UNITED STATES
	SECURITIES AND EXCHANGE COMMISSION
	Washington, D.C. 20549
	FORM 10-Q
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2017
		or
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ________________ to ________________
	Commission File Number: 001-38082
	KKR Real Estate Finance Trust Inc.
	(Exact name of registrant as specified in its charter)
	Maryland		47-2009094
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
	9 West 57th Street, Suite 4200 New York, NY		10019
	(Address of principal executive offices)		(Zip Code)
	(212) 750-8300
	(Registrant’s telephone number, including area code)
	Not Applicable
	(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨Accelerated filer ¨

Non-accelerated filer (Do not check if a smaller reporting company) x     Smaller reporting company ¨

Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes x No

The number of shares of the registrant's common stock, par value $0.01 per share, outstanding as of August 4, 2017was53,711,838.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the ‘Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward looking statements by the use of words such as "outlook," "believe," "expect," "potential," "continue," "may," "should," "seek," "approximately," "predict," "intend," "will," "plan," "estimate," "anticipate," the negative version of these words, other comparable words or other statements that do not relate strictly to historical or factual matters. By their nature, forward-looking statements speak only as of the date they are made, are not statements of historical fact or guarantees of future performance and are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under the heading “Risk Factors” in our prospectus dated May 4, 2017, filed with the Securities and Exchange Commission (the “SEC”) on May 8, 2017 pursuant to Rule 424(b)(4) under the Securities Act (the “Prospectus”), and in this Form 10-Q, as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Such risks and uncertainties include, but are not limited to, the following:

• the general political, economic and competitive conditions in the United States and in any foreign jurisdictions in which we invest; 

• the level and volatility of prevailing interest rates and credit spreads; 

• adverse changes in the real estate and real estate capital markets; 

• general volatility of the securities markets in which we participate; 

• changes in our business, investment strategies or target assets; 

• difficulty in obtaining financing or raising capital; 

• reductions in the yield on our investments and increases in the cost of our financing; 

• acts of God such as hurricanes, earthquakes and other natural disasters, acts of war and/or terrorism and other events that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments; 

• deterioration in the performance of properties securing our investments that may cause deterioration in the performance of our investments and potentially principal losses to us; 

• defaults by borrowers in paying debt service on outstanding indebtedness; 

• the adequacy of collateral securing our investments and declines in the fair value of our investments; 

• adverse developments in the availability of desirable investment opportunities whether they are due to competition, regulation or otherwise; 

• difficulty in successfully managing our growth, including integrating new assets into our existing systems; 

• the cost of operating our platform, including, but not limited to, the cost of operating a real estate investment platform and the cost of operating as a publicly traded company; 

• the availability of qualified personnel and our relationship with our Manager;

• KKR controls us and its interests may conflict with those of our stockholders in the future; 

• our qualification as a REIT for U.S. federal income tax purposes and our exclusion from registration under the Investment Company Act; and

• authoritative GAAP or policy changes from such standard-setting bodies such as the Financial Accounting Standards Board, the SEC, the IRS, the New York Stock Exchange and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled "Risk Factors" in our Prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q and in other filings we make with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

Except where the context requires otherwise, the terms "Company," "we," "us," "our" and "KREF" refer to KKR Real Estate Finance Trust Inc., a Maryland corporation, and its subsidiaries; "Manager" refers to KKR Real Estate Finance Manager LLC, a Delaware limited liability company, our external manager; and "KKR" refers to KKR & Co. L.P., a Delaware limited partnership, and its subsidiaries.

KKR REAL ESTATE FINANCE TRUST INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017

INDEX

	PAGE
Part 1 — Financial Information	1
Item 1. Condensed Consolidated Financial Statements (Unaudited)	1
Condensed Consolidated Balance Sheets as of June 30, 2017 (Unaudited) and December 31, 2016	1
Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended June 30, 2017 and 2016	2
Condensed Consolidated Statements of Changes in Equity (Unaudited) for the six months ended June 30, 2017 and 2016	3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2017 and 2016	4
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Note 1. Business and Organization	6
Note 2. Summary of Significant Accounting Policies	6
Note 3. Commercial Mortgage Loans	14
Note 4. Preferred Interest in Joint Venture	16
Note 5. Debt	17
Note 6. Variable Interest Entities	19
Note 7. Equity	21
Note 8. Commitments and Contingencies	23
Note 9. Related Party Transactions	23
Note 10. Fair Value of Financial Instruments	26
Note 11. Income Taxes	29
Note 12. Subsequent Events	30
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Overview	31
Key Financial Measures and Indicators	32
Our Portfolio	34
Results of Operations	39
Liquidity and Capital Resources	40
Contractual Obligations and Commitments	45
Subsequent Events	46
Off-Balance Sheet Arrangements	46
Critical Accounting Policies	47
Recent Accounting Pronouncements	47
Item 3. Quantitative and Qualitative Disclosures about Market Risk	48
Item 4. Controls and Procedures	50
Part II — Other Information	51
Item 1. Legal Proceedings	51
Item 1A. Risk Factors	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3. Defaults Upon Senior Securities	52
Item 4. Mine Safety Disclosures	52
Item 5. Other Information	52
Item 6. Exhibits	53
Signatures	55

PART I — FINANCIAL INFORMATION

ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share data)

