KR Financial Holdings Management Discusses Q3 2010 Results – Earnings Call Transcript
KKR Financial Holdings LLC (
)
Q3 2010 Earnings Call
November 4, 2010; 05:00 pm ET
Executives
Bill
Sonneborn - Chief Executive Officer
Michael McFerran - Chief Operating Officer & Chief Financial Officer
Laurie Poggi – Investor Relations
Analysts
Gabe Poggi - FBR Capital Markets
Michael Sarcone - Sandler O’Neill
Kyle Joseph - JMP Securities
Matthew Howlett – Macquarie
Leon Cooperman - Omega Advisors
Wayne Cooperman - Cobalt Capital
Presentation
Operator
Good day everyone and welcome to the KKR Financial Holdings LLC third 2010 earnings conference call. Today’s call is being recorded.
At this time I would like to turn the call over to Ms. Laurie Poggi. Please go ahead.
Laurie Poggi
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KKR Financial Holdings LLC Q3 2009 Earnings Call Transcript
Thank you, Elizabeth and good afternoon, everyone. Joining me on the call today Bill Sonneborn, our Chief Executive Officer and Michael McFerran, our Chief Operating Officer and Financial Officer. As a reminder this call is being recorded and webcast live on our website.
Today, we issued our financial results released for the quarter ended September 30, 2010 and filed our third quarter Form 10-Q with the Securities and Exchange Commission. These documents, together with the supplemental information packet are available in the Investor Relations section of our website at
.
Be for we get started, I’d like to caution you that this conference call and webcast contains forward-looking statements that are based on the beliefs of the management team regarding the operations and the results of the operations of the company, as well as general economic conditions.
These beliefs and the related forward-looking statements are subject to substantial risks and uncertainties, which are described in greater detail in the filings we have made with the SEC. These filings are available on the Securities and Exchange Commission’s website at www.sec.gov. KFN’s actual results may vary materially from those expressed in the forward-looking statements.
In addition some of the discussion today will include references to non-GAAP financial measures. Information about these measures may be found in the supplemental information packet also available on our website.
With that I’ll turn the call over to, Bill.
Bill
Sonneborn
Thank you, Laurie, and thanks to all of you for joining our call today. We appreciate your time and interest in KFN. We had a solid quarter based on the metrics we focus on. We fortunately were able to increase our earnings, book value, cash flow and distributions per share and we identified the unique opportunities for deploying our retained earnings and attractive target returns.
Our third quarter GAAP earnings were $0.52 per common share, which compares to $0.51 per share for the second quarter of this year, and $0.42 for the third quarter of 2009. On a GAAP basis, we generated a 25% return on equity in the quarter. If you subtract the impact of realized gains and other less predictable sources of revenue, as well as share-based compensation and incentive fee expense, we generated run rate earnings per share of $0.43 for the quarter or a pro forma 20% run rate return on equity.
Run rate income is a non-GAAP financial measure and it is a key metric that we use to evaluate the recurring earnings power of our business. Share-based compensation expenses excluded, this is a non-cash charge and incentive fee expenses excluded this amount is generally driven by realized gains at our portfolio that are included in our other income line in our income statement.
Run rate income for the quarter of $0.43 compares to $0.39 for the third quarter of last year. As disclosed in our earnings release yesterday our Board of Directors declared a cash distribution of $0.14 per common share payable on December 1 to shareholders is a record on November 17. This represents a 17% increase from our $0.12 per share dividend for the second quarter and following this payment, we would have distributed $0.36 per share for the first three quarters of this year. This is the fourth consecutive quarter where we have increased distributions per share.
With respect to cash flow, as shown on page 11 of our supplemental materials as new disclosure that we think is useful to investors on a going forward basis. Run rate, cash earnings per share equaled $0.27 for the third quarter as compared to $0.20 for the second quarter. Run rate cash earnings for the quarter represent effectively a 13% cash conversion with return on equity and can be used for either distributions to our shareholders or reinvestments into our business.
This number does fluctuate due to the timing of interest payments on our convertible notes, which are paid semiannually in July and January, so we had a payment this quarter, and the timing of receipts of interest payments and certain bond and loan position that have semiannually payment frequencies. This metric simply represents cash income excluding one-time items included in another income, net of all cash expense, effectively excludes principle accretion, quick interest or gains on any of our private equity investments.
For the first three quarters of 2010, our run rate cash earnings per share totaled $0.61 or an average of $0.20 quarterly per share this year. For the same nine month period, we declared aggregate dividends of $0.36 per share retaining $0.25 per reinvestment in our growth. A 25% ROE, a 20% run rate ROE, and a 13% cash conversion ROE, these are three of the key metrics we focus on and feel fortunate to be able to generate for shareholders such returns in a 2.5% “risk free environment”.
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