
expense
|
|
|
(19)
|
|
(33)
|
|
(458)
|
|
|
Preferred share
distributions
|
|
|
(6,891)
|
|
(6,891)
|
|
(6,738)
|
|
|
Net income available to common
shareholders
|
|
|
101,292
|
|
61,985
|
|
91,598
|
|
|
Adjustments to
reconcile to adjusted run-rate earnings:
|
|
|
|
|
|
|
|
|
|
Less: Other income
|
|
|
(72,840)
|
|
(33,244)
|
|
(74,220)
|
|
|
Add back: Provision for loan
losses
|
|
|
-
|
|
12,405
|
|
11,068
|
|
|
Add back: Incentive fee
expense
|
|
|
12,882
|
|
-
|
|
17,181
|
|
|
Adjusted run-rate
earnings
|
|
|
$
|
41,334
|
|
$
|
41,146
|
|
$
|
45,627
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
diluted common shares
|
|
|
204,236
|
|
204,154
|
|
197,153
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted run-rate
earnings per diluted common share
|
|
|
$
|
0.20
|
|
$
|
0.20
|
|
$
|
0.23
|
|
|
Schedule
IV
|
KKR Financial
Holdings LLC
|
RECONCILIATION OF
GAAP TO NON-GAAP FINANCIAL MEASUREMENTS (UNAUDITED):
|
RUN-RATE AND TOTAL
NET CASH EARNINGS
|
(Amounts in
thousands, except per share information)
|
|
|
Run-rate and total
net cash earnings are non-GAAP measures and are considered by
management to be appropriate supplemental measures of the Company's
performance with regard to cash inflows and outflows from
operations. Run-rate cash amounts are calculated based on actual
cash movement and exclude incentive fee expense and non-cash items
including share-based compensation expense. Total net cash amounts
also include realized cash gains on sales of assets and incentive
fee expense.
|
|
|
For the three months ended March 31,
2014
|
|
For the three months ended December 31,
2013
|
|
For the three months ended
March 31,
2013
|
Revenues
|
|
$
|
140,590
|
|
$
|
139,510
|
|
$
|
140,450
|
Investment costs and
expenses
|
|
(73,770)
|
|
(81,586)
|
|
(81,049)
|
Other
income
|
|
72,840
|
|
33,244
|
|
74,220
|
Other
expenses
|
|
(31,458)
|
|
(22,259)
|
|
(34,827)
|
Income tax
expense
|
|
(19)
|
|
(33)
|
|
(458)
|
Preferred share
distributions
|
|
(6,891)
|
|
(6,891)
|
|
(6,738)
|
Net income available to common
shareholders
|
|
101,292
|
|
61,985
|
|
91,598
|
Adjustments to
reconcile to cash earnings:
|
|
|
|
|
|
|
Cash and non-cash other
income
|
|
(72,840)
|
|
(33,244)
|
|
(74,220)
|
Incentive fees
|
|
12,882
|
|
-
|
|
17,181
|
Non-cash revenues and investment costs
and expenses
|
|
(12,246)
|
|
(2,301)
|
|
(232)
|
Non-cash other expenses
|
|
3,567
|
|
8,524
|
|
(3,291)
|
Non-cash
preferred share distributions
|
|
-
|
|
-
|
|
6,738
|
Non-cash income tax expense
|
|
19
|
|
33
|
|
458
|
Run-rate cash
earnings
|
|
$
|
32,674
|
|
$
|
34,997
|
|
$
|
38,232
|
Realized cash gain on sales
|
|
10,687
|
|
16,855
|
|
39,909
|
Incentive fees
|
|
(12,882)
|
|
-
|
|
(17,181)
|
Total net cash
earnings
|
|
$
|
30,479
|
|
$
|
51,853
|
|
$
|
60,960
|
|
|
|
|
|
|
|
Components of
run-rate cash earnings and total net cash earnings are as
follows:
|
|
|
|
|
|
|
|
For the three months ended March 31,
2014
|
|
For the three
months ended
December 31, 2013
|
|
For the three
months ended
March 31, 2013
|
Cash net
revenues:
|
|
|
|
|
|
|
Assets
held in CLOs
|
|
$
|
46,373
|
|
$
|
42,866
|
|
$
|
57,763
|
Holding company assets
|
|
20,000
|
|
24,217
|
|
19,349
|
Total cash net
revenues
|
|
66,373
|
|
67,083
|
|
77,112
|
Cash
expenses:
|
|
|
|
|
|
|
Holding company debt
|
|
18,690
|
|
18,351
|
|
17,943
|
Other expenses
|
|
15,009
|
|
13,735
|
|
20,937
|
Total cash expenses
|
|
33,699
|
|
32,086
|
|
38,880
|
Run-rate cash
earnings
|
|
$
|
32,674
|
|
$
|
34,997
|
|
$
|
38,232
|
Realized cash gains
on sales
|
|
10,687
|
|
16,855
|
|
39,909
|
Incentive
fees
|
|
(12,882)
|
|
-
|
|
(17,181)
|
Total net cash
earnings
|
|
$
|
30,479
|
|
$
|
51,853
|
|
$
|
60,960
|
Outstanding
shares
|
|
204,824
|
|
204,824
|
|
204,785
|
|
|
|
|
|
|
|
|
Run-rate cash
earnings per share
|
|
$
|
0.16
|
|
$
|
0.17
|
|
$
|
0.19
|
|
|
|
|
|
|
|
Total net cash
earnings per share
|
|
$
|
0.15
|
|
$
|
0.25
|
|
$
|
0.30
|
Investor Relations
Contact:
Pam Testani
Tholen
+1 (855) 374-5411 (US) /
+1 (415) 315-3633
kfn.ir@kkr.com
Media Contact:
Kristi
Huller
+1 (212)
230-9722
kristi.huller@kkr.com
1
Not presented in accordance with accounting principles
generally accepted in the United States
of America ("GAAP"). See Schedules III
and IV for reconciliations of such measures to financial results
prepared in accordance with GAAP.
SOURCE KKR Financial Holdings LLC