# KKR Real Estate Finance Trust Inc. (KREF) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from KKR Real Estate Finance Trust Inc.'s 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/1631596/000163159622000012/kref-20211231.htm Accession: 0001631596-22-000012 Filing date: 2022-02-08 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/KREF/ All MD&A years: /company/KREF/mda/ Next year: /company/KREF/mda/fy2022/ (FY 2022) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. The historical consolidated financial data below reflects the historical results and financial position of KREF. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under “Cautionary Note Regarding Forward-Looking Statements," and Part I, Item 1A. "Risk Factors" in this Annual Report on Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. Introduction KKR Real Estate Finance Trust Inc. is a real estate finance company that focuses primarily on originating and acquiring senior loans secured by CRE assets. We are externally managed by KKR Real Estate Finance Manager LLC, an indirect subsidiary of KKR, and are a REIT traded on the NYSE under the symbol “KREF.” We are headquartered in New York City. We conduct our operations as a REIT for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute at least 90% of our net taxable income to stockholders and maintain our qualification as a REIT. We also operate our business in a manner that permits us to maintain an exclusion from registration under the Investment Company Act. We are organized as a holding company and conduct our business primarily through our various subsidiaries. 2021 Highlights Operating Results: •Net Income Attributable to Common Stockholders of $125.6 million, or $2.21 per diluted share of common stock, a 130% increase over 2020 on a per share basis. •Distributable Earnings of $92.4 million, or $1.63 per diluted share of common stock, net of $32.9 million, or ($0.58) per diluted share, of realized losses on loan write-offs. •Declared dividends of $1.72 per common share. The fourth quarter dividend of $0.43 per common share produced an annualized yield of 8.26% on our closing stock price as of December 31, 2021. Investment Activity: •Originated and funded a record $4.8 billion and $3.6 billion, respectively, relating to 37 floating-rate loans. Total originations for 2021 represented a 428% and 56% increase over 2020 and 2019 originations, respectively. •Current funded loan portfolio of $6.7 billion is 100% performing, 100% floating rate with a weighted average LTV of 68% as of December 31, 2021. •Took title to the collateral of one defaulted senior retail loan with an outstanding principal balance and net carrying value of $109.6 million and $69.3 million, respectively. Accordingly, we recognized an $8.2 million GAAP gain from reversal of the allowance for credit losses and recognized a $32.1 million realized loss on write-off through distributable earnings. Portfolio Financing: •Non-mark-to-market financing is $3.8 billion as of December 31, 2021, representing 71% of our total outstanding portfolio financing. •Closed a $1.3 billion managed CLO with two-year reinvestment period providing $1.1 billion of non-mark financing equating to an 84.25% advance rate, at a weighted average cost of capital of L+1.30% before transaction costs. Concurrently, fully repaid the outstanding notes under our 2018 CLO. •Completed repricing of $297.8 million existing secured term loan and a $52.2 million add-on, for an aggregate principal amount of $350.0 million due September 2027. The new secured term loan bears interest at L+3.50% and is subject to a LIBOR floor of 0.50%, which is an aggregate improvement of 1.75%. 57 Table of Contents •Entered into a new $500.0 million term lending agreement, which provides asset-based financing on a non-mark-to-market basis with matched-term up to five years. Capital Markets Activity: •Issued 6,900,000 shares of 6.5% Series A Cumulative Redeemable Preferred Stock (the “Series A Preferred Stock”), at a liquidation price of $25.00 per share, and received net proceeds of $167.1 million. •Completed an accretive underwritten public offering of 5,547,361 common shares at $21.76 per share, less applicable transaction costs, resulting in $120.4 million of net proceeds. The offering was $0.22 per share accretive to book value per share. •Our common book value was $1,188.9 million, or $19.37 per common share, as of December 31, 2021, representing seven consecutive quarters of book value accretion. Recent Developments In January 2022, we issued an additional 6,210,000 shares of 6.5% Series A Preferred Stock, which included the exercise of the underwriters' option to purchase additional shares of Series A Preferred Stock, and received net proceeds after underwriting discount and commission of $151.2 million. In February 2022, we priced a $1.0 billion managed multifamily CLO (“KREF 2022-FL3”) expected to close on or around February 10, 2022, subject to customary closing conditions. KREF 2022-FL3 will provide us with match-term financing on a non-mark-to-market and non-recourse basis, and features a two-year reinvestment period with an 84.75% advance rate at a weighted average running cost of capital of Term SOFR plus 1.71%, before transaction costs. 58 Table of Contents Key Financial Measures and Indicators As a real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, Distributable Earnings and book value per share. Earnings (Loss) Per Share and Dividends Declared The following table sets forth the calculation of basic and diluted net income (loss) per share and dividends declared per share (amounts in thousands, except share and per share data): [[GREPCENT_TABLE]] [["","","Three Months Ended December 31,","","Year Ended December 31,"],["","","2021","","2021","","2020"],["Net income attributable to common stockholders","","$","35,198","","","$","125,635","","","$","53,553"],["Weighted-average number of shares of common stock outstanding"],["Basic","","59,364,672","","56,571,200","","55,985,014"],["Diluted","","59,453,264","","56,783,388","","56,057,237"],["Net income per share, basic","","$","0.59","","","$","2.22","","","$","0.96"],["Net income per share, diluted","","$","0.59","","","$","2.21","","","$","0.96"],["Dividends declared per share","","$","0.43","","","$","1.72","","","$","1.72"]] [[/GREPCENT_TABLE]] Distributable Earnings Distributable Earnings, a measure that is not prepared in accordance with GAAP, is a key indicator of our ability to generate sufficient income to pay our quarterly dividends and in determining the amount of such dividends, which is the primary focus of yield/income investors who comprise a significant portion of our investor base. Accordingly, we believe providing Distributable Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to our stockholders in assessing the overall performance of our business. We define Distributable Earnings as net income (loss) attributable to our stockholders or, without duplication, owners of our subsidiaries, computed in accordance with GAAP, including realized losses not otherwise included in GAAP net income (loss) and excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) any unrealized gains or losses or other similar non-cash items that are included in net income for the applicable reporting period, regardless of whether such items are included in other comprehensive income or loss, or in net income, and (iv) one-time events pursuant to changes in GAAP and certain material non-cash income or expense items agreed upon after discussions between our Manager and our board of directors and after approval by a majority of our independent directors. The exclusion of depreciation and amortization from the calculation of Distributable Earnings only applies to debt investments related to real estate to the extent we foreclose upon the property or properties underlying such debt investments. While Distributable Earnings excludes the impact of our unrealized current provision for (reversal of) credit losses, any loan losses are charged off and realized through Distributable Earnings when deemed non-recoverable. Non-recoverability is determined (i) upon the resolution of a loan (i.e. when the loan is repaid, fully or partially, or in the case of foreclosure, when the underlying asset is sold), or (ii) with respect to any amount due under any loan, when such amount is determined to be non-collectible. Distributable Earnings should not be considered as a substitute for GAAP net income. We caution readers that our methodology for calculating Distributable Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our reported Distributable Earnings may not be comparable to similar measures presented by other REITs. We also use Distributable Earnings (before incentive compensation payable to our Manager) to determine the management and incentive compensation we pay our Manager. For its services to KREF, our Manager is entitled to a quarterly management fee equal to the greater of $62,500 or 0.375% of a weighted average adjusted equity and quarterly incentive compensation equal to 20.0% of the excess of (a) the trailing 12-month Distributable Earnings (before incentive compensation payable to our Manager) over (b) 7.0% of the trailing 12-month weighted average adjusted equity(1) (“Hurdle Rate”), less incentive compensation KREF already paid to the Manager with respect to the first three calendar quarters of such trailing 12-month period. The quarterly incentive compensation is calculated and paid in arrears with a three-month lag. (1)    For purposes of calculating incentive compensation under our Management Agreement, adjusted equity excludes: (i) the effects of equity issued that provides for fixed distributions or other debt characteristics and (ii) unrealized provision for (reversal of) credit losses. 59 Table of Contents The following table provides a reconciliation of GAAP net income attributable to common stockholders to Distributable Earnings (amounts in thousands, except share and per share data): [[GREPCENT_TABLE]] [["","","Three Months Ended December 31,","","Year Ended December 31,"],["","","2021","","2021","","2020"],["Net Income (Loss) Attributable to Common Stockholders","","$","35,198","","","$","125,635","","","$","53,553"],["Adjustments"],["Non-cash equity compensation expense","","1,413","","","7,428","","","5,676"],["Unrealized (gains) or losses(A)","","1,463","","","1,059","","","4,036"],["Provision for (reversal of) credit losses, net","","(3,077)","","","(4,059)","","","50,344"],["Loan write-offs(B)","","(32,905)","","","(32,905)","","","(4,650)"],["Gain on redemption of non-voting manager units","","(5,126)","","","(5,126)","","","\u2014"],["Non-cash convertible notes discount amortization","","91","","","361","","","362"],["Distributable Earnings","","$","(2,943)","","","$","92,393","","","$","109,321"],["Weighted average number of shares of common stock outstanding"],["Basic","","59,364,672","","56,571,200","","55,985,014"],["Diluted(C)","","59,364,672","","56,783,388","","56,057,237"],["Distributable Earnings per Diluted Weighted Average Share","","$","(0.05)","","","$","1.63","","","$","1.95"]] [[/GREPCENT_TABLE]] (A)    Includes $2.5 million, $3.3 million and $0.2 million non-cash redemption value adjustment of our Special Non-Voting Preferred Stock, and ($1.1) million, ($2.2) million and $3.9 million of unrealized mark-to-market adjustment to our RECOP I's underlying CMBS investments for the three months ended December 31, 2021, and for the years ended December 31, 2021 and 2020, respectively. (B)    Includes $32.1 million write-off on a defaulted senior retail loan which we took title of the underlying property and $0.9 million write-off of the remaining balance on an impaired mezzanine retail loan during the year ended December 31, 2021. Includes $4.7 million write-off on a $5.5 million mezzanine retail loan, which was 5-rated and put on non-accrual status, during the year ended December 31, 2020. (C)    Includes zero, 212,188 and 72,223 dilutive restricted stock units for the three months ended December 31, 2021 and for the years ended December 31, 2021 and 2020, respectively. Book Value per Share We believe that book value per share is helpful to stockholders in evaluating the growth of our company as we have scaled our equity capital base and continue to invest in our target assets. The following table calculates our book value per share of common stock (amounts in thousands, except share and per share data): [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","2020"],["KKR Real Estate Finance Trust Inc. stockholders' equity","","$","1,361,434","","","$","1,043,554"],["Series A preferred stock (liquidation preference of $25.00 per share)","","(172,500)","","","\u2014"],["Common stockholders' equity","","$","1,188,934","","","$","1,043,554"],["Shares of common stock issued and outstanding at period end","","61,370,732","","","55,619,428"],["Book value per share of common stock","","$","19.37","","","$","18.76"]] [[/GREPCENT_TABLE]] Book value as of December 31, 2021 included the impact of an estimated CECL credit loss allowance of $23.7 million, or ($0.39) per common share. See Note 2 — Summary of Significant Accounting Policies, to our consolidated financial statements included in this Form 10-K for detailed discussion of allowance for credit losses. Book value as of December 31, 2020 included a cumulative non-cash redemption value adjustment (since issuance of the Special Non-Voting Preferred Stock, or "SNVPS"), which decreased our book value by $1.9 million, or ($0.03) per common share. On October 1, 2021, the KKR Member exercised its Call Option to redeem the non-voting units in our Manager, including the non-voting manager units held by us. Accordingly, we received a cash call amount of $5.1 million and concurrently redeemed the SNVPS, which resulted in a net book value accretion of $1.9 million, or $0.03 per common share, during the year ended December 31, 2021, thus eliminating the cumulative negative impact of the SNVPS on our book value. See Note 11 — Equity, to our consolidated financial statements included in this Form 10-K for detailed discussion of the SNVPS. 