	June 30, 2017		December 31, 2016
	(Unaudited)
Assets
Cash and cash equivalents	$	57,013	$	96,189
Restricted cash and cash equivalents	900		157
Commercial mortgage loans, held-for-investment, net	1,056,083		674,596
Commercial mortgage loans, held-for-sale, net	—		26,230
Preferred interest in joint venture, held-to-maturity	37,090		36,445
Equity method investments in unconsolidated subsidiaries, at fair value	4,344		—
Accrued interest receivable	5,266		2,974
Other assets	2,582		2,728
Commercial mortgage loans held in variable interest entities, at fair value	5,467,095		5,426,084
Total Assets	$	6,630,373	$	6,265,403
Liabilities and Equity
Liabilities
Secured financing agreements, net	$	177,198	$	439,144
Accounts payable, accrued expenses and other liabilities	7,121		2,297
Dividends payable	13,505		—
Accrued interest payable	333		593
Due to affiliates	3,516		1,728
Variable interest entity liabilities, at fair value	5,351,985		5,313,574
Total Liabilities	5,553,658		5,757,336
Commitments and Contingencies
Temporary Equity
Redeemable noncontrolling interests in equity of consolidated joint venture	3,073		3,030
Redeemable preferred stock	949		—
Permanent Equity
Preferred stock, 50,000,000 authorized (1 share with par value of $0.01 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively, and 125 shares with stated value of $1,000.00 issued and outstanding as of December 31, 2016)	—		125
Common stock, 300,000,000 authorized (53,711,838 and 24,158,392 shares with par value of $0.01 issued and outstanding as of June 30, 2017 and December 31, 2016, respectively)	537		242
Additional paid-in capital	1,053,045		479,417
Retained earnings	11,644		17,914
Total KKR Real Estate Finance Trust Inc. stockholders’ equity	1,065,226		497,698
Noncontrolling interests in equity of consolidated joint venture	7,467		7,339
Total Permanent Equity	1,072,693		505,037
Total Liabilities and Equity	$	6,630,373	$	6,265,403

See Notes to Condensed Consolidated Financial Statements.

1

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

(Amounts in thousands, except share and per share data)

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2017		2016		2017		2016
Net Interest Income
Interest income	$	17,446	$	6,719	$	30,352	$	12,988
Interest expense	3,225		1,199		7,178		2,349
Total net interest income	14,221		5,520		23,174		10,639
Other Income
Change in net assets related to consolidated variable interest entities	4,175		5,824		8,785		3,740
Income from equity method investments in unconsolidated subsidiaries	330		—		346		—
Other income	275		18		439		79
Total other income (loss)	4,780		5,842		9,570		3,819
Operating Expenses
General and administrative	963		716		1,915		1,200
Management fees to affiliate	3,488		1,329		5,524		2,467
Incentive compensation to affiliate	—		88		—		365
Total operating expenses	4,451		2,133		7,439		4,032
Income (Loss) Before Income Taxes, Noncontrolling Interests and Preferred Dividends	14,550		9,229		25,305		10,426
Income tax expense	146		72		268		143
Net Income (Loss)	14,404		9,157		25,037		10,283
Redeemable Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture	34		80		80		161
Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture	214		207		424		391
Net Income (Loss) Attributable to KKR Real Estate Finance Trust Inc. and Subsidiaries	14,156		8,870		24,533		9,731
Preferred Stock Dividends	75		4		88		8
Net Income (Loss) Attributable to Common Stockholders	$	14,081	$	8,866	$	24,445	$	9,723
Net Income (Loss) Per Share of Common Stock
Basic	$	0.30	$	0.51	$	0.66	$	0.60
Diluted	$	0.30	$	0.51	$	0.66	$	0.60
Weighted Average Number of Shares of Common Stock Outstanding
Basic	46,632,975		17,248,539		36,810,769		16,079,840
Diluted	46,633,248		17,248,539		36,811,042		16,079,840
Dividends Declared per Share of Common Stock	$	0.53	$	0.34	$	0.88	$	0.70

See Notes to Condensed Consolidated Financial Statements.

2

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Equity (Unaudited)

For the Six Months Ended June 30, 2017 and 2016

(Amounts in thousands, except share data)

