(EDGAR Online via COMTEX) — 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 discussed 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 all 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 avoid registration under the Investment Company Act. We are organized as a holding company and conduct our business primarily through our various subsidiaries.

2018 Highlights

Operating Results:

Net Income Attributable to Common Stockholders of $87.3 million, or $1.58 per basic and diluted share of common stock, increased 48% and $0.28, respectively, compared to 2017.

Net Core Earnings of $100.0 million, or $1.81 per basic and diluted share of common stock, increased 80% and $0.59 respectively, compared to 2017.

Declared dividends of $1.69 per common share. The fourth quarter dividend of $0.43 per common share produced an annualized yield of 8.75% on our December 31, 2018 book value.

Investment Activity:

Originated 19 floating-rate senior loans totaling $2.7 billion of commitments, of which $2.4 billion was funded as of December 31, 2018. Average loan size increased by $20.1 million to $143.6 million, a 16% increase over 2017.

Current portfolio of $4.1 billion is 100% performing and 98% floating-rate with a weighted average LTV of 68% as of December 31, 2018. Current portfolio increased 98% over 2017.

Sold four CMBS B-piece investments and recognized a $13.0 million gain.

Portfolio Financing:

Increased our borrowing capacity to $4.1 billion as of December 31, 2018, compared to $1.8 billion as of December 31, 2017.

Increased our non-mark-to-market financing to $1.8 billion as of December 31, 2018, representing 60% of our total asset based financing.

Entered into a $1.0 billion non-recourse term loan facility providing non-mark-to-market asset based financing.

Issued a $1.0 billion managed collateralized loan obligation, providing $810.0 million of non-mark-to-market portfolio financing.

Entered into a $200.0 million asset based financing facility providing non-mark-to-market financing.

Capital Markets Activity:

Issued $143.8 million aggregate principal amount of 6.125% convertible senior notes due May 2023.

Completed an underwritten public offering of 5.0 million primary shares of our common stock in August, providing $98.3 million in net proceeds.

Completed an underwritten public offering of 4.5 million shares of our common stock, consisting of 0.5 million primary shares issued and sold by KREF and 4.0 million secondary shares sold by certain of the Company’s shareholders in November, providing $9.4 million in net proceeds to KREF.

Repurchased 1,623,482 shares of our common stock for approximately $31.3 million at a weighted average price of $19.30 per share.

Our book value was $1.1 billion as of December 31, 2018, a 7% increase over 2017.

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, Core Earnings, Net Core Earnings and book value per share.

Earnings Per Share and Dividends Declared The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share (amounts in thousands, except share and per share data): Three Months Ended December 31, Year Ended December 31, 2018 2018 2017 Net income(A) $ 19,709 $ 87,293 $ 58,818 Weighted-average number of shares of common stock outstanding Basic 58,178,944 55,136,548 45,320,358 Diluted 58,253,821 55,171,061 45,321,360 Net income per share, basic $ 0.34 $ 1.58 $ 1.30 Net income per share, diluted $ 0.34 $ 1.58 $ 1.30 Dividends declared per share(B) $ 0.43 $ 1.69 $ 1.62

(A) Represents net income attributable to common stockholders.

(B) During February 2017, we declared a dividend of $0.35 per share of common stock paid on February 3, 2017 to shareholders of record on February 3, 2017 related to income generated during the three months ended December 31, 2016.

Core Earnings and Net Core Earnings

We use Core Earnings and Net Core Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Core Earnings and Net Core Earnings are measures that are not prepared in accordance with GAAP. We define Core 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) the incentive compensation payable to our Manager, (iii) depreciation and amortization, (iv) 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 (v) one-time events pursuant to changes in GAAP and certain material non-cash income or expense items after discussions between our Manager and our board of directors (and subject to the approval by a majority of our independent directors). The exclusion of depreciation and amortization from the calculation of Core Earnings only applies to debt investments related to real estate to the extent we foreclose upon the property or properties underlying such debt investments. Net Core Earnings is Core Earnings less incentive compensation payable to our Manager.

