KKR Real Estate Finance Trust (KREF) risk factors, FY2024 10-K

Risks Related to Our Lending and Investment Activities

1. 01Our loans and investments expose us to risks associated with debt-oriented real estate investments generally
2. 02We may not have control over certain of our loans and investments
3. 03CRE-related investments that are secured, directly or indirectly, by real property are subject to delinquency, foreclosure and loss, which could result in losses to us
4. 04Loans on properties in transition will involve a greater risk of loss than conventional mortgage loans
5. 05may experience a prolonged reduction of net operating income and may not be able to make payments on our investment on a timely basis or at all, which could result in significant losses
6. 06Prepayment rates may adversely affect the value of our portfolio of assets
7. 07Difficulty in redeploying the proceeds from repayments of our existing loans and investments may cause our financial performance and returns to investors to suffer
8. 08The due diligence process that our Manager undertakes in regard to investment opportunities may not reveal all facts that may be relevant in connection with an investment and if our Manager incorrectly evaluates the risks of our investments, we may experience losses
9. 09CMBS B-Pieces, mezzanine loans, preferred equity and other investments that are subordinated or otherwise junior in an issuer’s capital structure and that involve privately negotiated structures expose us to greater risk of loss
10. 10Investments may be concentrated in terms of geography, asset types and sponsors, which could subject us to increased risk of loss
11. 11Our investment strategy may be changed without stockholder consent
12. 12Any credit ratings assigned to our investments or to us will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
13. 13We have in the past, and may in the future, need to foreclose on certain of the loans we originate or acquire, subjecting us to the risks inherent in the ownership and operation of real estate, which could result in losses that harm our results of operations and financial condition
14. 14Real estate valuation is inherently subjective and uncertain, and is subject to change, especially during periods of volatility
15. 15We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses
16. 16Any distressed loans or investments we make, or loans and investments that later become distressed, may subject us to losses and other risks relating to bankruptcy proceedings
17. 17A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair our investments and harm our operations
18. 18We may experience a decline in the value of our assets
19. 19Some of our portfolio investments may be recorded at fair value and, as a result, there will be uncertainty as to the value of these investments
20. 20We may invest in derivative instruments, which would subject us to increased risk of loss
21. 21Transactions denominated in foreign currencies may subject us to foreign currency risks
22. 22Loans or investments involving international real estate-related assets are subject to special risks that we may not manage effectively, which could have a material adverse effect on our results of operations and our ability to make distributions to our stockholders
23. 23The lack of liquidity in certain of our target assets may adversely affect our business
24. 24We have utilized and may utilize in the future non-recourse long-term securitizations to finance our loans and investments, which may expose us to risks that could result in losses
25. 25Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions, which could impact our ability to timely prepare consolidated financial statements
26. 26Provisions for credit losses are difficult to estimate
27. 27There are increased risks involved with our construction lending activities
28. 28Insurance on underlying collateral of loans and real estate securities may not cover all losses

Risks Related to Our Financing and Hedging

1. 29Our indebtedness may subject us to increased risk of loss and could adversely affect our results of operations and financial condition
2. 30We leverage certain of our target assets, which may adversely affect our return on our investments and may reduce cash available for distribution
3. 31The utilization of any of our repurchase facilities is subject to the pre-approval of the lender
4. 32Our master repurchase agreements impose, and additional lending facilities may impose, restrictive covenants, which would restrict our flexibility to determine our operating policies and investment strategy and to conduct our business
5. 33Interest rate fluctuations could increase our financing costs, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments
6. 34We may be subject to counterparty risk associated with our debt obligations
7. 35We may utilize a wide variety of derivative financial instruments for risk management purposes, the use of which may entail greater than ordinary investment risks
8. 36Hedging against interest rate or currency exposure may adversely affect our earnings, which could reduce our cash available for distribution to stockholders
9. 37We may be subject to counterparty risk associated with any hedging activities
10. 38We may enter into hedging transactions that could expose us to contingent liabilities in the future