	Permanent Equity																							Temporary Equity
	KKR Real Estate Finance Trust Inc.
	Preferred Stock					Common Stock
	Shares		Stated Value			Shares	Par Value		Additional Paid-In Capital			Retained Earnings			Total KKR Real Estate Finance Trust Inc. Stockholders' Equity			Noncontrolling Interests in Equity of Consolidated Joint Venture			Total Permanent Equity			Redeemable Noncontrolling Interests in Equity of Consolidated Joint Venture			Redeemable Preferred Stock
Balance at December 31, 2015	125		$	125		13,636,416	$	136	$	272,518		$	8,681		$	281,460		$	4,914		$	286,374		$	4,643		$	—
Issuance of stock	—		—			5,021,976	51		99,953			—			100,004			—			100,004			—			—
Offering costs	—		—			—	—		(2,874		)	—			(2,874		)	—			(2,874		)	—			—
Preferred dividends declared	—		—			—	—		—			(8		)	(8		)	—			(8		)	—			—
Common dividends declared	—		—			—	—		—			(10,941		)	(10,941		)	—			(10,941		)	—			—
Capital contributions	—		—			—	—		—			—			—			2,048			2,048			—			—
Capital distributions	—		—			—	—		—			—			—			(145		)	(145		)	(173		)	—
Net income (loss)	—		—			—	—		—			9,731			9,731			391			10,122			161			—
Balance at June 30, 2016	125		$	125		18,658,392	$	187	$	369,597		$	7,463		$	377,372		$	7,208		$	384,580		$	4,631		$	—
Balance at December 31, 2016	126		$	125		24,158,392	$	242	$	479,417		$	17,914		$	497,698		$	7,339		$	505,037		$	3,030		$	—
Issuance of stock	—		—			29,553,446	295		580,011			—			580,306			—			580,306			—			949
Redemption of preferred stock	(125	)	(125		)	—	—		—			—			(125		)	—			(125		)	—			—
Offering costs	—		—			—	—		(6,398		)	—			(6,398		)	—			(6,398		)	—			—
Preferred dividends declared	—		—			—	—		—			(6		)	(6		)	—			(6		)	—			(82		)
Common dividends declared	—		—			—	—		—			(30,715		)	(30,715		)	—			(30,715		)	—			—
Capital distributions	—		—			—	—		—			—			—			(296		)	(296		)	(37		)	—
Equity compensation	—		—			—	—		15			—			15			—			15			—			—
Net income (loss)	—		—			—	—		—			24,451			24,451			424			24,875			80			82
Balance at June 30, 2017	1		$	—		53,711,838	$	537	$	1,053,045		$	11,644		$	1,065,226		$	7,467		$	1,072,693		$	3,073		$	949

See Notes to Condensed Consolidated Financial Statements.

3

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)

	For the Six Months Ended June 30,
	2017			2016
Cash Flows From Operating Activities
Net income (loss)	$	25,037		$	10,283
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of deferred debt issuance costs	1,070			682
Accretion of net deferred loan fees and discounts	(1,302		)	(278		)
Interest paid-in-kind	(644		)	(1,155		)
Change in noncash net assets of consolidated variable interest entities	(2,566		)	2,112
(Income) from equity investment in unconsolidated subsidiary	(332		)	—
Equity compensation	15			—
Changes in operating assets and liabilities:
Accrued interest receivable, net	(2,292		)	(438		)
Other assets	2,107			3,373
Due to affiliates	1,788			(849		)
Accounts payable, accrued expenses and other liabilities	4			(3,006		)
Accrued interest payable	(260		)	41
Net cash provided by operating activities	22,625			10,765
Cash Flows From Investing Activities
Proceeds from principal repayments of commercial mortgage loans, held-for-investment	1,685			2,376
Proceeds from sale of commercial mortgage loans	60,991			—
Origination and purchase of commercial mortgage loans, held-for-investment	(416,631		)	(64,583		)
Investment in commercial mortgage-backed securities, equity method investee	(23,600		)	—
Proceeds from commercial mortgage-backed securities, equity method investee	19,588			—
Purchases of commercial mortgage-backed securities	—			(36,351		)
Investment in preferred interest in joint venture	—			(10,240		)
Purchases of other capitalized assets	—			(431		)
Net cash used in investing activities	(357,967		)	(109,229		)

See Notes to Condensed Consolidated Financial Statements.

4

KKR Real Estate Finance Trust Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts in thousands)

	For the Six Months Ended June 30,
	2017			2016
Cash Flows From Financing Activities
Proceeds from borrowings under secured financing agreements	198,000			39,000
Proceeds from issuances of common stock	581,256			100,004
Redemption of preferred stock	(125		)	—
Proceeds from noncontrolling interest contributions	—			2,048
Payments of common stock dividends	(17,287		)	(10,941		)
Payments of preferred stock dividends	(11		)	(8		)
Principal repayments on borrowings under secured financing agreements	(460,432		)	—
Payments of debt issuance costs	(2,549		)	(1,010		)
Payments of stock issuance costs	(1,611		)	(2,796		)
Payments of redeemable noncontrolling interest distributions	(37		)	(222		)
Payments of noncontrolling interest distributions	(295		)	—
Net cash provided by financing activities	296,909			126,075
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	(38,433		)	27,611
Cash, Cash Equivalents, and Restricted Cash at Beginning of Period	96,346			26,686
Cash, Cash Equivalents, and Restricted Cash at End of Period	$	57,913		$	54,297
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest expense	$	6,325		$	1,626
Cash paid during the period for income tax expense	67			460
Supplemental Schedule of Non-Cash Investing and Financing Activities
Consolidation of variable interest entities (incremental assets and liabilities)	$	—		$	940,806
Dividend declared, not yet paid	13,428			—

See Notes to Condensed Consolidated Financial Statements.

5

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 1. Business and Organization

KKR Real Estate Finance Trust Inc. (together with its subsidiaries, "KREF") is a Maryland corporation that was formed and commenced operations on October 2, 2014 as a mortgage "real estate investment trust" ("REIT") that focuses primarily on originating and acquiring senior loans secured by commercial real estate assets.

KREF has elected and intends to maintain its qualification to be taxed as a REIT under the requirements of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), for U.S. federal income tax purposes. As such, KREF will generally not be subject to U.S. federal income tax on that portion of its income that it distributes to stockholders if it distributes at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gains. See Note 11 regarding taxes applicable to KREF.