We believe providing Core Earnings and Net Core Earnings on a supplemental basis to our net income as determined in accordance with GAAP is helpful to stockholders in assessing the overall performance of our business. Core Earnings and Net Core Earnings should not be considered as a substitute for GAAP net income. We caution readers that our methodology for calculating Core Earnings and Net Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and as a result, our Core Earnings and Net Core Earnings may not be comparable to similar measures presented by other REITs.

We also use Core Earnings to determine the management and incentive fees 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 Core Earnings over (b) 7.0% of the trailing 12-month weighted average adjusted equity ("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. During the year ended December 31, 2018, the Company incurred $4.8 million of incentive fees payable to the Manager, of which $2.4 million, or $0.04 per share, was related to the gain recognized as a result of the April 2018 CMBS sale, see Note 8 to our consolidated financial statements included in this Form 10-K.

The following tables provide a reconciliation of GAAP net income attributable to common stockholders to Core Earnings and Net Core Earnings (amounts in thousands, except share and per share data):

Three Months Ended Year Ended December 31, December 31, 2018 2018 2017 Net Income (Loss) Attributable to Common Stockholders $ 19,709 $ 87,293 $ 58,818 Adjustments Non-cash equity compensation expense 387 1,973 65 Incentive compensation to affiliate 1,470 4,756 – Depreciation and amortization – – – Unrealized (gains) or losses(A) 1,980 (1,370 ) (3,375 ) Non-cash convertible notes discount amortization 91 224 – Reversal of previously unrealized gain now realized(B) – 11,900 – Core Earnings(C) 23,637 104,776 55,508 Incentive compensation to affiliate 1,470 4,756 – Net Core Earnings $ 22,167 $ 100,020 $ 55,508 Weighted average number of shares of common stock outstanding Basic 58,178,944 55,136,548 45,320,358 Diluted 58,253,821 55,171,061 45,321,360 Core Earnings per Diluted Weighted Average Share $ 0.41 $ 1.90 $ 1.22 Net Core Earnings per Diluted Weighted Average Share $ 0.38 $ 1.81 $ 1.22

(A) Includes $1.6 million, $1.6 million and $0.0 million non-cash redemption value adjustment of our Special Non-Voting Preferred Stock for the three months ended December 31, 2018, the year ended December 31, 2018, and the year ended December 31, 2017, respectively.

(B) Includes $5.5 million and $6.4 million of unrealized gains related to the first quarter of 2018 and to prior periods, respectively, that were realized during the three months ended June 30, 2018.

(C) Excludes $0.2 million, $1.8 million and $4.0 million, or $0.00, $0.03 and $0.09 per diluted weighted average share outstanding, of net original issue discount on CMBS B-Pieces accreted as a component of taxable income during the three months ended December 31, 2018, year ended December 31, 2018 and 2017, 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): 6 ——————————————————————————– December 31, 2018 December 31, 2017 KKR Real Estate Finance Trust Inc. stockholders’ equity $ 1,132,342 $ 1,059,145 Shares of common stock issued and outstanding at period end 57,596,217 53,685,440 Book value per share of common stock $ 19.66 $ 19.73

Book value per share includes the impact of a $1.9 million non-cash redemption value adjustment to our redeemable Special Non-Voting Preferred Stock ("SNVPS") and the initial value of the SNVPS of $0.9 million (collectively referred to as "SNVPS Cumulative Impact"), which reduced our book value per share by $0.05 as of December 31, 2018. Upon redemption of the SNVPS, our book value will increase as a result of a one-time gain, thus substantially eliminating the SNVPS Cumulative Impact on our book value. See Note 9 -Equity, to our consolidated financial statements included in this Form 10-K, for detailed discussion of the SNVPS.

Our Portfolio

We have established a portfolio of diversified investments, consisting of performing senior loans, mezzanine loans and CMBS B-Pieces, which had a value of $4,133.5 million as of December 31, 2018.