60 Table of Contents Our Portfolio We have established a $6,791.5 million portfolio of diversified investments, consisting primarily of performing senior and mezzanine commercial real estate loans as of December 31, 2021. Our loan portfolio is 100.0% performing as of December 31, 2021. During the year ended December 31, 2021 and the month ended January 31, 2022, we collected 97.3% and 100.0% of interest payments due on our loan portfolio, respectively. As of December 31, 2021, the average risk rating of our loan portfolio was 2.9 (Average Risk), weighted by total loan exposure. As of December 31, 2021, 94.1% of our loans, based on total loan exposure, was risk-rated 3 or better. As of December 31, 2021, the average loan commitment in our portfolio was $130.5 million and multifamily and office loans comprised 74% of our loan portfolio, while hospitality loans comprised 7% of the portfolio. In addition to our loan portfolio, as of December 31, 2021, as a result of taking title to the collateral of one defaulted senior retail loan, we owned one REO asset with a net carrying value of $78.6 million, comprised of the fair value of the acquired retail property and the capitalized transaction costs, as of December 31, 2021. This property is held for investment and reflected on our consolidated balance sheets at its estimated fair value at the time of acquisition plus related acquisition costs. Since our IPO, we have continued to execute on our primary investment strategy of originating floating-rate transitional senior loans and, as we continue to scale our loan portfolio, we expect that our originations will continue to be heavily weighted toward floating-rate loans. As of December 31, 2021, 100.0% of our loans by total loan exposure earned a floating rate of interest and approximately 54% of our portfolio was subject to a LIBOR floor of at least 0.25%, with a weighted average floor of 0.74%. We expect the majority of our future investment activity to focus on originating floating-rate senior loans that we finance with our repurchase and other financing facilities, with a secondary focus on originating floating-rate loans for which we syndicate a senior position and retain a subordinated interest for our portfolio. As of December 31, 2021, all of our investments were located in the United States. The following charts illustrate the diversification and composition of our loan portfolio(A), based on type of investment, interest rate, underlying property type, geographic location, vintage and LTV as of December 31, 2021: The charts above are based on total outstanding principal amount of our commercial real estate loans. (A)    Excludes: (i) one REO retail asset on a defaulted loan with net carrying value of $78.6 million as of December 31, 2021, (ii) CMBS B-Piece investments held through RECOP I, an equity method investment and (iii) one impaired mezzanine loan with an outstanding principal of $5.5 million that was fully written off. (B)    Senior loans include senior mortgages and similar credit quality loans, including related contiguous junior participations in senior loans where we have financed a loan with structural leverage through the non-recourse sale of a corresponding first mortgage. 61 Table of Contents (C)    We classify a loan as life science if more than 50% of the gross leasable area is leased to, or will be converted to, life science-related space. (D)    Excludes one real estate corporate loan to a multifamily operator with an outstanding principal amount of $41.1 million, representing 0.6% of our commercial real estate loans as of December 31, 2021. (E)    LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value. The following table details our quarterly loan activity (dollars in thousands): [[GREPCENT_TABLE]] [["","","Three Months Ended","","Year Ended"],["","","March 31, 2021","","June 30, 2021","","September 30, 2021","","December 31, 2021","","December 31, 2021","","December 31, 2020"],["Loan originations","","$","534,500","","","$","967,108","","","$","1,536,993","","","$","1,804,897","","","$","4,843,498","","","$","917,851"],["Loan fundings(A)","","$","575,826","","","$","558,387","","","$","1,142,969","","","$","1,680,890","","","$","3,958,072","","","$","961,455"],["Loan repayments/syndications(B)","","(244,348)","","","(270,980)","","","(934,899)","","","(679,749)","","","(2,129,976)","","","(1,042,864)"],["Net fundings","","331,478","","","287,407","","","208,070","","","1,001,141","","","1,828,096","","","(81,409)"],["PIK interest","","845","","","458","","","373","","","418","","","2,094","","","4,231"],["Write-off","","\u2014","","","\u2014","","","\u2014","","","(32,905)","","","(32,905)","","","(4,650)"],["Transfer to REO","","\u2014","","","\u2014","","","\u2014","","","(77,516)","","","(77,516)","","","\u2014"],["Total activity","","$","332,323","","","$","287,865","","","$","208,443","","","$","891,138","","","$","1,719,769","","","$","(81,828)"]] [[/GREPCENT_TABLE]] (A)    Includes initial funding of new loans and additional fundings made under existing loans. (B)    Excludes $150.5 million, $150.5 million and $79.9 million of proceeds from senior note syndications during the three months ended March 31, 2021 and the years ended December 31, 2021 and 2020, respectively. The following table details overall statistics for our loan portfolio as of December 31, 2021 (dollars in thousands): [[GREPCENT_TABLE]] [["","","","","Total Loan Exposure(A)"],["","","Balance Sheet Portfolio","","Total Loan Portfolio","","Floating Rate Loans","","Fixed Rate Loans"],["Number of loans","","63","","62","","62","","\u2014"],["Principal balance","","$","6,364,105","","$","6,677,239","","$","6,677,239","","$","\u2014"],["Amortized cost","","$","6,316,733","","$","6,635,366","","$","6,635,366","","$","\u2014"],["Unfunded loan commitments(B)","","$","1,367,880","","$","1,367,880","","$","1,367,880","","$","\u2014"],["Weighted-average cash coupon(C)","","4.1","%","","L + 3.3","%","","L + 3.3","%","","n.a."],["Weighted-average all-in yield(C)","","4.4","%","","L + 3.6","%","","L + 3.6","%","","n.a."],["Weighted-average maximum maturity (years)(D)","","3.6","","3.6","","3.6","","n.a."],["LTV(E)","","68","%","","68","%","","68","%","","n.a."]] [[/GREPCENT_TABLE]] (A)     In certain instances, we finance our loans through the non-recourse sale of a senior interest that is not included in our consolidated financial statements. Total loan exposure includes the entire loan we originated and financed and excludes one impaired mezzanine loan with an outstanding principal of $5.5 million that was fully written off. (B)     Unfunded commitments will primarily be funded to finance property improvements and renovations or lease-related expenditures by the borrowers. These future commitments will be funded over the term of each loan, subject in certain cases to an expiration date. (C)     As of December 31, 2021, 100.0% of floating rate loans by principal balance are indexed to one-month USD LIBOR. In addition to cash coupon, all-in yield includes the amortization of deferred origination fees, loan origination costs and purchase discounts. Cash coupon and all-in yield for the total portfolio assume applicable floating benchmark rates as of December 31, 2021. L = the greater of one-month USD LIBOR; spot rate of 0.10%, and the applicable contractual LIBOR floor, included in portfolio-wide averages represented as fixed rates. Does not factor in prepayment fee income that might be earned upon prepayment. (D)     Maximum maturity assumes all extension options are exercised by the borrower; however, our loans may be repaid prior to such date. As of December 31, 2021, based on total loan exposure, 65.4% of our loans were subject to yield maintenance or other prepayment restrictions and 34.6% were open to repayment by the borrower without penalty. (E)     LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value. Weighted average LTV excludes one real estate corporate loan to a multifamily operator with an outstanding principal of $41.1 million as of December 31, 2021. 62 Table of Contents The table below sets forth additional information relating to our portfolio as of December 31, 2021 (dollars in millions): [[GREPCENT_TABLE]] [["","Investment(A)","","Location","","Property Type","","Investment Date","","Total Whole Loan(B)","","Committed Principal Amount(B)","","Current Principal Amount","","Net Equity(C)","","Coupon(D)(E)","","Max Remaining Term (Years)(D)(F)","","Loan Per SF / Unit / Key","","LTV(D)(G)","","Risk Rating"],["","Senior Loans(I)"],["1","Senior Loan","","Arlington, VA","","Multifamily","","9/30/2021","","$","381.0","","","$","381.0","","","$","352.9","","","$","78.8","","","L + 3.2","","4.8","","","$ 317,965 / unit","","69","%","","3"],["2","Senior Loan","","Bellevue, WA","","Office","","9/13/2021","","520.8","","","260.4","","","61.0","","","26.4","","","L + 3.6","","5.3","","","$ 200 / SF","","63","","","3"],["3","Senior Loan","","Los Angeles, CA","","Multifamily","","2/19/2021","","260.0","","","260.0","","","249.7","","","50.8","","","L + 3.6","","4.2","","","$ 465,874 / unit","","68","","","3"],["4","Senior Loan","","Boston, MA","","Life Science","","5/24/2018","","250.5","","","250.5","","","243.6","","","55.4","","","L + 3.2","","2.0","","","$ 521 / SF","","53","","","1"],["5","Senior Loan","","Mountain View, CA","","Office","","7/14/2021","","362.8","","","250.0","","","184.1","","","45.9","","","L + 3.3","","4.6","","","$ 599 / SF","","73","","","3"],["6","Senior Loan","","New York, NY","","Condo (Residential)","","12/20/2018","","234.5","","","234.5","","","210.7","","","40.0","","","L + 3.6","","2.0","","","$ 1,316 / SF","","71","","","4"],["7","Senior Loan","","Bronx, NY","","Industrial","","8/27/2021","","381.2","","","228.7","","","97.5","","","95.8","","","L + 4.1","","4.7","","","$ 118 / SF","","52","","","3"],["8","Senior Loan","","Various","","Multifamily","","5/31/2019","","216.5","","","216.5","","","215.3","","","37.7","","","L + 3.1","","2.4","","","$ 201,206 / unit","","74","","","3"],["9","Senior Loan(J)","","Various","","Industrial","","6/30/2021","","425.0","","","212.5","","","3.7","","","1.0","","","L + 5.4","","4.5","","","$ 8 / SF","","74","","","3"],["10","Senior Loan","","Minneapolis, MN","","Office","","11/13/2017","","194.4","","","194.4","","","194.4","","","32.8","","","L + 3.8","","0.9","","","$ 179 / SF","","65","","","2"],["11","Senior Loan","","Washington, D.C.","","Office","","11/9/2021","","187.7","","","187.7","","","111.9","","","26.7","","","L + 3.3","","4.9","","","$ 321 / SF","","55","","","3"],["12","Senior Loan","","Boston, MA","","Office","","2/4/2021","","375.0","","","187.5","","","187.5","","","37.4","","","L + 3.3","","4.1","","","$ 506 / SF","","71","","","3"],["13","Senior Loan","","Chicago, IL","","Multifamily","","6/6/2019","","186.0","","","186.0","","","179.5","","","32.4","","","L + 3.6","","2.4","","","$ 364,837 / unit","","72","","","3"],["14","Senior Loan","","The Woodlands, TX","","Hospitality","","9/15/2021","","183.3","","","183.3","","","168.3","","","29.8","","","L + 4.2","","4.8","","","$ 185,155 / key","","64","","","3"],["15","Senior Loan","","Philadelphia, PA","","Office","","4/11/2019","","182.6","","","182.6","","","156.9","","","24.6","","","L + 2.6","","2.4","","","$ 219 / SF","","68","","","3"],["16","Senior Loan","","Washington, D.C.","","Office","","12/20/2019","","175.5","","","175.5","","","119.7","","","36.5","","","L + 3.4","","3.0","","","$ 586 / SF","","58","","","3"],["17","Senior Loan","","West Palm Beach, FL","","Multifamily","","12/29/2021","","171.5","","","171.5","","","169.2","","","70.6","","","L + 2.7","","5.0","","","$ 208,405 / unit","","73","","","3"],["18","Senior Loan","","Chicago, IL","","Office","","7/15/2019","","170.0","","","170.0","","","136.6","","","25.9","","","L + 3.3","","2.6","","","$ 131 / SF","","59","","","3"],["19","Senior Loan","","Boston, MA","","Life Science","","4/27/2021","","332.3","","","166.2","","","123.1","","","33.3","","","L + 3.6","","4.4","","","$ 511 / SF","","66","","","3"],["20","Senior Loan","","Philadelphia, PA","","Office","","6/19/2018","","165.0","","","165.0","","","165.0","","","72.1","","","L + 2.5","","1.5","","","$ 169 / SF","","71","","","3"],["21","Senior Loan","","New York, NY","","Multifamily","","12/5/2018","","163.0","","","163.0","","","148.0","","","22.3","","","L + 2.6","","1.9","","","$ 556,391 / unit","","77","","","3"],["22","Senior Loan","","Oakland, CA","","Office","","10/23/2020","","509.9","","","159.7","","","106.5","","","16.8","","","L + 4.3","","3.9","","","$ 306 / SF","","65","","","3"],["23","Senior Loan","","Plano, TX","","Office","","2/6/2020","","153.7","","","153.7","","","131.0","","","19.8","","","L + 2.7","","3.1","","","$ 182 / SF","","63","","","2"],["24","Senior Loan","","Seattle, WA","","Life Science","","10/1/2021","","188.0","","","140.3","","","87.3","","","21.1","","","L + 3.1","","4.8","","","$ 555 / SF","","69","","","3"],["25","Senior Loan","","Boston, MA","","Multifamily","","3/29/2019","","138.0","","","138.0","","","137.0","","","29.5","","","L + 2.7","","2.3","","","$ 351,282 / unit","","63","","","3"],["26","Senior Loan","","Dallas, TX","","Office","","12/10/2021","","138.0","","","138.0","","","135.8","","","24.8","","","L + 3.6","","4.9","","","$ 432 / SF","","68","","","3"],["27","Senior Loan","","Fort Lauderdale, FL","","Hospitality","","11/9/2018","","130.0","","","130.0","","","130.0","","","24.1","","","L + 3.4","","1.9","","","$ 375,723 / key","","66","","","3"],["28","Senior Loan","","Fontana, CA","","Industrial","","5/11/2021","","119.9","","","119.9","","","43.2","","","14.0","","","L + 4.6","","4.4","","","$ 37 / SF","","64","","","3"],["29","Senior Loan","","Irving, TX","","Multifamily","","4/22/2021","","117.6","","","117.6","","","108.9","","","17.1","","","L + 3.3","","4.4","","","$ 119,949 / unit","","70","","3"],["30","Senior Loan","","Cambridge, MA","","Life Science","","12/22/2021","","401.3","","","115.7","","","50.6","","","11.5","","","L + 3.9","","5.0","","","$ 469 / SF","","51","","","3"],["31","Senior Loan","","Pittsburgh, PA","","Student Housing","","6/8/2021","","112.5","","","112.5","","","112.5","","","16.9","","","L + 2.9","","4.4","","","$ 155,602 / bed","","74","","","3"],["32","Senior Loan","","Las Vegas, NV","","Multifamily","","12/28/2021","","106.3","","","106.3","","","102.0","","","24.5","","","L + 2.7","","5.0","","","$ 193,182 / unit","","61","","","3"],["33","Senior Loan","","Doral, FL","","Multifamily","","12/10/2021","","212.0","","","106.0","","","106.0","","","25.6","","","L + 2.8","","4.9","","","$ 335,975 / unit","","77","","","3"],["34","Senior Loan","","San Diego, CA","","Multifamily","","10/20/2021","","103.5","","","103.5","","","103.5","","","18.3","","","L + 2.8","","4.9","","","$ 448,052 / unit","","71","","","3"],["35","Senior Loan","","Orlando, FL","","Multifamily","","12/14/2021","","102.4","","","102.4","","","88.9","","","21.2","","","L + 3.0","","5.0","","","$ 234,565 / unit","","74","","","3"],["36","Senior Loan","","Brisbane, CA","","Life Science","","7/22/2021","","95.0","","","95.0","","","85.0","","","16.3","","","L + 3.0","","4.6","","","$ 734 / SF","","71","","","3"],["37","Senior Loan","","State College, PA","","Student Housing","","10/15/2019","","93.4","","","93.4","","","85.3","","","27.6","","","L + 2.7","","2.9","","","$ 71,474 / bed","","64","","","3"]] [[/GREPCENT_TABLE]] 63 Table of Contents [[GREPCENT_TABLE]] [["","Investment(A)","","Location","","Property Type","","Investment Date","","Total Whole Loan(B)","","Committed Principal Amount(B)","","Current Principal Amount","","Net Equity(C)","","Coupon(D)(E)","","Max Remaining Term (Years)(D)(F)","","Loan Per SF / Unit / Key","","LTV(D)(G)","","Risk Rating"],["38","Senior Loan","","Dallas, TX","","Multifamily","","12/23/2021","","90.0","","","90.0","","","77.5","","","18.7","","","L + 2.8","","5.0","","","$ 238,488 / unit","","67","","","3"],["39","Senior Loan","","Miami, FL","","Multifamily","","10/14/2021","","89.5","","","89.5","","","89.5","","","20.5","","","L + 2.8","","4.9","","","$ 304,422 / unit","","76","","","3"],["40","Senior Loan","","Denver, CO","","Multifamily","","6/24/2021","","88.5","","","88.5","","","88.5","","","16.2","","","L + 3.0","","4.5","","","$ 295,000 / unit","","77","","","3"],["41","Senior Loan","","Dallas, TX","","Office","","1/22/2021","","87.0","","","87.0","","","87.0","","","21.1","","","L + 3.3","","4.1","","","$ 288 / SF","","65","","","3"],["42","Senior Loan","","Charlotte, NC","","Multifamily","","12/14/2021","","86.8","","","86.8","","","76.0","","","18.1","","","L + 3.0","","5.0","","","$ 206,522 / unit","","74","","","3"],["43","Senior Loan","","New York, NY","","Multifamily","","3/29/2018","","86.0","","","86.0","","","86.0","","","13.2","","","L + 4.0","","1.3","","","$ 462,366 / unit","","63","","","2"],["44","Senior Loan","","Mesa, AZ","","Industrial","","5/4/2021","","84.3","","","84.3","","","57.0","","","23.9","","","L+ 3.2","","4.4","","","$ 66 / SF","","55","","","3"],["45","Senior Loan","","Hollywood, FL","","Multifamily","","12/20/2021","","81.0","","","81.0","","","81.0","","","19.4","","","L + 3.0","","5.0","","","$ 327,935 / unit","","74","","","3"],["46","Senior Loan","","Seattle, WA","","Office","","3/20/2018","","80.7","","","80.7","","","80.7","","","13.4","","","L + 4.1","","1.3","","","$ 468 / SF","","56","","","3"],["47","Senior Loan","","Brooklyn, NY","","Hospitality","","1/18/2019","","76.2","","","76.2","","","76.2","","","16.2","","","L + 2.9","","2.1","","","$ 389,000 / key","","69","","","4"],["48","Senior Loan","","Phoenix, AZ","","Single Family Rental","","4/22/2021","","72.1","","","72.1","","","15.7","","","8.1","","","L + 4.8","","4.4","","","$ 34,268 / unit","","50","","","3"],["49","Senior Loan","","Arlington, VA","","Multifamily","","10/23/2020","","141.8","","","70.9","","","70.9","","","11.5","","","L + 3.8","","3.8","","","$ 393,858 / unit","","73","","","3"],["50","Senior Loan","","Denver, CO","","Multifamily","","9/14/2021","","70.3","","","70.3","","","69.3","","","12.0","","","L + 2.7","","4.8","","","$ 286,157 / unit","","78","","","3"],["51","Senior Loan","","Queens, NY","","Industrial","","7/21/2017","","70.1","","","70.1","","","67.5","","","17.3","","","L + 3.0","","0.6","","","$ 112 / SF","","77","","","4"],["52","Senior Loan","","Washington, D.C.","","Multifamily","","12/4/2020","","69.0","","","69.0","","","66.3","","","10.3","","","L + 3.5","","3.9","","","$ 265,132 / unit","","63","","","3"],["53","Senior Loan","","Dallas, TX","","Multifamily","","8/18/2021","","68.2","","","68.2","","","68.2","","","9.6","","","L + 3.8","","4.7","","","$ 189,444 / unit","","70","","","3"],["54","Senior Loan","","Austin, TX","","Multifamily","","9/12/2019","","67.5","","","67.5","","","67.5","","","10.5","","","L + 2.5","","2.7","","","$ 191,218 / unit","","74","","","3"],["55","Senior Loan","","Nashville, TN","","Hospitality","","12/9/2021","","66.0","","","66.0","","","64.3","","","9.7","","","L + 3.6","","5.0","","","$ 279,498 / key","","68","","","3"],["56","Senior Loan","","Atlanta, GA","","Multifamily","","12/10/2021","","61.5","","","61.5","","","55.4","","","13.3","","","L + 2.9","","5.0","","","$ 183,542 / unit","","67","","","3"],["57","Senior Loan","","Durham, NC","","Multifamily","","12/15/2021","","60.0","","","60.0","","","50.0","","","49.4","","","L + 2.9","","5.0","","","$ 144,795 / unit","","67","","","3"],["58","Senior Loan","","Sharon, MA","","Multifamily","","12/1/2021","","56.9","","","56.9","","","56.9","","","13.8","","","L + 2.8","","4.9","","","$ 296,484 / unit","","70","","","3"],["59","Senior Loan","","Georgetown, TX","","Multifamily","","12/16/2021","","41.8","","","41.8","","","41.8","","","41.4","","","L + 3.3","","5.0","","","$ 199,048 / unit","","68","","","3"],["60","Senior Loan(K)","","New York, NY","","Condo (Residential)","","8/4/2017","","39.9","","","39.9","","","39.9","","","20.4","","","L + 4.2","","0.3","","","$ 1,333 / SF","","73","","","4"],["61","Senior Loan","","Denver, CO","","Industrial","","12/11/2020","","28.8","","","28.8","","","10.7","","","10.3","","","L + 3.8","","4.0","","","$ 21 / SF","","61","","","3"],["","Total/Weighted Average Senior Loans Unlevered","","$","10,004.1","","","$","8,051.8","","","$","6,636.2","","","$","1,623.6","","","L + 3.2%","","3.6","","","","","68","%","","2.9"],["","Non-Senior Loans"],["1","Corporate","","n.a.","","Multifamily","","12/11/2020","","102.6","","","41.1","","","41.1","","","40.5","","","L + 12.0","","4.0","","","n.a.","","n.a.","","3"],["","Total/Weighted Average Non-Senior Loans Unlevered","","$","102.6","","","$","41.1","","","$","41.1","","","$","40.5","","","12.3%","","4.0","","","","","n.a.","","3.0"],["","CMBS B-Pieces"],["1","RECOP I(H)","","Various","","Various","","2/13/2017","","n.a.","","40.0","","","35.7","","","35.7","","","4.6","","7.4","","","n.a.","","58","","","n.a."],["","Total/Weighted Average CMBS B-Pieces Unlevered","","","","$","40.0","","","$","35.7","","","$","35.7","","","4.6%","","7.4","","","","","58","%"],["","Real Estate Owned"],["1","Real Estate Asset","","Portland, OR","","Retail","","12/16/2021","","n.a.","","n.a.","","78.6","","","78.4","","","n.a.","","n.a.","","n.a.","","n.a.","","n.a."],["","Total/Weighted Average Real Estate Owned","","","","","","$","78.6","","","$","78.4"],["","Grand Total / Weighted Average","","","","","","","","","","$","8,132.8","","","$","6,791.5","","","$","1,778.2","","","4.0%","","3.6","","","","","68","%","","2.9"]] [[/GREPCENT_TABLE]] 64 Table of Contents *    Numbers presented may not foot due to rounding. (A)    Our total portfolio represents the current principal amount on senior, mezzanine and corporate loans, net equity in RECOP I, which holds CMBS B-Piece investments, and net carrying value of our sole REO investment. Excludes one impaired mezzanine loan with an outstanding principal of $5.5 million that was fully written off. For Senior Loan 12, the total whole loan is $375.0 million, co-originated and co-funded by us and a KKR affiliate. Our interest was 50% of the loan or $187.5 million, of which $150.0 million in senior notes were syndicated to a third party. Post syndication, we retained a mezzanine loan with a commitment of $37.5 million, fully funded as of December 31, 2021, at an interest rate of L+7.9%. For Senior Loan 13, the total whole loan is $186.0 million, of which an $81.6 million senior note was syndicated to a third party lender. Post syndication, we retained the mezzanine loan and a 45% interest in the senior loan with a total commitment of $104.4 million, of which $100.7 million was funded as of December 31, 2021, at a blended interest rate of L+4.7%. For Senior Loan 22, the total whole loan is $509.9 million, co-originated and co-funded by us and a KKR affiliate. Our interest was 31% of the loan or $159.7 million, of which $134.7 million in senior notes were syndicated to third party lenders. Post syndication, we retained a mezzanine loan with a commitment of $25.0 million, of which $16.7 million was funded as of December 31, 2021, at an interest rate of L+12.9%. (B)    Total Whole Loan represents total commitment of the entire whole loan originated. Committed Principal Amount includes participations by KKR affiliated entities and third parties that are syndicated/sold. (C)    Net equity reflects (i) the amortized cost basis of our loans, net of borrowings; and (ii) the cost basis of our investments in RECOP I and REO. (D)    Weighted average is weighted by current principal amount for our senior, mezzanine and corporate loans and by net equity for our RECOP I CMBS B-Pieces. (E)    L = the greater of one-month USD LIBOR; spot rate of 0.10%, and the applicable contractual LIBOR floor, included in portfolio-wide averages represented as fixed rates. (F)    Max remaining term (years) assumes all extension options are exercised, if applicable.  (G)    For senior loans, LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated or by the current principal amount as of the date of the most recent as-is appraised value; for mezzanine loans, LTV is based on the current balance of the whole loan divided by the as-is appraised value as of the date the loan was originated; for RECOP I CMBS B-Pieces, LTV is based on the weighted average LTV of the underlying loan pool at issuance. Weighted Average LTV excludes one fully funded corporate loan to a multifamily operator with an outstanding principal amount of $41.1 million. For Senior Loan 6, LTV is based on the initial loan amount divided by the appraised bulk sale value assuming a condo-conversion and no renovation. For Senior Loan 60, LTV is based on the current principal amount divided by the adjusted appraised gross sellout value net of sales cost. For Senior Loans 2, 7, 9, 28, 30, 44, 48 and 61, LTV is calculated as the total commitment amount of the loan divided by the as-stabilized value as of the date the loan was originated. (H)    Represents our investment in an aggregator vehicle alongside RECOP I that invests in CMBS B-Pieces. Committed principal represents our total commitment to the aggregator vehicle whereas current principal represents the current funded amount. (I)    Senior loans include senior mortgages and similar credit quality investments, including junior participations in our originated senior loans for which we have syndicated the senior participations and retained the junior participations for our portfolio and excludes vertical loan participations. (J)    For Senior Loan 9, the total whole loan facility is $425.0 million, co-originated and co-funded by us and a KKR affiliate. Our interest was 50% of the facility or $212.5 million. The facility is comprised of individual cross-collateralized whole loans. As of December 31, 2021, there were three underlying senior loan in the facility with a commitment of $31.6 million and outstanding principal of $3.7 million. (K)    For Senior Loan 60, Loan per SF of $1,333 is based on the allocated loan amount of the residential units. Excluding the value of the retail and parking components of the collateral, the Loan per SF is $1,926 based on allocating the full amount of the loan to only the residential units. 65 Table of Contents Portfolio Surveillance and Credit Quality Our Manager actively manages our portfolio and assesses the risk of any deterioration in credit quality by quarterly evaluating the performance of the underlying property, the valuation of comparable assets as well as the financial wherewithal of the associated borrower. Our loan documents generally give us the right to receive regular property, borrower and guarantor financial statements; approve annual budgets and tenant leases; and enforce loan covenants and remedies. In addition, our Manager evaluates the macroeconomic environment, prevailing real estate fundamentals and micro-market dynamics where the underlying property is located. Through site inspections, local market experts and various data sources, as part of its risk assessment, our Manager monitors criteria such as new supply and tenant demand, market occupancy and rental rate trends, and capitalization rates and valuation trends. We maintain a robust asset management relationship with our borrowers and have utilized these relationships to proactively address the potential impacts of the COVID-19 pandemic on our loans secured by properties experiencing cash flow pressure, most significantly hospitality and retail assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences and have requested temporary interest deferral or forbearance, or other modifications of their loans. Accordingly, discussions we have had with our borrowers have addressed potential near-term defensive loan modifications, which could include repurposing of reserves, temporary deferrals of interest, or performance test or covenant waivers on loans collateralized by assets directly impacted by the COVID-19 pandemic, and which would generally be coupled with an additional equity commitment and/or guaranty from sponsors. We believe our loan sponsors are generally committed to supporting assets collateralizing our loans through additional equity investments, and that we will benefit from our long-standing core business model of originating senior loans collateralized by large assets in major markets with experienced, well-capitalized institutional sponsors. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments. In addition to ongoing asset management, our Manager performs a quarterly review of our portfolio whereby each loan is assigned a risk rating of 1 through 5, from lowest risk to highest risk. Our Manager is responsible for reviewing, assigning and updating the risk ratings for each loan on a quarterly basis. The risk ratings are based on many factors, including, but not limited to, underlying real estate performance and asset value, values of comparable properties, durability and quality of property cash flows, sponsor experience and financial wherewithal, and the existence of a risk-mitigating loan structure. Additional key considerations include LTVs, debt service coverage ratios, real estate and credit market dynamics, and risk of default or principal loss. Based on a five-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows: 1—Very Low Risk—The underlying property performance has surpassed underwritten expectations, and the sponsor’s business plan is generally complete. The property demonstrates stabilized occupancy and/or rental rates resulting in strong current cash flow and/or a very low LTV (65%). At the level of performance, it is very likely that the underlying loan can be refinanced easily in the period’s prevailing capital market conditions. 