KREF is externally managed by KKR Real Estate Finance Manager LLC ("KKR Manager"), a subsidiary of KKR & Co. L.P. (together with its subsidiaries, "KKR"), through a management agreement ("Management Agreement") pursuant to which the KKR Manager provides a management team and other professionals who are responsible for implementing KREF’s business strategy, subject to the supervision of KREF’s board of directors. For its services, the KKR Manager is entitled to management fees and incentive compensation, both defined in, and in accordance with the terms of, the Management Agreement (Note 9).

As of June 30, 2017, KKR beneficially owned 23,758,616 shares of KREF's common stock, of which 3,758,616 shares were held by KKR on behalf of a third-party investor.

As of June 30, 2017, KREF's principal business activities related to the origination and purchase of credit investments related to commercial real estate. Management assesses performance of KREF's current portfolio of leveraged and unleveraged commercial mortgage loans and commercial mortgage-backed securities ("CMBS") as a whole and makes operating decisions accordingly. As a result, management presents KREF's operations within a single segment.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation — The accompanying unaudited condensed consolidated financial statements and related notes of KREF are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and instructions to Form 10-Q. The condensed consolidated financial statements, including these notes, are unaudited and exclude some of the disclosures required in annual financial statements. Accordingly, certain information and footnote disclosures normally included in consolidated financial statements have been condensed or omitted. The condensed consolidated financial statements include the accounts of KREF and its consolidated subsidiaries, and all intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments considered necessary for a fair presentation of KREF’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These condensed consolidated financial statements should be read in conjunction with KREF’s prospectus dated May 4, 2017, filed with the Securities and Exchange Commission (the “SEC”) on May 8, 2017 pursuant to Rule 424(b)(4) under the Securities Act (the “Prospectus”).

Consolidation— KREF consolidates those entities for which (i) it controls significant operating, financial and investing decisions of the entity or (ii) management determines that KREF is the primary beneficiary of entities deemed to be variable interest entities ("VIEs").

Variable Interest Entities— VIEs are defined as entities in which equity investors do not have an interest with the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party that has the power to direct the activities of the VIE that most significantly impact its economic performance and that has the obligation to absorb losses of, or the right to receive benefits from, the VIE that could be potentially significant to the VIE (Note 6).

To assess whether KREF has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, KREF considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power to direct those activities. To assess whether KREF has the

6

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE, KREF considers all of its economic interests and applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.

CMBS— KREF consolidates those trusts that issue beneficial ownership interests in mortgage loans secured by commercial real estate (commonly known as CMBS) when KREF holds a variable interest in, and management considers KREF to be the primary beneficiary of, those trusts. Management believes the performance of the assets that underlie CMBS issuances most significantly impacts the economic performance of the trust, and the primary beneficiary is generally the entity that conducts activities that most significantly impact the performance of the underlying assets. In particular, the most subordinate tranches of CMBS expose the holder to the greater variability of economic performance when compared to more senior tranches since the subordinate tranches absorb a disproportionately higher amount of the credit risk related to the underlying assets. Generally, a trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust. The special servicer is responsible for the servicing and administration of delinquent and nonperforming loans as well as real estate owned ("REO") properties held as collateral delivered on foreclosed loans. While the special servicer cannot prevent losses, its services to the trust are designed to mitigate credit losses to holders of the CMBS.

For the trusts that KREF consolidates, KREF holds non-investment grade rated and unrated CMBS that represent the most subordinate tranches of the CMBS issued by those trusts, which include the controlling class. As the holder of the most subordinate tranche, KREF is in a first loss position and has the right to receive benefits. As the holder of the controlling class, KREF has the ability to unilaterally appoint and remove the special servicer for the trust. In these cases, management considers KREF to be the primary beneficiary and consolidates the CMBS trusts.

For VIEs in which management determines KREF is the primary beneficiary, all of the underlying assets, liabilities and equity of the trusts are recorded on KREF's books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these trusts is eliminated in consolidation.

Management elected the fair value option for KREF's initial and subsequent recognition of the assets and liabilities of KREF's consolidated CMBSVIEs in order to provide users of the financial statements with better information regarding the effects of credit risk and other market factors on the CMBS beneficially held by KREF's stockholders. Since the changes in fair value include the interest income and interest expense associated with these CMBSVIEs, management does not consider the separate presentation of the components of fair value changes to be relevant. Management has elected to present these items in aggregate as "Other Income — Change in net assets related to consolidated variable interest entities" in the accompanying Condensed Consolidated Statements of Operations; the residual difference represents KREF's beneficial interest in the CMBSVIEs.

Management separately presents the assets and liabilities of KREF's consolidated VIEs as individual line items on KREF's Condensed Consolidated Balance Sheets for entities in which the VIEs assets can only be used to settle the VIE’s obligations. The liabilities of KREF's consolidated VIEs consist solely of obligations to the CMBS holders of the consolidated trusts, excluding CMBS held by KREF as such interests are eliminated in consolidation, and the interest accrued thereon, presented as "Liabilities — Variable interest entity liabilities, at fair value." The assets of KREF's consolidated VIEs consist principally of commercial mortgage loans and the interest accrued thereon, and are likewise presented as a single line item entitled "Assets — Commercial mortgage loans held in variable interest entities, at fair value."

Assets of a CMBS trust, as a whole, can only be used to settle the obligations of the consolidated CMBSVIE. The assets of KREF's CMBSVIEs are not individually accessible by, and obligations of the CMBSVIEs are not recourse to, the bondholders.

