KKR Financial Corporation's CEO Discusses Second Quarter Results - Earnings Call Transcript

KKR Financial Corporation (KFN)

Q2 2012 Earnings Conference Call

July 26, 2012, 05:00 pm ET


Pam Testani – Head of Investor Relations

Bill Sonneborn – President, CEO

Michael McFerran - COO


Stephen Laws – Deutsche Bank

Lee Cooperman – Omega Advisors

Michael Sarcone – Sandler O'Neill

Daniel Furtado – Jefferies

Gabe Poggi – FBR

Wayne Cooperman – Cobalt Capital

Jason Stewart – Compass Point



Good day, everyone. Welcome to the KKR Financial Holdings, LLC second quarter 2012 earnings conference call. As a reminder, today's presentation is being recorded. At this time, I would like to turn the call over to Pam Testani. Please go ahead, ma'am.

Pam Testani

Thank you, (Doris), and thank you all for joining us for KKR Financial Holdings second quarter 2012 earnings call. I’m Pam Testani and I have recently joined the KFN team as Head of Investor Relations.

I've spent time with many of you in my prior role on the KKR IR team but for those of you I haven't met, I look forward to working together.

And Angela Yang, who has been working with our investors over the last year will be assuming some additional responsibilities related to KFN's SEC and investor reporting and I'd like to extend our thanks to her for contributing a great deal to building KFN's IR function.

With me this afternoon are Bill Sonneborn, our Chief Executive Officer and Michael McFerran, our Chief Operating and Financial Officer.

This call is being webcast and can be accessed at ir.kkr.com under the KKR Financial Holdings heading. A replay will be available later today. You can also find our second quarter supplemental information packet, which Bill and Mike will refer to during the call on the website.

We'd like to remind everyone that this call will contain forward-looking statements based on management's beliefs about KFN's operations and results as well as about general economic conditions.

These statements are subject to substantial uncertainties and risks that are described in greater detail, both on our supplement and our filings we've made with the SEC, which you can access on our website. KFN's actual results may vary materially from the views we express today.

In addition, some of our discussion will include references to non-GAAP financial measures. Information about these measures as well as their corresponding GAAP reconciliations can be found in the supplements.

And before we get started, we'd like to announce that we're holding our first investor day in New York on the morning of September 5th. This will be a half day event giving you a detailed look at KFN's investment strategies and the outlook for the business as a whole.

We'll put out a press release in mid-August with further details, including information on the live webcast so anyone interested can participate. And with that, I'll turn the call over to Bill.

Bill Sonneborn

Thank you, Pam, and thanks to all of you for joining our call today. As usual, I'll begin with some second quarter highlights then Mike will go over our financial results. I'll warp up with a review of the market and our outlook.

Today we announced that our board of directors declared a $0.21 cash distribution on all our common shares for the quarter. This represents a 17% increase over the regular distribution we paid in each of the last four quarters.

The distribution is payable on August 23rd to shareholders of record as of August 9th. Our net income for the second quarter was $71 million or $0.39 per diluted common share, reflecting a 16% return on equity. Our book value per share as of June 30th was $9.79, effectively flat from $9.81 at March 31st.

Looking at run rate cash earnings, we generated $0.32 per common share in second quarter, up from $0.26 in the first quarter. This implies a 13% cash ROE for the quarter. If you normalize for semi-annual coupon payment son our convertible notes, which reduce our first and third quarter cash earnings, we generated $0.30 per common share in Q2 compared to $0.29 per common share in Q1.

On the capital deployment front, we invested about $54 million to acquire $84 million of working interest in oil and gas properties. The $30 million difference was financed to our non-recourse natural resources credit facility.

In addition, we deployed $30 million to our royalties joint venture with Chesapeake Energy, which is discussed on Page 13 of our supplemental presentation.

Together, these bring aggregate capital deployment on our natural resources strategy to $84 million for the quarter.

We also deployed or committed to deploy about $40 million to our special situation strategy this quarter, which consisted primarily of investments in distressed European companies. Net of $25 million in realizations, our Q2 capital deployment to special situations is approximately $15 million.

We continued to source incremental investment capital by selling rated (trenches) we hold in our CLO subsidiaries. During the second quarter, we sold $18 million paramount of Class D notes from CLO 2007-1 resulting in net proceeds of $13 million.

In addition, we sold another $18 million paramount of these notes this week, generating an additional $14 million of proceeds. In total, we have generated nearly $60 million of cash proceeds this year by divesting these bonds, which have a stated cash coupon of LIBOR plus 2.25%, so effectively less than a 3% cash cost to the company.

Through these sales, we were able to extract lower yielding capital held in these CLOs and redeploy it to higher yielding opportunities elsewhere.

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