1301508--3/29/2006--KKR_Financial

related topics

{investment, property, distribution}

{tax, income, asset}

{loan, real, estate}

{provision, law, control}

{stock, price, share}

{competitive, industry, competition}

{debt, indebtedness, cash}

{acquisition, growth, future}

{interest, director, officer}

{operation, international, foreign}

{control, financial, internal}

{cost, regulation, environmental}

{regulation, change, law}

{loss, insurance, financial}

Risks Related to Our Management and Our Relationship with Our Manager We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the management agreement. The departure of any of the senior management of our Manager or the loss of our access to KKR s investment professionals and principals may adversely affect our ability to achieve our investment objectives. If our Manager ceases to be our Manager pursuant to the management agreement, financial institutions providing our credit facilities may not provide future financing to us. Our Manager has limited experience in managing a REIT, and our investment focus will differ from those of other KKR funds. Our board of directors has approved very broad investment guidelines for our Manager and does not approve each investment decision made by our Manager. Our incentive fee may induce our Manager to make certain investments, including speculative investments. There are potential conflicts of interest in our relationship with our Manager and its affiliates, including KKR, which could result in decisions that are not in the best interests of our stockholders. We expect that affiliates of our Manager and KKR will compete with us and there may be conflicts arising from allocation of investment opportunities. Termination by us of the management agreement with our Manager without cause is difficult and costly. Certain of our investments may create a conflict of interest with KKR and other affiliates. We will compete with other investment entities affiliated with KKR for access to its investment professionals and principals. Our access to confidential information may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect the potential return to stockholders. Our Manager s liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities. Risks Related to Our Operation and Business Strategy We have a limited operating history and limited experience as a REIT. Our internal controls over financial reporting contain material weaknesses. If we fail to remedy these weaknesses or otherwise fail to achieve and maintain effective internal controls on a timely basis, our internal controls would be considered ineffective for purposes of Section 404 of the Sarbanes-Oxley Act of 2002. Ineffective internal controls also could have an adverse effect on our future operations. We may change our investment strategy and operational policies without stockholder consent, which may result in riskier investments and adversely affect the market price of our common stock and our ability to make distributions to our stockholders. Our Manager s failure to identify and invest in securities and loans that meet our investment criteria or perform its responsibilities under the management agreement may adversely affect our ability for future growth. We operate in a highly competitive market for investment opportunities. Failure to procure adequate capital and funding would adversely affect our results and may, in turn, negatively affect the market price of shares of our common stock and our ability to make distributions to our stockholders. We leverage our portfolio investments, which may adversely affect our return on our investments and may reduce cash available for distribution. If credit spreads widen before we obtain long-term financing for our net assets we may experience a material reduction in the economic value of the assets that we have acquired. If we are unable to continue to securitize our portfolio successfully, we may be unable to grow or fully execute our business strategy and our earnings may decrease. We may not be able to acquire eligible securities for a CDO or CLO issuance, or may not be able to issue CDO or CLO securities on attractive terms that closely match-fund the duration of our assets and liabilities, which may require us to seek more costly financing for our investments or to liquidate assets. The use of CDO or CLO financings with over-collateralization requirements may have a negative impact on our cash flow. We may be required to repurchase loans or securities that we have sold in connection with CDOs and CLOs. The B Notes in which we invest may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us. An increase in our borrowing costs relative to the interest we receive on our portfolio investments may adversely affect our profitability, which may negatively affect cash available for distribution to our stockholders. We may enter into derivative contracts that could expose us to contingent liabilities in the future. Hedging against interest rate exposure may adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders. Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs. We make investments in non-U.S. dollar denominated investments, which subject us to currency rate exposure and the uncertainty of foreign laws and markets. Risks Related To Our Investments We may not realize gains or income from our investments. Declines in the market values of our investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders. Some of our portfolio investments are recorded at fair value as determined by our Manager and, as a result, there is uncertainty as to the value of these investments. Changes in interest rates could negatively affect the value of our investments, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders. Our assets include leveraged loans, high yield securities and common and preferred equity securities, each of which has greater risks of loss than secured senior loans and, if those losses are realized, it could adversely affect our earnings, which could adversely affect our cash available for distribution to our stockholders. Prepayments can adversely affect the yields on our investments. The mortgage loans we invest in and the mortgage loans underlying the mortgage and asset-backed securities we invest in are subject to delinquency, foreclosure and loss, which could result in losses to us. In the future we may invest in RMBS backed by non-prime or sub-prime residential mortgage loans which are subject to higher delinquency, foreclosure and loss rates than prime residential mortgage loans which could result in losses to us. All, or a significant portion, of our investment portfolio is invested in non-agency RMBS and non-conforming residential mortgage loans. Our investment portfolio of residential mortgage loans, residential mortgage-backed securities, commercial real estate loans, and commercial real estate mortgage-backed securities may have material geographic concentrations. Our investments in subordinated commercial mortgage-backed securities are generally in the second loss position and therefore subject to losses. Our investments in senior unsecured REIT securities are subject to specific risks relating to the particular REIT issuer of the securities and to the general risks of investing in subordinated real estate related securities, which may result in losses to us. Our dependence on the management of other entities may adversely affect our business. Our due diligence may not reveal all of an entity s liabilities and may not reveal other weaknesses in its business. A prolonged economic slowdown, a recession or declining real estate values could impair our investments and harm our operating results. Many of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions. We are exposed to environmental liabilities with respect to properties to which we take title. Risks Related to our Organization and Structure Our ability to make future distributions may be affected by, and the amount of such distributions may be reduced by, among other factors, a change in the return on our investments, our operating expense levels and certain restrictions imposed by Maryland law. The terms of our indebtedness may restrict our ability to make future distributions and impose limitations on our current and future operations. Our Investment Company Act exemption limits our investment discretion and loss of the exemption would adversely affect us and negatively affect the market price of shares of our common stock and the ability to make distributions to our stockholders. Rapid changes in the values of our mortgage-backed securities and other real estate related investments may make it more difficult for us to maintain our REIT status or exemption from the Investment Company Act. Maryland takeover statutes may prevent or make difficult a change of control of our company that could be in the interests of our stockholders. Our charter and bylaws contain provisions that may inhibit potential acquisition bids that our stockholders may consider favorable, and the market price of our common stock may be lower as a result. Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit their recourse in the event of actions not in their best interests. Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or engage in marginal investment opportunities. The prohibited transactions tax will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for federal income tax purposes. We may be subject to the prohibited transactions tax on the loans we sold or will sell to our CLO issuers if the Internal Revenue Service challenges our characterization of those transactions. Certain of our financing activities may subject us to U.S. federal income tax. Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders. Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders. Ownership limitations and certain provisions of our charter may restrict a change of control in which our stockholders might receive a premium for their shares. Our ownership of and relationship with our taxable REIT subsidiaries will be limited and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax. Our stockholders may receive lower distributions because KKR TRS Holdings, Inc. will likely retain its earnings. We may lose our REIT status if the IRS successfully challenges our characterization of our income from our CLO and CDO issuers. If our CLO and CDO issuers that are taxable REIT subsidiaries are subject to federal income tax at the entity level, it would greatly reduce the amounts those entities would have available to distribute to us and that we would have available to pay their creditors. The taxation of corporate dividends may adversely affect the value of our common stock. Complying with REIT requirements may limit our ability to hedge effectively. We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

Full 10-K form ▸

1301508--3/29/2006--KKR_Financial_Corp