REO assets generally represent a small percentage of the overall asset pool of a CMBS trust. In a new issue CMBS trust there are no REO assets, and no REO existed in KREF's consolidated VIE assets as of June 30, 2017. KREF derives the fair value of its Level 3 CMBSVIE assets from its Level 3 CMBSVIE liabilities, which management considers to possess more observable market value data than the CMBSVIE assets. See "— Fair Value — Valuation of Consolidated VIEs" for additional discussion regarding management's valuation of consolidated CMBSVIEs.

Commercial Mezzanine Loan Joint Venture— KREF consolidates a joint venture that holds a portion of KREF's investments in commercial mezzanine loans, and in which a third-party owns a 5.0% redeemable noncontrolling interest (Note 6). Management determined the joint venture to be a VIE as the third party owners of the redeemable noncontrolling interest do not

7

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

have substantive participating or kick-out rights. KREF owns 95.0% of the equity interests in the joint venture and participates in the profits and losses. Management considers KREF to be the primary beneficiary of the joint venture as KREF holds decision-making power over the activities that most significantly impact the economic performance of the joint venture.

Preferred Interest in Joint Venture— KREF consolidates a joint venture that holds a lending agreement with an entity engaged in the management of a multi-family tower, and in which a third-party owns a 20.0% noncontrolling interest (Note 4). Management determined the joint venture to be a VIE as the third-party owners of the noncontrolling interest do not have substantive participating or kick-out rights. KREF owns 80.0% of the equity interests in the joint venture and participates in the profits and losses. Management considers KREF to be the primary beneficiary of the joint venture as KREF holds decision-making power over the activities that most significantly impact the economic performance of the joint venture.

Noncontrolling Interests— Noncontrolling interests represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than KREF. Those noncontrolling interests that allow the holder to redeem before liquidation or termination of the entity that issued those interests are considered redeemable noncontrolling interests.

The redeemable noncontrolling interests issued by subsidiaries of KREF are subject to certain restrictions and require KREF to transfer assets or issue equity to satisfy the redemption. As KREF does not control the circumstances under which the noncontrolling interests may redeem their interests, management considers these redeemable noncontrolling interests as temporary equity, presented as "Temporary Equity — Redeemable noncontrolling interests in equity of consolidated joint venture" in the accompanying Condensed Consolidated Balance Sheets and their share of "Net Income (Loss)" as "Redeemable Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture" in the Condensed Consolidated Statements of Operations. KREF recorded the redeemable noncontrolling interests at fair value upon issuance by subsidiaries of KREF, and accretes to the redemption values at each subsequent reporting period date if KREF determines the noncontrolling interests are redeemable or probable to become redeemable. As of June 30, 2017, KREF determined that the redeemable noncontrolling interests were not currently redeemable or probable to become redeemable, and as a result did not adjust the value of the redeemable noncontrolling interests.

KREF reflects noncontrolling interests that are not redeemable as permanent equity that is not attributable to KREF's stockholders. KREF presents these interests as "Permanent Equity — Noncontrolling interests in equity of consolidated joint venture" in the accompanying Condensed Consolidated Balance Sheets and their share of "Net Income (Loss)" as "Noncontrolling Interests in Income (Loss) of Consolidated Joint Venture" in the Condensed Consolidated Statements of Operations.

Equity investments in unconsolidated subsidiaries — Investments are accounted for under the equity method when KREF has significant influence over the operations of an investee, but KREF does not consolidate that investment. Equity method investments, for which management has not elected a fair value option, are initially recorded at cost and subsequently adjusted for KREF's share of net income or loss and cash contributions and distributions each period.

Management determined that its investment in the KKR Manager is an interest in a VIE as KREF did not have substantive participating or kick-out rights. KREF does not have the power to direct activities and the obligation to absorb losses of the KKR Manager that could be significant to the KKR Manager. KREF accounts for its investment in the KKR Manager using the equity method since KREF is not the primary beneficiary of the KKR Manager (Note 6).

Management determined that its investment in an aggregator vehicle alongside KKR Real Estate Credit Opportunity Partners L.P. ("RECOP") is an interest in a VIE, however KREF is not the primary beneficiary and does not have substantive participating or kick-out rights. Management elected the fair value option for KREF's investment in RECOP. KREF records its share of net asset value in RECOP as “Equity investments in unconsolidated subsidiaries, at fair value” in its Condensed Consolidated Balance Sheets and its share of unrealized gains or losses in "Income from equity investments in unconsolidated subsidiaries" in its Condensed Consolidated Statements of Operations (Note 6).

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management makes subjective estimates to project cash flows KREF expects to receive on its investments in loans and securities as well as the related market discount rates, which significantly impacts the

8

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

interest income, impairments, allowance for loan loss and fair values recorded or disclosed. Actual results could differ from those estimates.

Fair Value — GAAP requires the categorization of the fair value of financial instruments into three broad levels that form a hierarchy based on the transparency of inputs to the valuation.

Level 1 -    Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 -    Inputs are other than quoted prices that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

Level 3 -    Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

KREF follows this hierarchy for its financial instruments. The classifications are based on the lowest level of input that is significant to the fair value measurement.

Valuation Process— The KKR Manager reviews the valuation of Level 3 financial instruments as part of KKR's quarterly process. As of June 30, 2017, KKR’s valuation process for Level 3 measurements, as described below, subjected valuations to the review and oversight of various committees. KKR has a global valuation committee assisted by valuation subcommittees, including a real estate subcommittee that reviews and approves preliminary Level 3 valuations for certain real estate assets including the financial instruments held by KREF. The global valuation committee provides general oversight of the valuation subcommittees. The global valuation committee is responsible for coordinating and implementing KKR’s valuation process to ensure consistency in the application of valuation principles across portfolio investments and between periods. All valuations are subject to approval by the global valuation committee.