2—Low Risk—The underlying property performance has matched or exceeded underwritten expectations, and the sponsor’s business plan may be ahead of schedule or has achieved some or many of the major milestones from a risk mitigation perspective. The property has achieved improving occupancy at market rents, resulting in sufficient current cash flow and/or a low LTV (65%-70%). Operating trends are favorable, and the underlying loan can be refinanced in today’s prevailing capital market conditions. The sponsor/manager is well capitalized or has demonstrated a history of success in owning or operating similar real estate. 3—Average Risk—The underlying property performance is in-line with underwritten expectations, or the sponsor may be in the early stages of executing its business plan. Current cash flow supports debt service payments, or there is an ample interest reserve or loan structure in place to provide the sponsor time to execute the value-improvement plan. The property exhibits a moderate LTV (75%). Loan structure appropriately mitigates additional risks. The sponsor/manager has a stable credit history and experience owning or operating similar real estate. 66 Table of Contents 4—High Risk/Potential for Loss—A loan that has a risk of realizing a principal loss. The underlying property performance is behind underwritten expectations, or the sponsor is behind schedule in executing its business plan. The underlying market fundamentals may have deteriorated, comparable property valuations may be declining or property occupancy has been volatile, resulting in current cash flow that may not support debt service payments. The loan exhibits a high LTV (80%), and the loan covenants are unlikely to fully mitigate some risks. Interest payments may come from an interest reserve or sponsor equity. 5—Impaired/Loss Likely—A loan that has a very high risk of realizing a principal loss or has otherwise incurred a principal loss. The underlying property performance is significantly behind underwritten expectations, the sponsor has failed to execute its business plan and/or the sponsor has missed interest payments. The market fundamentals have deteriorated, or property performance has unexpectedly declined or valuations for comparable properties have declined meaningfully since loan origination. Current cash flow does not support debt service payments. With the current capital structure, the sponsor might not be incentivized to protect its equity without a restructuring of the loan. The loan exhibits a very high LTV (90%), and default may be imminent. During the fourth quarter of 2021, we took title to one defaulted senior retail loan with an outstanding principal balance and net carrying value of $109.6 million and $69.3 million, respectively, as of September 30, 2021; such acquisition was accounted for as an asset acquisition under ASC 805. Accordingly, we recognized the property on our balance sheet as REO with a carrying value of $78.6 million, which included the estimated fair value of the property and capitalized transaction costs. In addition, we assumed $2.0 million in other net assets of the REO. Accordingly, in the fourth quarter we recognized an $8.2 million GAAP gain from the reversal of the allowance for credit losses and recognized a $32.1 million write-off through distributable earnings. In addition, in the fourth quarter of 2021, we wrote off $0.9 million remaining outstanding balance of an impaired loan and recognized the write off in GAAP earnings and through distributable earnings. As of December 31, 2021, the average risk rating of our loan portfolio was 2.9 (Average Risk), weighted by total loan exposure, as compared to 3.0 (Average Risk) as of September 30, 2021. [[GREPCENT_TABLE]] [["December 31, 2021","","September 30, 2021"],["Risk Rating","","Number of Loans","","Net Book Value","","Total Loan Exposure(A)","","Total Loan Exposure %","","Risk Rating","","Number of Loans","","Net Book Value","","Total Loan Exposure(A)","","Total Loan Exposure %"],["1","","1","","","$","243,544","","","$","243,552","","","3.6","%","","1","","\u2014","","","$","\u2014","","","$","\u2014","","","\u2014","%"],["2","","3","","","409,812","","","411,424","","","6.2","","","2","","3","","","517,168","","","517,434","","","8.9"],["3","","54","","","5,256,052","","","5,627,927","","","84.3","","","3","","43","","","4,415,030","","","4,764,745","","","82.3"],["4","","4","","","385,081","","","394,336","","","5.9","","","4","","4","","","381,608","","","393,501","","","6.8"],["5","","1","","","\u2014","","","\u2014","","","\u2014","","","5","","2","","","70,121","","","115,071","","","2.0"],["","","63","","","$","6,294,489","","","$","6,677,239","","","100.0","%","","","","52","","","$","5,383,927","","","$","5,790,751","","","100.0","%"]] [[/GREPCENT_TABLE]] (A)    In certain instances, we finance our loans through the non-recourse sale of a senior interest that is not included in our consolidated financial statements under GAAP. Total loan exposure includes the entire loan we originated and financed, including $318.6 million and $312.7 million of such non-consolidated senior interests as of December 31, 2021 and September 30, 2021, respectively. CMBS B-Piece Investments Our Manager has processes and procedures in place to monitor and assess the credit quality of our CMBS B-Piece investments and promote the regular and active management of these investments. This includes reviewing the performance of the real estate assets underlying the loans that collateralize the investments and determining the impact of such performance on the credit and return profile of the investments. Our Manager holds monthly surveillance calls with the special servicer of our CMBS B-Piece investments to monitor the performance of our portfolio and discuss issues associated with the loans underlying our CMBS B-Piece investments. At each meeting, our Manager is provided with a due diligence submission for each loan underlying our CMBS B-Piece investments, which includes both property- and loan-level information. These meetings assist our Manager in monitoring our portfolio, identifying any potential loan issues, determining if a re-underwriting of any loan is warranted and examining the timing and severity of any potential losses or impairments. Valuations for our CMBS B-Piece investments are prepared using inputs from an independent valuation firm and confirmed by our Manager via quotes from two or more broker-dealers that actively make markets in CMBS. As part of the quarterly valuation process, our Manager also reviews pricing indications for comparable CMBS and monitors the credit metrics of the loans that collateralize our CMBS B-Piece investments. 67 Table of Contents Our current CMBS exposure is through RECOP I, an equity method investment. Portfolio Financing Our portfolio financing arrangements include term loan financing, term lending agreements, collateralized loan obligations, secured term loan, warehouse facility, asset specific financing, non-consolidated senior interest (collectively “Non-Mark-to-Market Financing Sources”) and master repurchase agreements. Our Non-Mark-to-Market Financing Sources, which accounted for 71% of our total secured financing (excluding our corporate revolver) as of December 31, 2021, are not subject to credit or capital markets mark-to-market provisions. The remaining 29% of our secured borrowings, which is primarily comprised of three master repurchase agreements, are only subject to credit marks. We continue to expand and diversify our financing sources, especially those sources that provide non-mark-to-market financing, reducing our exposure to market volatility. The following table summarizes our portfolio financing (dollars in thousands): [[GREPCENT_TABLE]] [["","","","","Portfolio Financing Outstanding Principal Balance(A)"],["","","Non-/Mark-to-Market","","December 31, 2021","","December 31, 2020"],["Master repurchase agreements","","Mark-to-Credit","","$","1,554,808","","","$","673,120"],["Term lending agreements","","Non-Mark-to-Market","","1,117,627","","","900,000"],["Collateralized loan obligations","","Non-Mark-to-Market","","1,095,250","","","810,000"],["Term loan financing","","Non-Mark-to-Market","","870,458","","","948,204"],["Secured term loan","","Non-Mark-to-Market","","350,000","","","300,000"],["Asset specific financing","","Non-Mark-to-Market","","60,000","","","60,000"],["Warehouse facility","","Non-Mark-to-Market","","\u2014","","","\u2014"],["Non-consolidated senior interests","","Non-Mark-to-Market","","318,634","","","158,672"],["Total portfolio financing","","","","$","5,366,777","","","$","3,849,996"]] [[/GREPCENT_TABLE]] (A)    Excludes $66.2 million of vertical loan participations sold as of December 31, 2020. Such participations did not qualify for sale accounting under GAAP and therefore were consolidated in our Consolidated Balance Sheets as of December 31, 2020. Financing Agreements The following table details our financing agreements (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2021"],["","","Maximum","","Collateral","","Borrowings"],["","","Facility Size(A)","","Assets(B)","","Potential(C)","","Outstanding","","Available"],["Master Repurchase Agreements"],["Wells Fargo","","$","1,000,000","","","$","1,395,703","","","$","1,000,000","","","$","980,593","","","$","19,407"],["Morgan Stanley","","600,000","","","552,313","","","409,498","","","383,592","","","25,906"],["Goldman Sachs","","240,000","","","282,026","","","196,911","","","190,623","","","6,288"],["Term Loan Facility","","1,000,000","","","1,078,795","","","870,458","","","870,458","","","\u2014"],["Term Lending Agreements"],["KREF Lending V","","671,625","","","755,701","","","623,453","","","617,627","","","5,826"],["KREF Lending IX","","500,000","","","621,573","","","500,000","","","500,000","","","\u2014"],["Warehouse Facility"],["HSBC","","500,000","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Asset Specific Financing"],["BMO Facility","","300,000","","","76,000","","","60,000","","","60,000","","","\u2014"],["Revolver","","335,000","","","\u2014","","","335,000","","","135,000","","","200,000"],["","","$","5,146,625","","","$","4,762,111","","","$","3,995,320","","","$","3,737,893","","","$","257,427"]] [[/GREPCENT_TABLE]] 68 Table of Contents (A)     Maximum facility size represents the largest amount of borrowings available under a given facility once sufficient collateral assets have been approved by the lender and pledged by us. (B)     Represents the principal balance of the collateral assets. (C)     Potential borrowings represents the total amount we could draw under each facility based on collateral already approved and pledged. When undrawn, these amounts are available to us under the terms of each credit facility. Master Repurchase Agreements We utilize master repurchase facilities to finance the origination of senior loans. After a mortgage asset is identified by us, the lender agrees to advance a certain percentage of the principal of the mortgage to us in exchange for a secured interest in the mortgage. We have not received any margin calls on any of our master repurchase facilities to date. Repurchase agreements effectively allow us to borrow against loans and participations that we own in an amount generally equal to (i) the market value of such loans and/or participations multiplied by (ii) the applicable advance rate. Under these agreements, we sell our loans and participations to a counterparty and agree to repurchase the same loans and participations from the counterparty at a price equal to the original sales price plus an interest factor. The transaction is treated as a secured loan from the financial institution for GAAP purposes. During the term of a repurchase agreement, we receive the principal and interest on the related loans and participations and pay interest to the lender under the master repurchase agreement. At any point in time, the amounts and the cost of our repurchase borrowings will be based upon the assets being financed—higher risk assets will result in lower advance rates (i.e., levels of leverage) at higher borrowing costs and vice versa. In addition, these facilities include various financial covenants and limited recourse guarantees, including those described below. Each of our existing master repurchase facilities includes "credit mark-to-market" features. "Credit mark-to-market" provisions in repurchase facilities are designed to keep the lenders' credit exposure generally constant as a percentage of the underlying collateral value of the assets pledged as security to them. If the credit underlying collateral value decreases, the gross amount of leverage available to us will be reduced as our assets are marked-to-market, which would reduce our liquidity. The lender under the applicable repurchase facility sets the valuation and any revaluation of the collateral assets in its sole, good faith discretion. As a contractual matter, the lender has the right to reset the value of the assets at any time based on then-current market conditions, but the market convention is to reassess valuations on a monthly, quarterly and annual basis using the financial information delivered pursuant to the facility documentation regarding the real property, borrower and guarantor under such underlying loans. Generally, if the lender determines (subject to certain conditions) that the market value of the collateral in a repurchase transaction has decreased by more than a defined minimum amount, the lender may require us to provide additional collateral or lead to margin calls that may require us to repay all or a portion of the funds advanced. We closely monitor our liquidity and intend to maintain sufficient liquidity on our balance sheet in order to meet any margin calls in the event of any significant decreases in asset values. As of December 31, 2021 and 2020, the weighted average haircut under our repurchase agreements was 30.3% and 36.7%, respectively (or 25.9% and 34.8%, respectively, if we had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates). In addition, our existing master repurchase facilities are not entirely term-matched financings and may mature before our CRE debt investments that represent underlying collateral to those financings. As we negotiate renewals and extensions of these liabilities, we may experience lower advance rates and higher pricing under the renewed or extended agreements. Term Loan Financing In connection with our efforts to diversify our financing sources, further expand our non-mark-to-market borrowing base and reduce our exposure to market volatility, we entered into a term loan financing agreement in April 2018 with third party lenders for an initial borrowing capacity of $200.0 million that was increased to $1.0 billion in October 2018 (“Term Loan Facility”). The facility provides us with asset-based financing on a non-mark-to-market basis with matched term up to five years and is non-recourse to us. Borrowings under the facility are collateralized by senior loans, held-for-investment, and bear interest equal to one-month LIBOR plus a margin. As of December 31, 2021, the weighted average margin on the facility was 1.6%. 