As we continue to scale our portfolio, we expect that our originations will continue to be heavily weighted toward floating-rate loans. As of December 31, 2018, 99% of our loans by total loan exposure earned a floating rate of interest. 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 term 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, 2018, our portfolio had experienced no impairments and did not contain any legacy assets that were originated prior to October 2014. As of December 31, 2018, all of our investments were located in the United States. The following charts illustrate the diversification of our portfolio, based on type of investment, interest rate, underlying property type and geographic location, as of December 31, 2018:

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The charts above are based on total assets. Total assets reflect (i) the principal amount of our senior and mezzanine loans; and (ii) the cost basis of our CMBS B-Pieces, net of VIE liabilities. In accordance with GAAP, we carry our CMBS B-Piece investments at fair value. In April 2018, we sold our controlling beneficial interest in four of our five CMBS trusts for net proceeds of $112.7 million. During the year ended December 31, 2018, we had a $2.6 million unrealized loss on the remaining CMBS investment.

(A) Excludes CMBS B-Pieces. Our CMBS B-Piece portfolio diversification is as follows and is inclusive of our $29.6 million investment in RECOP:

Geography: California (23.0%), New York (12.5%) Texas (8.5%) and Other (56.0%). As of December 31, 2018, no other individual geography comprised more than 5% of our total CMBS B�Piece portfolio.

Vintage: 2015 (19.6%), 2016 (10.2%), and 2017 (70.2%).

(B) LTV is generally based on the initial loan amount divided by the as-is appraised value as of the date the loan was originated.

The following table details our quarterly loan activity (dollars in thousands):

Three Months Ended Year Ended March 31, September 30, December 31, December 31, December 31, 2018 June 30, 2018 2018 2018 2018 2017 Loan originations $ 411,425 $ 728,713 $ 680,500 $ 907,982 $ 2,728,620 $ 1,476,075 Loan fundings(A) $ 421,056 $ 590,441 $ 698,047 $ 855,369 $ 2,564,913 $ 1,294,700 Loan repayments(B) (35,000 ) (14,503 ) (281,436 ) (110,840 ) (441,779 ) (68,015 ) Net fundings 386,056 575,938 416,611 744,529 2,123,134 1,226,685 Loan participations sold – – – – – (81,472 ) Non-consolidated senior interest – – – – – (60,991 ) Total activity $ 386,056 $ 575,938 $ 416,611 $ 744,529 $ 2,123,134 $ 1,084,222

(A) Includes initial funding of new loans and additional fundings made under existing loans. Excludes fundings on loan participations sold.

(B) Includes 100.0% of the proceeds from the repayment of one of the mezannine loans held within our commercial mezzanine loan joint venture during the year ended December 31, 2018.

The following table details overall statistics for our loan portfolio as of December 31, 2018 (dollars in thousands):

Total Loan Exposure(A) Balance Sheet Total Loan Portfolio Portfolio Floating Rate Loans Fixed Rate Loans Number of loans 41 41 35 6 Principal balance $ 4,026,713 $ 4,093,868 $ 4,067,638 $ 26,230 Carrying value $ 4,001,820 $ 4,068,975 $ 4,042,745 $ 26,230 Unfunded loan commitments(B) $ 419,485 $ 419,485 $ 419,485 $ – Weighted-average cash coupon(C) 6.0 % 6.0 % L+3.5 % 10.6 % Weighted-average all-in yield(C) 6.5 % 6.5 % L+3.9 % 11.4 % Weighted-average maximum maturity (years)(D) 3.7 3.7 3.7 5.2 LTV(E) 68 % 69 % 68 % 72 %

(A) In certain instances, we finance our loans through the non-recourse sale of a senior interest that is not included in our condensed consolidated financial statements. Total loan exposure includes the entire loan we originated and financed, including $67.2 million of such non-consolidated interests that are not included within our balance sheet portfolio.

(B) Unfunded commitments will primarily be funded to finance property improvements 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, 2018, 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, 2018. L = one-month USD LIBOR rate; spot rate of 2.50% included in portfolio-wide averages represented as fixed rates.