Valuation of Consolidated VIEs— Management categorizes the financial assets and liabilities of the CMBS trusts that KREF consolidates as Level 3 assets and liabilities in the fair value hierarchy and has elected the fair value option for financial assets and liabilities of each CMBS trust. Management has adopted the measurement alternative included in Accounting Standards Update ("ASU") No. 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity ("ASU 2014-13"). Pursuant to ASU 2014-13, management measures both the financial assets and financial liabilities of the CMBS trusts consolidated by KREF using the fair value of the financial liabilities, which management considers more observable than the fair value of the financial assets. As a result, KREF presents the CMBS issued by the consolidated trust, but not beneficially owned by KREF's stockholders, as financial liabilities in KREF's condensed consolidated financial statements, measured at their estimated fair value; KREF measures the financial assets as the total estimated fair value of the CMBS issued by the consolidated trust, regardless of whether such CMBS represent interests beneficially owned by KREF's stockholders. Under the measurement alternative prescribed by ASU 2014-13, KREF's "Net Income (Loss)" reflects the economic interests in the consolidated CMBS beneficially owned by KREF's stockholders, presented as "Change in net assets related to consolidated variable interest entities" in the Condensed Consolidated Statements of Operations, which includes applicable (i) changes in the fair value of CMBS beneficially owned by KREF, (ii) interest and servicing fees earned from the CMBS trust and (iii) other residual returns or losses of the CMBS trust, if any (Note 6).

Management categorizes the preferred interest and commercial mezzanine loans held by separate joint ventures, VIEs consolidated by KREF as primary beneficiary, as Level 3 assets in the fair value hierarchy as such assets are illiquid, structured instruments that are specific to the properties and their corresponding operating performance (Note 10).

Other Valuation Matters— For Level 3 financial assets originated, or otherwise acquired, and financial liabilities assumed during the calendar month immediately preceding a quarter end that were conducted in an orderly transaction with an unrelated party, management generally believes that the transaction price provides the most observable indication of fair value given the illiquid nature of these financial instruments, unless management is aware of any circumstances that may cause a material change in the fair value through the remainder of the reporting period. For instance, significant changes to the underlying property or its planned operations may cause material changes in the fair value of commercial mortgage loans acquired, or originated, by KREF.

9

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

KREF’s determination of fair value is based upon the best information available for a given circumstance and may incorporate assumptions that are management’s best estimates after consideration of a variety of internal and external factors. When an independent valuation firm expresses an opinion on the fair value of a financial instrument in the form of a range, management selects a value within the range provided by the independent valuation firm, generally the midpoint, to assess the reasonableness of management’s estimated fair value for that financial instrument.

See Note 10 for additional information regarding the valuation of KREF's financial assets and liabilities.

Sales of Financial Assets and Financing Agreements — KREF will, from time to time, sell loans, securities and other assets as well as finance assets in the form of secured borrowings. In each case, management evaluates whether the transaction constitutes a sale through legal isolation of the transferred financial asset from KREF, the ability of the transferee to pledge or exchange the transferred asset without constraint and the transfer of control of the transferred asset. For transfers that constitute sales, KREF (i) recognizes the financial assets it retains and liabilities it has incurred, if any, (ii) derecognizes the financial assets it has sold, and derecognizes liabilities when extinguished and (iii) recognizes a realized gain, or loss, based upon the excess, or deficient, proceeds received over the carrying value of the transferred asset. KREF does not recognize a gain, or loss, on interests retained, if any, where management elected the fair value option prior to sale.

Balance Sheet Measurement

Cash, Cash Equivalentsand Restricted Cashand Cash Equivalents— KREF considers cash equivalents as highly liquid short-term investments with maturities of 90 days or less when purchased. Substantially all amounts on deposit with major financial institutions exceed insured limits.

As of June 30, 2017 and December 31, 2016, KREF held $0.9 million and $0.2 million, respectively, of restricted cash related to good faith deposits and surety bond deposits. KREF receives good faith deposits from potential borrowers when originating or acquiring commercial mortgage loans, which KREF must return to the borrower in the event of a successful transaction or use to pay the costs it incurs in the event of a broken deal. Management considers these deposits restricted until the good faith deposit is returned to the borrower or management considers the deal broken.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows.

	June 30, 2017		December 31, 2016
Cash and cash equivalents	$	57,013	$	96,189
Restricted cash and cash equivalents	900		157
Total cash, cash equivalents and restricted cash and cash equivalents shown in the Condensed Consolidated Statements of Cash Flows	$	57,913	$	96,346

KREF must also maintain sufficient cash and cash equivalents to satisfy liquidity covenants related to its secured financing agreements. However, such amounts are not restricted from use in KREF's current operations, and KREF does not present these cash and cash equivalents as restricted. As of June 30, 2017 and December 31, 2016, KREF was required to maintain unrestricted cash and cash equivalents of at least $10.0 million and $11.1 million, respectively, to satisfy its liquidity covenants (Note 5).