69 Table of Contents The following table summarizes our borrowings under the Term Loan Facility (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2021"],["Term Loan Facility","","Count","","Outstanding Principal","","Amortized Cost","","Carrying Value","","Wtd. Avg. Yield/Cost(A)","","Guarantee(B)","","Wtd. Avg. Term(C)"],["Collateral assets","","12","","$","1,078,795","","","$","1,076,241","","","$","1,074,116","","","L + 3.4%","","n.a.","","August 2024"],["Financing provided","","n.a.","","870,458","","","870,458","","","870,458","","","L + 1.6%","","n.a.","","August 2024"]] [[/GREPCENT_TABLE]] (A)     Floating rate loans and related liabilities are indexed to one-month LIBOR. Our net interest rate exposure is in direct proportion to our interest in the net assets indexed to that rate. In addition to cash coupon, yield/cost includes the amortization of deferred origination/financing costs. (B)    Financing under the Term Loan Facility is non-recourse to us. (C)    The weighted-average term is determined using the maximum maturity date of the corresponding loans, assuming all extension options are exercised by the borrower. Term Lending Agreements In June 2019, we entered into a Master Repurchase and Securities Contract Agreement ("KREF Lending V Facility") with Morgan Stanley Mortgage Capital Holdings LLC ("Administrative Agent"), as administrative agent on behalf of Morgan Stanley Bank, N.A. ("Initial Buyer"), which provides non-mark-to-market financing. In March 2021, the current stated maturity was extended to June 2022, subject to four additional one-year extension options, which may be exercised by us upon the satisfaction of certain customary conditions and thresholds. The Initial Buyer subsequently syndicated a portion of the facility to multiple financial institutions. As of December 31, 2021, the Initial Buyer held 24.4% of the total commitment under the facility. Borrowings under the facility are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a 1.9% margin. Total outstanding borrowings under the facility as of December 31, 2021 was $617.6 million. In July 2021, we entered into a $500.0 million Master Repurchase and Securities Contract Agreement with a financial institution (“KREF Lending IX Facility”). The facility, which provides financing on a non-mark-to-market basis with partial recourse to us, has a three-year draw period and matched term to the underlying loans. As of December 31, 2021, there was $500.0 million outstanding on this facility. Warehouse Facility In March 2020, we entered into a $500.0 million Loan and Security Agreement with HSBC Bank USA, National Association (“HSBC Facility”). The facility, which matures in March 2023, provides warehouse financing on a non-mark-to-market basis with partial recourse to us. Borrowings under the facility are collateralized by certain loans, held for investment, and bear interest equal to one-month LIBOR, plus a margin. As of December 31, 2021, there was no balance outstanding on this facility. Asset Specific Financing In August 2018, we entered into a $200.0 million loan financing facility with BMO Harris Bank (the "BMO Facility”). In May 2019, we increased the borrowing capacity to $300.0 million. The facility provides asset-based financing on a non-mark-to-market basis with matched-term up to five years with partial recourse to us. As of December 31, 2021, there was $60.0 million outstanding on this facility. Revolving Credit Agreement We have a $335.0 million corporate revolving credit facility (“Revolver”) administered by Morgan Stanley Senior Funding, Inc. We may use our Revolver as a source of financing, which is designed to provide short-term liquidity to purchase or de-lever loans, pay operating expenses and borrow amounts for general corporate purposes. Borrowings under the Revolver bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. Our Revolver is secured by corporate level guarantees and does not include asset-based collateral. As of December 31, 2021, there was $135.0 million outstanding on this facility. Collateralized Loan Obligations In August 2021, we financed a pool of loan participations from our existing loan portfolio through a managed collateralized loan obligation ("CLO" or "KREF 2021-FL2"). The CLO provides us with match-term financing on a non-mark-to-market and 70 Table of Contents non-recourse basis. The CLO has a two-year reinvestment feature that allows principal proceeds of the collateral assets to be reinvested in qualifying replacement assets, subject to the satisfaction of certain conditions set forth in the indenture. In connection with the closing of KREF 2021-FL2, we fully repaid the outstanding notes under our previous CLO, KREF 2018-FL1. The following table outlines KREF 2021-FL2 collateral assets and respective borrowing (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2021"],["Collateralized Loan Obligation 2021-FL2","","Count","","Outstanding Principal","","Amortized Cost","","Carrying Value","","Wtd. Avg. Yield/Cost","","Wtd. Avg. Term(B)"],["Collateral assets(A)","","20","","$","1,300,000","","","$","1,300,000","","","$","1,296,745","","","L + 3.4%","","June 2025"],["Financing provided","","1","","1,095,250","","","1,087,976","","","1,087,976","","","L + 1.7%","","February 2039"]] [[/GREPCENT_TABLE]] (A)Including $54.0 million cash held in CLO as of December 31, 2021.Collateral loan assets represent 19.6% of the principal of our commercial real estate loans as of December 31, 2021. As of December 31, 2021, 100% of our loans financed through the CLO are floating rate loans. (B)Loan term represents weighted-average final maturity, assuming extension options are exercised by the borrower. Repayments of CLO notes are dependent on timing of related collateral loan asset repayments post reinvestment period. The term of the CLO notes represents the rated final distribution date. Loan Participations Sold In connection with our investments in CRE loans, we finance certain investments through the syndication of a non-recourse, or limited-recourse, loan participation to unaffiliated third parties. Our presentation of the senior loan and related financing involved in the syndication depends upon whether GAAP recognized the transaction as a sale, though such differences in presentation do not generally impact our net stockholders’ equity or net income aside from timing differences in the recognition of certain transaction costs. To the extent that GAAP recognizes a sale resulting from the syndication, we derecognize the participation in the senior/whole loan that we sold and continue to carry the retained portion of the loan as an investment. While we do not generally expect to recognize a material gain or loss on these sales, we would realize a gain or loss in an amount equal to the difference between the net proceeds received from the third party purchaser and our carrying value of the loan participation we sold at time of sale. Furthermore, we recognize interest income only on the portion of the senior loan that we retain as a result of the sale. To the extent that GAAP does not recognize a sale resulting from the syndication, we do not derecognize the participation in the senior/whole loan that we sold. Instead, we recognize a loan participation sold liability in an amount equal to the principal of the loan participation syndicated less any unamortized discounts or financing costs resulting from the syndication. We continue to recognize interest income on the entire senior loan, including the interest attributable to the loan participation sold, as well as interest expense on the loan participation sold liability. Non-Consolidated Senior Interests In certain instances, we finance our loans through the non-recourse sale of a senior loan interest that is not included in our consolidated financial statements. These non-consolidated senior interests provide structural leverage on a non-mark-to-market, matched-term basis for our net investments, which are typically reflected in the form of mezzanine loans or other subordinate interests on our balance sheets and in our statements of income. The following table details the subordinate interests retained on our balance sheet and the related non-consolidated senior interests (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2021"],["Non-Consolidated Senior Interests","","Count","","Principal Balance","","Carrying Value","","Wtd. Avg. Yield/Cost","","Guarantee","","Wtd. Avg.Term"],["Total loan","","3","","$","473,531","","","n.a.","","L + 3.6%","","n.a.","","May 2025"],["Senior participation","","3","","318,634","","","n.a.","","L + 2.3%","","n.a.","","August 2025"],["Interests retained","","","","154,897","","","","","L + 6.4%","","","","December 2024"]] [[/GREPCENT_TABLE]] 71 Table of Contents Secured Term Loan In September 2020, we entered into a $300.0 million secured term loan at a price of 97.5%, which bears interest at a per annum rate equal to LIBOR plus a 4.75% margin, subject to a 1.0% LIBOR floor, payable quarterly beginning in December 2020. The secured term loan is partially amortizing, with an amount equal to 1.0% per annum of the principal balance due in quarterly installments starting March 31, 2021. In November 2021, we completed repricing of $297.8 million existing secured term loan and a $52.2 million add-on, for an aggregate principal amount of $350.0 million, which was issued at par. The new secured term loan bears interest at LIBOR plus a 3.50% margin, and subject to a 0.50% LIBOR floor, which is an aggregate improvement of 1.75% over the 2020 secured term loan. The secured term loan matures on September 1, 2027 and contains restrictions relating to liens, asset sales, indebtedness, investments and transactions with affiliates. Our secured term loan is secured by corporate level guarantees and does not include asset-based collateral. Refer to Notes 2 and 7 to our consolidated financial statements for additional discussion of our secured term loan. Convertible Notes We may issue convertible debt to take advantage of favorable market conditions. In May 2018, we issued $143.75 million of 6.125% Convertible Notes due on May 15, 2023. The Convertible Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2018. The Convertible Notes mature on May 15, 2023, unless earlier repurchased or converted. Refer to Notes 2 and 8 to our consolidated financial statements for additional discussion of our Convertible Notes. Borrowing Activities The following tables provide additional information regarding our borrowings (dollars in thousands): [[GREPCENT_TABLE]] [["","","","Year Ended December 31, 2021"],["","Outstanding Principal as of December 31, 2021","","Average Daily Amount Outstanding(A)","","Maximum Amount Outstanding","","Weighted Average Daily Interest Rate"],["Wells Fargo","$","980,593","","","$","547,166","","","$","980,593","","","1.6","%"],["Morgan Stanley","383,592","","","368,089","","","473,902","","","2.1"],["Goldman Sachs","190,623","","","91,217","","","190,623","","","3.0"],["Term Loan Facility","870,458","","","926,978","","","992,777","","","1.7"],["KREF Lending V","617,627","","","816,719","","","900,000","","","2.0"],["KREF Lending IX","500,000","","","242,786","","","500,000","","","1.8"],["BMO Facility","60,000","","","60,000","","","60,000","","","1.8"],["Revolver","135,000","","","43,507","","","335,000","","","2.1"],["Total/Weighted Average","$","3,737,893","","","","","","","1.9","%"]] [[/GREPCENT_TABLE]] (A)     Represents the average for the period the facility was outstanding. [[GREPCENT_TABLE]] [["","","Average Daily Amount Outstanding(A)"],["","","Three Months Ended"],["","","December 31, 2021","","September 30, 2021","","June 30, 2021","","March 31, 2021"],["Wells Fargo","","$","566,984","","","$","598,729","","","$","529,169","","","$","492,395"],["Morgan Stanley","","326,625","","","366,046","","","429,449","","","350,519"],["Goldman Sachs","","99,140","","","97,574","","","91,075","","","76,762"],["Term Loan Facility","","933,928","","","953,283","","","878,021","","","942,484"],["KREF Lending V","","638,958","","","830,634","","","900,000","","","900,000"],["KREF Lending IX","","422,974","","","62,598","","","\u2014","","","\u2014"],["BMO Facility","","60,000","","","60,000","","","60,000","","","60,000"],["Revolver","","119,837","","","32,609","","","\u2014","","","20,611"]] [[/GREPCENT_TABLE]] (A)     Represents the average for the period the debt was outstanding. 