(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, 2018, based on total loan exposure, 75.7% of our loans were subject to yield maintenance or other prepayment restrictions and 24.3% were open to repayment by the borrower without penalty.

(E) Based on LTV as of the dates loans were originated or acquired by us.

The table below sets forth additional information relating to our portfolio as of December 31, 2018 (dollars in millions):

Max Committed Current Remaining Principal Principal Net Term Investment(A) Investment Date Amount Amount Equity(B) Location Property Type Coupon(C)(D) (Years)(C)(E) LTV(C)(F) Senior Loans(G) 1 Senior Loan 5/9/2018 $ 350.0 $ 255.2 $ 151.5 Queens, NY Office L+3.3% 4.4 71 % Atlanta, GA / 2 Senior Loan 7/31/2018 341.0 335.5 82.0 Tampa, FL Multifamily L+3.2 4.6 75 Condo 3 Senior Loan 8/4/2017 239.2 170.7 59.4 New York, NY (Residential) L+4.8 1.6 62 4 Senior Loan 12/20/2018 234.5 182.2 43.2 New York, NY Multifamily L+3.6 5.0 70 5 Senior Loan 5/23/2018 213.7 195.4 32.3 Boston, MA Office L+2.4 4.4 69 Minneapolis, 6 Senior Loan 11/13/2017 181.8 159.2 41.1 MN Office L+3.8 3.9 75 7 Senior Loan 9/13/2018 172.0 162.1 36.5 Seattle, WA Office L+3.7 4.8 65 8 Senior Loan 9/9/2016 168.0 159.5 41.7 San Diego, CA Office L+4.2 2.8 71 Philadelphia, 9 Senior Loan 6/19/2018 165.0 143.1 26.4 PA Office L+2.5 4.5 71 10 Senior Loan 12/5/2018 163.0 148.0 20.6 New York, NY Multifamily L+2.6 4.9 67 11 Senior Loan 4/11/2017 162.1 140.8 40.7 Irvine, CA Office L+3.9 3.3 62 12 Senior Loan 10/26/2015 155.0 125.0 49.4 Portland, OR Retail L+5.5 1.8 61 North Bergen, 13 Senior Loan 10/23/2017 150.0 147.8 39.7 NJ Multifamily L+4.3 3.8 57 Fort Lauderdale, 14 Senior Loan 11/9/2018 150.0 140.0 27.3 FL Hospitality L+2.9 4.9 62 West Palm 15 Senior Loan 11/7/2018 135.0 122.0 52.7 Beach, FL Multifamily L+2.9 4.9 73 16 Senior Loan 3/30/2017 132.3 116.5 35.2 Brooklyn, NY Office L+4.4 3.3 68 17 Senior Loan 8/15/2017 119.0 99.8 13.8 Atlanta, GA Office L+3.0 3.7 66 Crystal City, 18 Senior Loan 9/14/2016 103.5 96.8 23.8 VA Office L+4.5 2.8 59 19 Senior Loan 11/20/2018 103.5 81.8 20.9 San Diego, CA Multifamily L+3.2 4.9 74 20 Senior Loan 9/7/2018 93.0 93.0 58.5 Seattle, WA Multifamily L+2.6 4.7 79 21 Senior Loan 3/8/2018 89.0 87.1 14.4 Westbury, NY Multifamily L+3.1 4.3 69 22 Senior Loan 3/29/2018 86.0 86.0 14.1 New York, NY Multifamily L+2.6 4.3 48 23 Senior Loan 2/28/2017 85.9 82.9 15.7 Denver, CO Multifamily L+3.8 3.2 75 24 Senior Loan 8/4/2017 81.0 81.0 17.3 Denver, CO Multifamily L+4.0 3.6 73 25 Senior Loan 3/20/2018 80.7 80.7 18.6 Seattle, WA Office L+3.6 4.3 65 26 Senior Loan 3/28/2018 80.0 71.1 12.0 Orlando, FL Multifamily L+2.8 4.3 70 Philadelphia, . . .

Feb 21, 2019

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