Commercial Mortgage Loans Held‑For‑Investment and Provision for Loan Losses— Loans that are held‑for‑investment are carried at their aggregate outstanding face amount, net of applicable (i) unamortized origination or acquisition premiums and discounts, (ii) unamortized deferred nonrefundable fees and other direct loan origination costs, (iii) allowance for loan losses and (iv) charge-offs or write-downs of impaired loans. If a loan is determined to be impaired, management writes down the loan through a charge to the provision for loan losses. See "— Expense Recognition — Loan Impairment" for additional discussion regarding management’s determination for loan losses. KREF applies the effective interest method to amortize origination or acquisition premiums and discounts and deferred nonrefundable fees or other direct loan origination costs. Loans for which management elects the fair value option at the time of origination, or acquisition, are carried at fair value on a recurring basis (Note 3).

10

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Commercial Mortgage Loans Held‑For‑Sale— Loans that KREF originates, or acquires, which KREF is unable to hold, or management intends to sell or otherwise dispose of, in the foreseeable future are classified as held‑for‑sale and are carried at the lower of amortized cost or fair value. As of June 30, 2017, KREF did not classify any loans as held-for-sale (Note 3).

Preferred Interest in Joint Venture Held-To-Maturity— KREF invests in preferred equity issued by a limited liability company engaged in commercial real estate activities that KREF accounts for as a debt security. Management intends, and believes KREF has the ability, to hold this investment until maturity. Accordingly, KREF presents this preferred interest in joint venture held‑to‑maturity for which management did not elect the fair value option, at cost, net of unamortized premiums and discounts; KREF applies the effective interest method to amortize applicable premiums and discounts through interest income. In the event that the fair value of the preferred interest in joint venture held‑to‑maturity is less than its amortized cost, management considers whether the unrealized holding loss represents an other-than-temporary impairment ("OTTI"). If management does not expect to recover the carrying value of the preferred interest in joint venture held-to-maturity based on future expected cash flows, an OTTI exists and KREF reduces the carrying value by the impairment amount, recognizes the portion of the impairment related to credit factors in earnings and the portion of the impairment related to other factors in accumulated other comprehensive income. For the six months ended June 30, 2017 and 2016, KREF had not recognized an OTTI related to its investment in preferred interest in joint venture held-to-maturity (Note 4).

Secured Financing Agreements— KREF's secured financing agreements are treated as collateralized financing transactions and consist of floating rate, uncommitted repurchase facilities carried at their contractual amounts, net of unamortized debt issuance costs (Note 5).

Other Assets and Accounts Payable, Accrued Expenses and Other Liabilities— Other assets and liabilities are comprised of the following:

	Other Assets
	June 30,		December 31,
	2017		2016
Deferred debt issuance costs, net(A)	$	2,008	$	448
Prepaid expenses, net	449		22
Other assets	70		30
Due from affiliates	55		360
Deferred stock issuance costs, net	—		1,326
Accounts receivable	—		542
	$	2,582	$	2,728

	Accounts Payable, Accrued Expenses And Other Liabilities
	June 30,		December 31,
	2017		2016
Accrued stock issuance costs	$	3,460	$	60
Accounts payable	2,829		1,538
Accrued expenses	572		558
Income taxes payable	202		141
Deferred revenue	58		—
	$	7,121	$	2,297

(A) Deferred debt issuance costs related to undrawn repurchase facilities are presented net of accumulated amortization of $0.2 million and $0.0 million as of June 30, 2017 and December 31, 2016, respectively.

Special Non-Voting Preferred Stock ("SNVPS") — Equity instruments that are redeemable for cash or other assets are classified as temporary equity if the instrument is redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the issuer. Redeemable equity instruments are initially carried at the fair value of the equity instrument at the issuance date, which is subsequently adjusted at each balance sheet date if the instrument is currently redeemable. The fair value of the instrument is adjusted to reflect the instrument’s redemption amount at each balance sheet date if KREF determines the SNVPS is redeemable or it is probable that the SNVPS will become redeemable. KREF accounted for the SNVPS as redeemable preferred stock since a third party holds a redemption option, exercisable after May 5, 2018, and such redemption is not solely within KREF’s control. As of June 30, 2017, KREF determined that the SNVPS was not currently redeemable or it was not probable that the SNVPS would become redeemable, and did not adjust its value as a result. KREF presents the SNVPS as “Temporary Equity — Redeemable preferred stock” in the accompanying Condensed Consolidated Balance Sheets (Note 7).

11

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Income Recognition

Interest Income— Loans where management expects to collect all contractually required principal and interest payments are considered performing loans. KREF accrues interest income on performing loans based on the outstanding principal amount and contractual terms of the loan. Interest income also includes origination fees and direct loan origination costs for loans that KREF originates, but where management did not elect the fair value option, as a yield adjustment using the effective interest method over the loan term. KREF expenses origination fees and direct loan origination costs for loans acquired, but not originated, by KREF as well as loans for which management elected the fair value option, as incurred. KREF also includes interest income arising from its preferred interest in joint venture held-to-maturity.

Realized Gain (Loss) on Sale of Investments— KREF recognizes the excess, or deficiency, of net proceeds received, less the net carrying value of such investments, as realized gains or losses, respectively. KREF reverses cumulative, unrealized gains or losses previously reported in its Condensed Consolidated Statements of Operations with respect to the investment sold at the time of sale.