72 Table of Contents Covenants—Each of our repurchase facilities, term lending agreements, warehouse facility and our Revolver contain customary terms and conditions, including, but not limited to, negative covenants relating to restrictions on our operations with respect to our status as a REIT, and financial covenants, such as: •an interest income to interest expense ratio covenant (1.5 to 1.0);  •a minimum consolidated tangible net worth covenant (75.0% of the aggregate net cash proceeds of any equity issuances made and any capital contributions received by us and KKR Real Estate Finance Holdings L.P. (our "Operating Partnership") or up to approximately $1,095.4 million, depending on the agreement;  •a cash liquidity covenant (the greater of $10.0 million or 5.0% of our recourse indebtedness); •a total indebtedness covenant (83.3% of our Total Assets, as defined in the applicable financing agreements); With respect to our secured term loan, we are required to comply with customary loan covenants and event of default provisions that include, but not limited to, negative covenants relating to restrictions on operations with respect to our status as a REIT, and financial covenants. Such financial covenants include a minimum consolidated tangible net worth of $650.0 million and a maximum total debt to total assets ratio of 83.3% (the “Leverage Covenant”). As of December 31, 2021, we were in compliance with the covenants of our financing facilities. Guarantees—In connection with our financing arrangements including; master repurchase agreements, our term lending agreements, and our asset specific financing, our Operating Partnership has entered into a limited guarantee in favor of each lender, under which our Operating Partnership guarantees the obligations of the borrower under the respective financing agreement (i) in the case of certain defaults, up to a maximum liability of 25.0% of the then-outstanding repurchase price of the eligible loans, participations or securities, as applicable, or (ii) up to a maximum liability of 100.0% in the case of certain "bad boy" defaults. The borrower in each case is a special purpose subsidiary of us. In addition, some guarantees include certain full recourse insolvency-related trigger events. With respect to our Revolver, amounts borrowed are full recourse to certain guarantor wholly-owned subsidiaries of us. Real Estate Owned and Joint Venture In 2015, we originated a $177.0 million senior loan secured by a retail property in Portland, Oregon. The loan had a risk rating of 5 and was placed on a non-accrual status in October 2020, with an amortized cost and carrying value of $109.6 million and $69.3 million, respectively, as of September 30, 2021. In December 2021, we took title to the retail property; such acquisition was accounted for as an asset acquisition under ASC 805. Accordingly, we recognized the property on our balance sheet as REO with a carrying value of $78.6 million, which included the estimated fair value of the property and capitalized transaction costs. In addition, we assumed $2.0 million in other net assets of the REO. As a result, we recognized an $8.2 million benefit from the reversal of the allowance for credit losses for GAAP, and a $32.1 million realized loss on loan write-off through distributable earnings (representing the difference between the carrying value of the foreclosed loan and the fair value of the REO’s net assets). Concurrently with taking the title of our sole REO asset, we contributed the majority of the REO's net assets to a joint venture with a third party local development operator (“JV Partner”), whereby we have a 90% interest in the joint venture and the JV Partner has a 10% interest. As of December 31, 2021, the joint venture held REO assets with a net carrying value of $68.9 million, of which $0.1 million represented non-controlling interests. 73 Table of Contents Results of Operations The following table summarizes the changes in our results of operations for years ended December 31, 2021, 2020 and 2019 (dollars in thousands, except per share data): [[GREPCENT_TABLE]] [["","","For the Year Ended December 31,","","Increase (Decrease)","","For the Year Ended December 31,","","Increase (Decrease)"],["","","2021","2020","","Dollars","Percentage","","2020","2019","","Dollars","Percentage"],["Net Interest Income"],["Interest income","","$","279,950","","$","269,188","","","$","10,762","","4.0","%","","$","269,188","","$","274,335","","","$","(5,147)","","(1.9)","%"],["Interest expense","","114,439","","127,312","","","(12,873)","","(10.1)","","","127,312","","158,860","","","(31,548)","","(19.9)"],["Total net interest income","","165,511","","141,876","","","23,635","","16.7","","","141,876","","115,475","","","26,401","","22.9"],["Other Income"],["Income (loss) from equity method investments","","6,371","","537","","","5,834","","1,086.4","","","537","","4,568","","","(4,031)","","(88.2)"],["Gain (loss) on sale of investments","","5,126","","\u2014","","","5,126","","100.0","","","\u2014","","(2,688)","","","2,688","","100.0"],["Change in net assets related to CMBS consolidated variable interest entities","","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","1,665","","","(1,665)","","(100.0)"],["Other income","","686","","744","","","(58)","","(7.8)","","","744","","2,453","","","(1,709)","","(69.7)"],["Total other income (loss)","","12,183","","1,281","","","10,902","","851.1","","","1,281","","5,998","","","(4,717)","","(78.6)"],["Operating Expenses"],["General and administrative","","14,235","","14,238","","","(3)","","\u2014","","","14,238","","10,522","","","3,716","","35.3"],["Provision for (reversal of ) credit losses, net","","(4,059)","","50,344","","","(54,403)","","(108.1)","","","50,344","","\u2014","","","50,344","","100.0"],["Management fees to affiliate","","19,378","","16,992","","","2,386","","14.0","","","16,992","","17,135","","","(143)","","(0.8)"],["Incentive compensation to affiliate","","10,273","","6,774","","","3,499","","51.7","","","6,774","","3,272","","","3,502","","107.0"],["Total operating expenses","","39,827","","88,348","","","(48,521)","","(54.9)","","","88,348","","30,929","","","57,419","","185.6"],["Income (Loss) Before Income Taxes, Preferred Dividends, Redemption Value Adjustment and Participating Securities' Share in Earnings","","137,867","","54,809","","","83,058","","151.5","","","54,809","","90,544","","","(35,735)","","(39.5)"],["Income tax expense","","684","","412","","","272","","66.0","","","412","","579","","","(167)","","(28.8)"],["Net Income (Loss)","","137,183","","54,397","","","82,786","","152.2","","","54,397","","89,965","","","(35,568)","","(39.5)"],["Preferred stock dividends and redemption value adjustment","","11,369","","844","","","10,525","","1,247.0","","","844","","(527)","","","1,371","","260.2"],["Participating securities' share in earnings","","179","","\u2014","","","179","","100.0","","","\u2014","","\u2014","","","\u2014","","\u2014"],["Net Income (Loss) Attributable to Common Stockholders","","$","125,635","","$","53,553","","","$","72,082","","134.6","%","","$","53,553","","$","90,492","","","$","(36,939)","","(40.8)","%"],["Net Income (Loss) Per Share of Common Stock"],["Basic","","$","2.22","","$","0.96","","","$","1.26","","131.3","%","","$","0.96","","$","1.58","","","$","(0.62)","","(39.2)","%"],["Diluted","","$","2.21","","$","0.96","","","$","1.25","","130.2","%","","$","0.96","","$","1.57","","","$","(0.61)","","(38.9)","%"],["Weighted Average Number of Shares of Common Stock Outstanding"],["Basic","","56,571,200","","55,985,014","","","586,186","","1.0","%","","55,985,014","","57,426,912","","","(1,441,898)","","(2.5)","%"],["Diluted","","56,783,388","","56,057,237","","","726,151","","1.3","%","","56,057,237","","57,532,490","","","(1,475,253)","","(2.6)","%"],["Dividends Declared per Share of Common Stock","","$","1.72","","$","1.72","","","$","\u2014","","\u2014","%","","$","1.72","","$","1.72","","","$","\u2014","","\u2014","%"]] [[/GREPCENT_TABLE]] 74 Table of Contents Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Net Interest Income Net interest income increased by $23.6 million, or 16.7%, during the year ended December 31, 2021, as compared to the year ended December 31, 2020, primarily due to a $10.8 million, or 4.0%, increase in our interest income and a $12.9 million, or 10.1%, decrease in our interest expense. The increase in interest income was primarily attributable to a decrease in the weighted average principal of our loan portfolio of $401.1 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020, as a result of continuing capital deployment from loan repayments and deployment of the proceeds from the issuance of 6.5% Series A Preferred Stock in April 2021 and issuance of common stock in November 2021. In addition, we recognized net accelerated deferred loan fees and prepayment fee income of $11.3 million during the year ended December 31, 2021, as compared to $1.8 million during the year ended December 31, 2020. The decrease in interest expense was primarily due to a decrease in spot LIBOR, partially offset by an increase in the weighted average principal balance of our financing facilities of $253.5 million for the year ended December 31, 2021, as compared to the year ended December 31, 2020. In addition, our loans continued to benefit from in-the-money LIBOR floors during the year ended December 31, 2021. As of December 31, 2021, 54% of our loan portfolio was subject to a LIBOR floor of at least 0.25%, with a weighted average floor of 0.74%; by contrast, only 9% of total outstanding financing (inclusive of the secured term loan) is subject to a LIBOR floor greater than 0.0%. Other Income Total other income increased by $10.9 million during the year ended December 31, 2021, as compared to the year ended December 31, 2020. This increase was due to a $2.2 million unrealized mark-to-market gain on our RECOP I's underlying CMBS investments during the year ended December 31, 2021, as compared to a $3.9 million unrealized loss during the year ended December 31, 2020. In addition, we recognized a $5.1 million gain from the redemption of non-voting manager units during the year ended December 31, 2021. Operating Expenses Total operating expenses decreased by $48.5 million during the year ended December 31, 2021, as compared to the year ended December 31, 2020. This decrease was primarily due to a net decrease of $54.4 million in the provision for credit losses resulting from the reversal of $32.1 million in allowance for credit losses for one senior retail loan where we took title of the underlying collateral and a more stable macro-economic outlook based on improved observed economic data, partially offset by an increase to the allowance related to newly originated loans during the year ended December 31, 2021. The following table provides additional information regarding total operating expenses (dollars in thousands): [[GREPCENT_TABLE]] [["","","Three Months Ended"],["","","March 31, 2021","","June 30, 2021","","September 30, 2021","","December 31, 2021"],["Professional services","","$","567","","","$","527","","","$","610","","","$","673"],["Operating and other costs","","946","","","1,167","","","1,022","","","1,297"],["Stock-based compensation","","1,992","","","1,994","","","2,027","","","1,413"],["Total general and administrative expenses","","3,505","","","3,688","","","3,659","","","3,383"],["Provision for (reversal of) credit losses, net","","(1,588)","","","(559)","","","1,165","","","(3,077)"],["Management fees to affiliate","","4,290","","","4,835","","","4,964","","","5,289"],["Incentive compensation to affiliate","","2,192","","","2,403","","","2,215","","","3,463"],["Total operating expenses","","$","8,399","","","$","10,367","","","$","12,003","","","$","9,058"]] [[/GREPCENT_TABLE]] 75 Table of Contents Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Net Interest Income Net interest income increased by $26.4 million during the year ended December 31, 2020, compared to the year ended December 31, 2019. This increase was primarily due to a decrease in the weighted-average LIBOR which decreased our interest expense compared to prior year as substantially all of our secured financing facilities are not subject to LIBOR floors, while the interest income earned on our loans from rate floors above LIBOR increased (85% of our portfolio was subject to a LIBOR floor of 1.0% or higher as of December 31, 2020). In addition, we recognized $18.1 million of deferred loan fees and origination discounts accreted into interest income during the year ended December 31, 2020, as compared to $20.2 million during the year ended December 31, 2019. We also recognized a non-recurring exit fee income of $2.8 million during the year ended December 31, 2020. We recorded $22.3 million of deferred financing costs amortization into interest expense during the year ended December 31, 2020, as compared to $16.3 million during the year ended December 31, 2019. Other Income Total other income decreased by $4.7 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. This decrease was primarily due to a $3.9 million unrealized mark-to-market loss from our RECOP I equity method investment during the year ended December 31, 2020. Operating Expenses Total operating expenses increased by $57.4 million during the year ended December 31, 2020, as compared to the year ended December 31, 2019. This increase was primarily due to (i) a $50.3 million provision for credit losses in connection with the adoption of ASU 2016-03, (ii) a $3.5 million increase in Manager incentive compensation, (iii) a $1.6 million increase in noncash stock-based compensation expense, and (iv) $2.0 million in non-recurring dead deal costs for the year ended December 31, 2020. We did not have a provision for loan credit losses prior to January 1, 2020. Upon the adoption of ASU 2016-13 on January 1, 2020, we recorded a $15.0 million cumulative-effect adjustment to our accumulated deficit. During the year ended December 31, 2020, we recorded an incremental $50.3 million in credit loss provision primarily due to the adverse change in the economic outlook as a result of the COVID-19 pandemic and incremental reserves for our 4- and 5-risk rated loans. COVID-19 Impact During 2020, the COVID-19 pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans. The impact of the outbreak has been rapidly evolving around the globe, with several countries taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns, imposing travel restrictions and limiting operations of non-essential offices and retail centers. In 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. However, wide disparities in vaccination rates and continued vaccine hesitancy, combined with the emergence of COVID-19 variants and surges in COVID-19 cases, could trigger the reinstatement of restrictions, including mandatory business shut-downs, travel restrictions, reduced business operations and social distancing requirements, which could dampen or delay any economic recovery and could materially and adversely affect our results and financial condition. Although we have observed signs of economic recovery and is generally encouraged by the response of its borrowers, we cannot predict the time required for a widespread sustainable economic recovery to take hold. While the economy has improved significantly since the initial outbreak of the COVID-19 pandemic, the pandemic has resulted in, and may continue to result in, declines in rental rates and increases in rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or rent abatements for tenants severely impacted by the COVID-19 pandemic. Such responses have resulted in, and may continue to result in, decreases in cash flows to certain of our borrowers and potentially in defaults in paying debt service on outstanding indebtedness, which could adversely impact our 76 Table of Contents results of operations and financial performance. The COVID-19 pandemic continues to disrupt global supply chains, has caused labor shortages and has added broad inflationary pressures, which has a potential negative impact on our borrowers’ ability to execute on their business plans and potentially their ability to perform under the terms of their loan obligations. In addition, declines in economic conditions caused by the COVID-19 pandemic could negatively impact real estate and real estate capital markets and result in lower occupancy, lower rental rates and declining values in our portfolio, which could adversely impact the value of our investments, making it more difficult for us to make distributions or meet our financing obligations. We believe COVID-19’s adverse impact on our business, financial performance and operating results will in part be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic; the distribution and acceptance of vaccines and their impact on the timing and speed of economic recovery; the spread of new variants of the virus; the pandemic’s impact on the U.S. and global economies, including concerns regarding additional surges of the pandemic or the expansion of the economic impact thereof as a result of certain jurisdictions “re-opening” or otherwise lifting certain restrictions prematurely; the availability of U.S. federal, state, local or non-U.S. funding programs aimed at supporting the economy during the COVID-19 pandemic, including uncertainties regarding the potential implementation of new or extended programs; the timing, scope and effectiveness of additional governmental responses to the pandemic; and the negative impact on our financing sources, vendors and other business partners that may indirectly adversely affect us. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and negatively impact our business, financial performance and operating results for the year ending December 31, 2021 and potentially longer. 77 Table of Contents Liquidity and Capital Resources Overview We have capitalized our business to date primarily through the issuance and sale of our common stock and preferred stock, borrowings from Non-Mark-to-Market Financing Sources(1), borrowings from three master repurchase agreements, the issuance and sale of convertible notes and our secured term loan. Our Non-Mark-to-Market Financing Sources, which accounted for 71% of our total secured financing (excluding our corporate Revolver) as of December 31, 2021, are not subject to credit or capital markets mark-to-market provisions. The remaining 29% of our secured borrowings, which are comprised of three master repurchase agreements, are only subject to credit marks. We have not received any margin calls on our master repurchase agreements to date, nor do we expect any at this time. Our primary sources of liquidity include $271.5 million of cash on our consolidated balance sheet, $200.0 million of available capacity on our corporate revolver, $57.4 million of available borrowings under our financing arrangements based on existing collateral and cash flows from operations. In addition, we had $235.3 million of unencumbered senior loans that can be financed, as of December 31, 2021. Our corporate revolver and secured term loan are secured by corporate level guarantees and do not include asset-based collateral. We may seek additional sources of liquidity from syndicated financing, other borrowings (including borrowings not related to a specific investment) and future offerings of equity and debt securities. Our primary liquidity needs include our ongoing commitments to repay the principal and interest on our borrowings and pay other financing costs, financing our assets, meeting future funding obligations, making distributions to our stockholders, funding our operations that includes making payments to our Manager in accordance with the management agreement, and other general business needs. We believe that our cash position and sources of liquidity will be sufficient to meet anticipated requirements for financing, operating and other expenditures in both the short- and long-term, based on current conditions. As described in Note 10 to our consolidated financial statements, we have off-balance sheet arrangements related to VIEs that we account for using the equity method of accounting and in which we hold an economic interest or have a capital commitment. Our maximum risk of loss associated with our interests in these VIEs is limited to the carrying value of our investment in the entity and any unfunded capital commitments. As of December 31, 2021, we held $35.5 million of interests in such entities, which does not include a remaining commitment of $4.3 million to RECOP I that we are required to fund if called. We are continuing to monitor the COVID-19 pandemic and its impact on our operating partners, financing sources, borrowers and their tenants, and the economy as a whole. While the availability of approved COVID-19 vaccines and their impact on the economy is encouraging, the distribution and acceptance of such vaccines and their effectiveness with respect to new variants of the virus remain unknown. Accordingly, the ultimate magnitude and duration of the COVID-19 pandemic, as well as its impact on our borrowers, lenders and the economy as a whole, remains uncertain and continues to evolve. To the extent that our operating partners, financing sources, borrower’s and their tenants continue to be impacted by the COVID-19 pandemic, or by the other risks disclosed in this Annual Report on Form 10-K, it would have a material adverse effect on our liquidity and capital resources. To facilitate future offerings of equity, debt and other securities, we have in place an effective shelf registration statement (the “Shelf”) with the SEC. The amount of securities that may be issued pursuant to this Shelf is not to exceed $750.0 million. The securities covered by this Shelf include: (i) common stock, (ii) preferred stock, (iii) depository shares, (iv) debt securities, (v) warrants, (vi) subscription rights, (vii) and purchase contracts, and (viii) units. The specifics of any future offerings, along with the use of proceeds of any securities offered, will be described in detail in a prospectus supplement, or other offering material, at the time of any offering. In February 2019, we entered into an equity distribution agreement with certain sales agents, pursuant to which we may sell, from time to time, up to an aggregate sales price of $100.0 million of our common stock, pursuant to a continuous offering program (the “ATM”), under the Shelf. Sales of our common stock made pursuant to the ATM may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act. We have not sold any shares of our common stock under the ATM to date. See Notes 5, 6, 7, 8 and 11 to our consolidated financial statements for additional details regarding our secured financing agreements, collateralized loan obligations, secured term loan, convertible notes and stock activity. (1)    Comprised of term loan financing, term lending agreements, collateralized loan obligations, secured term loan, warehouse facility, asset specific financing, and non-consolidated senior interests. 78 Table of Contents Debt-to-Equity Ratio and Total Leverage Ratio The following table presents our debt-to-equity ratio and total leverage ratio: [[GREPCENT_TABLE]] [["","","December 31, 2021","","December 31, 2020"],["Debt-to-equity ratio(A)","","2.3x","","1.9x"],["Total leverage ratio(B)","","3.7x","","3.6x"]] [[/GREPCENT_TABLE]] (A)     Represents (i) total outstanding debt agreements (excluding non-recourse term loan facility), secured term loan and convertible notes, less cash to (ii) total permanent equity, in each case, at period end. (B)    Represents (i) total outstanding debt agreements, secured term loan, convertible notes, and collateralized loan obligations, less cash to (ii) total permanent equity, in each case, at period end. Sources of Liquidity Our primary sources of liquidity include cash and cash equivalents and available borrowings under our secured financing agreements, inclusive of our Revolver. Amounts available under these sources as of the date presented are summarized in the following table (dollars in thousands): [[GREPCENT_TABLE]] [["","","December 31, 2021","","December 31, 2020"],["Cash and cash equivalents","","$","271,487","","","$","110,832"],["Available borrowings under revolving credit agreements","","200,000","","","335,000"],["Available borrowings under master repurchase agreements","","51,601","","","19,319"],["Available borrowings under term lending agreement","","5,826","","","\u2014"],["Available borrowings under asset specific financing","","\u2014","","","800"],["Loan principal payments receivable","","\u2014","","","15,850"],["","","$","528,914","","","$","481,801"]] [[/GREPCENT_TABLE]] We also had $235.3 million and $274.7 million of unencumbered senior loans that can be pledged to financing facilities subject to lender approval, as of December 31, 2021 and 2020. In addition to our primary sources of liquidity, we have the ability to access further liquidity through our ATM program and public offerings of debt and equity securities. Our existing loan portfolio also provides us with liquidity as loans are repaid or sold, in whole or in part, and the proceeds from repayment become available for us to invest. Cash Flows The following table sets forth changes in cash and cash equivalents for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands): [[GREPCENT_TABLE]] [["","","For the Year Ended December 31,"],["","","2021","","2020","","2019"],["Cash Flows From Operating Activities","","$","124,793","","","$","115,062","","","$","91,713"],["Cash Flows From Investing Activities","","(1,540,836)","","","88,709","","","(926,314)"],["Cash Flows From Financing Activities","","1,578,981","","","(160,558)","","","815,689"],["Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash","","$","162,938","","","$","43,213","","","$","(18,912)"]] [[/GREPCENT_TABLE]] 79 Table of Contents Cash Flows from Operating Activities Our cash flows from operating activities were primarily driven by our net interest income, which is driven by the income generated by our investments less financing costs. The following table sets forth interest received by, and paid for, our investments for the years ended December 31, 2021, 2020 and 2019 (dollars in thousands): [[GREPCENT_TABLE]] [["","","For the Year Ended December 31,"],["","","2021","","2020","","2019"],["Interest Received:"],["Commercial real estate loans","","$","249,564","","","$","242,313","","","$","251,062"],["CMBS B-Pieces","","\u2014","","","\u2014","","","1,715"],["","","249,564","","","242,313","","","252,777"],["Interest Paid:"],["Interest expense","","$","95,256","","","103,405","","","146,156"],["Net interest collections","","$","154,308","","","$","138,908","","","$","106,621"]] [[/GREPCENT_TABLE]] Our net interest collections were partially offset by cash used to pay management and incentive fees, as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","","For the Year Ended December 31,"],["","","2021","","2020","","2019"],["Management Fees to affiliate","","$","18,341","","","$","17,020","","","$","17,185"],["Incentive Fees to affiliate","","10,273","","","6,774","","","3,272"],["Net decrease in cash and cash equivalents","","$","28,614","","","$","23,794","","","$","20,457"]] [[/GREPCENT_TABLE]] Cash Flows from Investing Activities Our cash flows from investing activities consisted of cash outflows to fund new loan originations and our commitments under existing loan investments, partially offset by cash inflows from the sale/syndication and principal repayments on our loan investments. During the year ended December 31, 2021, we funded $3,904.6 million of CRE loans and received $2,362.4 million from the repayments and sales/syndications of CRE loans. During the year ended December 31, 2020, we funded $966.2 million of CRE loans and received $1,054.9 million from the sale/syndication and repayments of CRE loans. Cash Flows from Financing Activities Our cash flows from financing activities were primarily driven by proceeds from borrowings under our financing agreements of $3,642.0 million, proceeds from CLO KREF 2021-FL2 issuance of $1,095.3 million, net proceeds from Series A preferred stock issuance of $167.1 million, and net proceeds from common stock issuance of $120.7 million during the year ended December 31, 2021, which were partially offset by (i) repayments of $2,487.7 million on borrowings under our financing agreements, (ii) principal repayment of $810.0 million under CLO KREF 2018-FL1, and (iii) payment of $103.9 million in dividends. During the year ended December 31, 2020, our cash flows from financing activities were primarily driven by proceeds from borrowings under our financing agreements of $1,015.4 million and net proceeds from our secured term loan of $292.5 million, which were partially offset by (i) principal repayments of $1,332.8 million on borrowings under our financing agreements, (ii) payment of $97.1 million in dividends, and (iii) payment of $25.1 million for our share repurchases. 