Risks Related to Our Relationship with Our Manager and Its Affiliates

1. 39We depend on our Manager and its personnel for our success. We may not find a suitable replacement for our Manager if the management agreement is terminated, or if key personnel cease to be employed by our Manager and its affiliates or otherwise become unavailable to us
2. 40Termination of the management agreement would be costly
3. 41Our Manager’s liability is limited under the management agreement and we have agreed to indemnify our Manager against certain liabilities
4. 42The historical returns generated by funds managed by affiliates of our Manager should not be considered indicative of our future results or of any returns expected on an investment in shares of our common stock
5. 43Our Manager’s fee structure may not create proper incentives or may induce our Manager and its affiliates to make certain loans or investments, including speculative investments, which increase the risk of our loan and investment portfolio
6. 44There are various conflicts of interest in our relationship with KKR, including with our Manager and in the allocation of investment opportunities to KKR investment vehicles and us, which could result in decisions that are not in the best interests of our stockholders
7. 45There is no guarantee that the policies and procedures adopted by us, the terms and conditions of the management agreement or the policies and procedures adopted by our Manager, KKR and their affiliates, will enable us to identify, adequately address or mitigate these conflicts of interest
8. 46rights are exercised with respect to the relevant investment, potentially resulting in an adverse impact on us. Generally, such transactions are not required to be presented to our board of directors for approval, and there can be no assurances that any conflicts will be resolved in our favor
9. 47with the allocation policy and its prevailing policies and procedures with respect to conflicts resolution among KKR funds generally, only those transactions set forth in this paragraph will be required to be presented for approval by the independent directors
10. 48We do not own the KKR name, but we will use it as part of our corporate name pursuant to a license agreement with KKR. Use of the name by other parties or the termination of our license agreement may harm our business

Legal and Regulatory Risks

1. 49State licensing requirements will cause us to incur expenses and our failure to be properly licensed may have a material adverse effect on us and our operations
2. 50Maintaining an exclusion from registration under the Investment Company Act imposes significant limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act
3. 51enforce contracts with third parties, that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company
4. 52adversely impact the implementation of our investment strategy and our returns. In an extreme eventuality, it is possible that such regulations could render the continued operation of our company unviable
5. 53Changes in laws or regulations governing the operations of borrowers could affect our returns with respect to those borrowers
6. 54Climate change, climate change-related initiatives and regulations and the increased focus on sustainability issues, may adversely affect our business and financial results and damage our reputation
7. 55We are subject to risks from litigation filed by or against us
8. 56The obligations associated with being a public company require significant resources and attention from our Manager’s senior management team
9. 57If we are unable to implement and maintain effective internal controls over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected

Risks Related to Our REIT Status and Certain Other Tax Considerations

1. 58If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability
2. 59Even if we maintain our qualification as a REIT, we may incur tax liabilities that would reduce our cash available for distribution to stockholders
3. 60Complying with REIT requirements may cause us to forego otherwise attractive opportunities and limit our expansion opportunities
4. 61Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments
5. 62Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities
6. 63We may choose to make distributions in the form of shares of our own stock, in which case stockholders may be required to pay income taxes without receiving any cash dividends
7. 64Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends
8. 65The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT
9. 66Our investments in certain loans may require us to make estimates about the fair value of real property improvements that may be challenged by the IRS
10. 67We may fail to qualify as a REIT if the IRS successfully challenges our characterization for U.S. federal income tax purposes of our mezzanine loans or preferred equity investments
11. 68The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing or syndicating mortgage loans that would be treated as sales for U.S. federal income tax purposes
12. 69The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT
13. 70Liquidation of assets may jeopardize our REIT qualification
14. 71Certain financing activities may subject us to U.S. federal income tax and could have negative tax consequences for our stockholders
15. 72Our qualification as a REIT may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax
16. 73Any taxable REIT subsidiaries owned by us are subject to corporate-level taxes and our dealings with our taxable REIT subsidiaries may be subject to 100% excise tax
17. 74Failure of our subsidiary REIT to qualify as a REIT could adversely impact our ability to qualify as a REIT
18. 75We may be subject to adverse legislative or regulatory tax changes that could increase our tax liability, reduce our operating flexibility and reduce the price of our common stock
19. 76Operational risks, including the risk of cyberattacks, may disrupt our business, result in losses or limit our growth
20. 77Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us
21. 78KKR has influence over us and its interests may conflict with ours or those of our stockholders in the future
22. 79Some of the provisions of Maryland law and our charter and bylaws discussed below could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares at a premium to the then current market price
23. 80Control shares do not include shares the acquiror is then entitled to vote as a result of having previously obtained stockholder approval or shares acquired directly from the corporation. A control share acquisition means the acquisition of issued and outstanding control shares, subject to certain exceptions
24. 81the holders of shares of our common stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we have elected to be subject to the provisions of MUTA relating to the filling of vacancies on our board of directors
25. 82Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests
26. 83Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management
27. 84Our charter contains provisions that are designed to reduce or eliminate duties of KKR and its affiliates and our directors with respect to corporate opportunities and competitive activities
28. 85We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future