80 Table of Contents Contractual Obligations and Commitments The following table presents our contractual obligations and commitments (including interest payments) as of December 31, 2021 (dollars in thousands): [[GREPCENT_TABLE]] [["","Total","","Less than 1 year","","1 to 3 years","","3 to 5 years","","Thereafter"],["Recourse Obligations:"],["Master Repurchase Facilities(A)"],["Wells Fargo(B)","$","1,021,558","","","$","14,997","","","$","1,006,561","","","$","\u2014","","","$","\u2014"],["Morgan Stanley(C)","390,826","","","390,826","","","\u2014","","","\u2014","","","\u2014"],["Goldman Sachs(D)","194,177","","","194,177","","","\u2014","","","\u2014","","","\u2014"],["Term Lending Agreements(A)"],["KREF Lending V(E)","623,696","","","623,696","","","\u2014","","","\u2014","","","\u2014"],["KREF Lending IX","529,332","","","9,031","","","391,379","","","128,922","","","\u2014"],["Warehouse Facility"],["HSBC","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Asset Specific Financing"],["BMO Facility(A)","60,114","","","60,114","","","\u2014","","","\u2014","","","\u2014"],["Total secured financing agreements","2,819,703","","","1,292,841","","","1,397,940","","","128,922","","","\u2014"],["Convertible Notes","155,979","","","8,927","","","147,052","","","\u2014","","","\u2014"],["Secured Term Loan","428,277","","","17,602","","","34,894","","","34,288","","","341,493"],["Future funding obligations(F)","1,367,880","","","554,118","","","738,948","","","74,814","","","\u2014"],["RECOP I commitment(G)","4,324","","","4,324","","","\u2014","","","\u2014","","","\u2014"],["Revolver(H)","137,840","","","137,840","","","\u2014","","","\u2014","","","\u2014"],["Total recourse obligations","4,914,003","","","2,015,652","","","2,318,834","","","238,024","","","341,493"],["Non-Recourse Obligations:"],["Collateralized Loan Obligations","1,173,598","","","15,661","","","31,322","","","31,365","","","1,095,250"],["Term Loan Financing","887,323","","","535,842","","","314,708","","","36,773","","","\u2014"],["Total","$","6,974,924","","","$","2,567,155","","","$","2,664,864","","","$","306,162","","","$","1,436,743"]] [[/GREPCENT_TABLE]] (A)    The allocation of repurchase facilities and term lending agreements is based on the current maturity date of each individual borrowing under these facilities. The amounts include the related future interest payment obligations, which are estimated by assuming the amounts outstanding under these facilities and the interest rates in effect as of December 31, 2021 will remain constant into the future. This is only an estimate, as actual amounts borrowed and rates may vary over time. Amounts borrowed are subject to a maximum 25.0% recourse limit. (B)    In September 2021, the current stated maturity was amended to September 2024, subject to two, twelve-month facility term extensions available to us, which is contingent upon certain covenants and thresholds. (C)    In December 2021, the current stated maturity was extended to December 2022, with one-year extension option upon KREF giving written notice and another two one-year extension periods subject to approval by Morgan Stanley. (D)    In October 2021, the current stated maturity was amended to October 2022, subject to a twelve-month extension option available to us, subject to the satisfaction of certain conditions. (E)    In March 2021, the current stated maturity was extended to June 2022, subject to four additional one-year extension options, which may be exercised by us upon the satisfaction of certain customary conditions and thresholds. (F)    We have future funding obligations related to our investments in senior loans. These future funding obligations primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Generally, funding obligations are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios, minimal debt yield tests, or executions of new leases before advances are made to the borrower. As such, the allocation of our future funding obligations is based on the earlier of the expected funding or commitment expiration date. (G)    Amounts committed to invest in an aggregator vehicle alongside RECOP I, which had a two-year investment period which ended in April 2019. (H)    Any amounts borrowed are full recourse to certain subsidiaries of KREF. Includes principal and assumes interest outstanding over a one-year period. Amounts are estimated based on the amount outstanding under the Revolver and the interest rate in effect as of December 31, 2021. This is only an estimate as actual amounts borrowed, the timing of repayments and interest rates may vary over time. The Revolver matures in December 2023. We are required to pay our Manager a base management fee, an incentive fee and reimbursements for certain expenses pursuant to our management agreement. The table above does not include the amounts payable to our Manager under our management agreement as they are not fixed and determinable. See Note 15 to our consolidated financial statements included in this Form 10-Q for additional terms and details of the fees payable under our management agreement. As a REIT, we generally must distribute at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains, to stockholders in the form of dividends to comply with the REIT provisions 81 Table of Contents of the Code. Our taxable income does not necessarily equal our net income as calculated in accordance with GAAP, or our Distributable Earnings as described above under "Key Financial Measures and Indicators — Distributable Earnings." Recent Market Conditions Due to the ongoing COVID-19 pandemic in the United States and globally, our operating partners, borrowers and their tenants, the properties securing our investments, and the economy as a whole have been, and will continue to be, adversely impacted. The magnitude and duration of the COVID-19 pandemic and its impact on our borrowers and their tenants, cash flows and future results of operations has been significant, and its continued impact will largely depend on future developments, which are highly uncertain and cannot be predicted. Although there are effective vaccines for COVID-19 that have been approved for use and are widely available to the majority of the public, vaccination rates across populations varies and the effectiveness of such vaccines against future strains of COVID-19 is uncertain. Accordingly, given the ongoing nature of the outbreak, at this time we cannot reasonably estimate the magnitude of the ultimate impact that COVID-19 will have on our business, financial performance and operating results. We believe COVID-19’s adverse impact on our business, financial performance and operating results will in part be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic; the distribution and acceptance of vaccines and their impact on the timing and speed of economic recovery; the spread of new variants of the virus; the pandemic’s impact on the U.S. and global economies, including concerns regarding additional surges of the pandemic or the expansion of the economic impact thereof as a result of certain jurisdictions “re-opening” or otherwise lifting certain restrictions prematurely; the availability of U.S. federal, state, local or non-U.S. funding programs aimed at supporting the economy during the COVID 19 pandemic, including uncertainties regarding the potential implementation of new or extended programs; the timing, scope and effectiveness of additional governmental responses to the pandemic; and the negative impact on our financing sources, vendors and other business partners that may indirectly adversely affect us. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and impact our financial performance. While the economy has improved significantly since the initial outbreak of the COVID-19 pandemic, the pandemic has resulted in and may continue to result in declines in rental rates and increases in rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, or rent abatements for tenants severely impacted by the COVID-19 pandemic. Such responses have resulted in and may continue to result in decreases in cash flows to certain of our borrowers and potentially in defaults in paying debt service on outstanding indebtedness, which could adversely impact our results of operations and financial performance. The COVID-19 pandemic continues to disrupt global supply chains, has caused labor shortages and has added broad inflationary pressures, which has a potential negative impact on our borrowers’ ability to execute on their business plans and potentially their ability to perform under the terms of their loan obligations. In addition, declines in economic conditions could negatively impact real estate and real estate capital markets and result in lower occupancy, lower rental rates and declining values in our portfolio, which could adversely impact the value of our investments, making it more difficult for us to make distributions or meet our financing obligations. Subsequent Events Our subsequent events are detailed in Note 18 to our consolidated financial statements. Critical Accounting Policies and Use of Estimates Our consolidated financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to understanding our financial statements because they involve significant judgments and uncertainties that could affect our reported assets and liabilities, as well as our reported revenue and expenses. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of the financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in our allowance for credit losses, future write-off of our investments, and valuation of our investment portfolio, among other effects. We believe that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require the most difficult, subjective or complex judgments: 82 Table of Contents Allowance for Loan Losses We originate and purchase CRE debt and related instruments generally to be held as long-term investments at amortized cost. We adopted ASU No. 2016-13, Financial Instruments—Credit Losses, and subsequent amendments (“ASU 2016-13”), which replaced the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss or CECL model. CECL amends the previous credit loss model to reflect our current estimate of all expected credit losses, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. In connection with our adoption of ASU No. 2016-13 on January 1, 2020, we implemented new processes including the utilization of loan loss forecasting models, updates to our reserve policy documentation, changes to our internal reporting processes and related internal controls. We have implemented loan loss forecasting models for estimating expected life-time credit losses, at the individual loan level, for our commercial mortgage loan portfolio. The CECL forecasting methods used by us include (i) a probability of default and loss given default method using underlying third-party CMBS/CRE loan database with historical loan losses from 1998 to 2020, and (ii) probability weighted expected cash flow method, depending on the type of loan and the availability of relevant historical market loan loss data. We might use other acceptable alternative approaches in the future depending on, among other factors, the type of loan, underlying collateral, and availability of relevant historical market loan loss data. We estimate our CECL allowance for our loan portfolio, including unfunded loan commitments, at the individual loan level. Significant inputs to our forecasting methods include (i) key loan-specific inputs such as vintage year, loan-term, underlying property type, geographic location, and expected timing and amount of future loan fundings, (ii) performance against the underwritten business plan and our internal loan risk rating and (iii) a macro-economic forecast. In certain instances, we consider relevant loan-specific qualitative factors to certain loans to estimate its CECL allowance. We consider loan investments that are both (i) expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) for which the borrower is experiencing financial difficulty, to be “collateral-dependent” loans. For such loans that we determine that foreclosure of the collateral is probable, we measure the expected losses based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For collateral-dependent loans that we determine foreclosure is not probable, we apply a practical expedient to estimate expected losses using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan. We consider the individual loan internal risk rating as the primary credit quality indicator underlying the CECL assessment. We perform a quarterly review of our loan portfolio at the individual loan level to determine the internal risk rating for each of our loans by assessing the risk factors of each loan, including, without limitation, LTV, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. Considering these factors, we rate our loans based on a five-point scale, "1" though "5", from less risk to greater risk, which ratings are defined as follows: 1—Very Low Risk—The underlying property performance has surpassed underwritten expectations, and the sponsor’s business plan is generally complete. The property demonstrates stabilized occupancy and/or rental rates resulting in strong current cash flow and/or a very low loan-to-value ratio (65%). At the level of performance, it is very likely that the underlying loan can be refinanced easily in the period’s prevailing capital market conditions. 2—Low Risk—The underlying property performance has matched or exceeded underwritten expectations, and the sponsor’s business plan may be ahead of schedule or has achieved some or many of the major milestones from a risk mitigation perspective. The property has achieved improving occupancy at market rents, resulting in sufficient current cash flow and/or a low loan-to-value ratio (65%-70%). Operating trends are favorable, and the underlying loan can be refinanced in today’s prevailing capital market conditions. The sponsor/manager is well capitalized or has demonstrated a history of success in owning or operating similar real estate. 3—Average Risk—The underlying property performance is in-line with underwritten expectations, or the sponsor may be in the early stages of executing its business plan. Current cash flow supports debt service payments, or there is an ample interest reserve or loan structure in place to provide the sponsor time to execute the value-improvement plan. 83 Table of Contents The property exhibits a moderate loan-to-value ratio (75%). Loan structure appropriately mitigates additional risks. The sponsor/manager has a stable credit history and experience owning or operating similar real estate. 4—High Risk/Potential for Loss—A loan that has a risk of realizing a principal loss. The underlying property performance is behind underwritten expectations, or the sponsor is behind schedule in executing its business plan. The underlying market fundamentals may have deteriorated, comparable property valuations may be declining or property occupancy has been volatile, resulting in current cash flow that may not support debt service payments. The loan exhibits a high loan-to-value ratio (80%), and the loan covenants are unlikely to fully mitigate some risks. Interest payments may come from an interest reserve or sponsor equity. 5—Impaired/Loss Likely—A loan that has a very high risk of realizing a principal loss or has otherwise incurred a principal loss. The underlying property performance is significantly behind underwritten expectations, the sponsor has failed to execute its business plan and/or the sponsor has missed interest payments. The market fundamentals have deteriorated, or property performance has unexpectedly declined or valuations for comparable properties have declined meaningfully since loan origination. Current cash flow does not support debt service payments. With the current capital structure, the sponsor might not be incentivized to protect its equity without a restructuring of the loan. The loan exhibits a very high loan-to-value ratio (90%), and default may be imminent. Recently Adopted Accounting Standard None. 84 Table of Contents