Expense Recognition

Loan Impairment— For each loan in KREF's portfolio, management performs a quarterly evaluation of impairment indicators of loans classified as held‑for‑investment using applicable loan, property, market and sponsor information obtained from borrowers, loan servicers and local market participants. Such indicators may include the net present value of the underlying collateral, property operating cash flows, the sponsor’s financial wherewithal and competency in managing the property, macroeconomic trends, and property submarket-specific economic factors. The evaluation of these indicators of impairment requires significant judgment by management to determine whether failure to collect contractual amounts is probable.

If management deems that it is probable that KREF will be unable to collect all amounts owed according to the contractual terms of a loan, impairment of that loan is indicated. If management considers a loan to be impaired, management establishes an allowance for loan losses, through a valuation provision in earnings, which reduces the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Significant judgment is required in determining impairment and in estimating the resulting loss allowance, and actual losses, if any, could materially differ from those estimates.

Management considers loans to be past due when a monthly payment is due and unpaid for 60 days or more. Loans are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of collection. Management may return a loan to accrual status when repayment of principal and interest is reasonably assured under the terms of the restructured loan. As of June 30, 2017, KREF did not hold any loans that management placed on nonaccrual status or otherwise considered past due.

In addition to reviewing for impairment, commercial mortgage loans held-for-investment, management evaluates KREF's commercial mortgage loans to determine if an allowance for loan loss should be established. In conjunction with this review, management assesses the risk factors of each loan, and assigns a risk rating based on a variety of factors, including, without limitation, 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 loan-to-value ratios, debt service coverage ratios, loan structure, real estate and credit market dynamics, and risk of default or principal loss. Based on a five-point scale, KREF's loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:

1 –    Very Low Risk

2 –    Low Risk

3 –    Average Risk

4 –    High Risk/Potential for Loss: A loan that has a risk of realizing a principal loss.

5 –    Impaired/Loss Likely: A loan that has a very high risk of realizing a principal loss or has otherwise incurred a principal loss.

12

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

As of June 30, 2017, the average risk rating of KREF's portfolio was 2.9 (Average Risk), weighted by investment carrying value, with 98.5% of commercial mortgage loans held-for-investment rated 3 (Average Risk) or better by the KKR Manager. As of June 30, 2017 and December 31, 2016, no investments were rated 5 (Impaired/Loss Likely).

As of June 30, 2017 and December 31, 2016, management did not impair any, or establish an allowance for loan loss for, commercial mortgage loans held-for-investment (Note 3).

Interest Expense— Management expenses contractual interest due in accordance with KREF's financing agreements as incurred.

Deferred Debt Issuance Costs— Management capitalizes and amortizes deferred debt facility costs incurred when entering repurchase agreements on a straight-line basis over the expected term of the facility and incremental costs incurred when KREF draws on those facilities using the effective interest method over the expected term of the draw. KREF presents such expensed amounts, as well as deferred amounts written off, as additional interest expense in its Condensed Consolidated Statements of Operations.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The ASU is effective for KREF in the first quarter of 2018. Early adoption is permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance in the ASU. KREF does not expect the adoption of this new guidance to have a material impact on its condensed consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. The standard: (i) requires that certain equity investments be measured at fair value, and modifies the assessment of impairment for certain other equity investments, (ii) changes certain disclosure requirements related to the fair value of financial instruments measured at amortized cost, (iii) changes certain disclosure requirements related to liabilities measured at fair value, (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and (v) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for KREF in the first quarter of 2018. Early adoption is permitted subject to certain application guidance. An entity should apply ASU No. 2016-01 by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. KREF is currently evaluating the new guidance to determine the impact it may have on its condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses. The standard amends the existing credit loss model to reflect a reporting entity's current estimate of all expected credit losses and requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at a net amount expected to be collected through deduction of an allowance for credit losses from the amortized cost basis of the financial asset(s). ASU No. 2016-13 is effective for KREF in the first quarter of 2020. Early adoption is permitted beginning in the first quarter of 2019. KREF is currently evaluating the new guidance to determine the impact it may have on its condensed consolidated financial statements.

The FASB has recently issued or discussed a number of proposed standards on such topics as consolidation, financial statement presentation, financial instruments, restricted cash and hedging. Some of the proposed changes are significant and could have a material impact on KREF’s reporting. KREF has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.

13

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 3. Commercial Mortgage Loans

KREF recognizes its investments in commercial mortgage loans based on management's intent, and KREF's ability, to hold those investments through their contractual maturity. Management classifies those loans that management does not intend to sell in the foreseeable future, and KREF is able to hold until maturity, as held-for-investment. See Note 2 for additional information regarding KREF's accounting for its investments in commercial mortgage loans. The following table summarizes KREF's investments in commercial mortgage loans as of June 30, 2017 and December 31, 2016:

						Weighted Average
Loan Type	Outstanding Face Amount		Carrying Value		Loan Count	Floating Rate Loan %(A)		Coupon(A)		Yield(B)		Life (Years)(B)(C)
June 30, 2017
Loans held-for-investment
Senior loans	$	968,374	$	960,094	11	100.0	%	5.7	%	5.7	%	3.9
Mezzanine loans(D)	96,227		95,989		10	72.7		10.9		10.9		4.0
	$	1,064,601	$	1,056,083	21	97.5	%	6.1	%	6.2	%	3.9
December 31, 2016
Loans held-for-investment
Senior loans	$	625,638	$	618,779	7	100.0	%	4.4	%	6.5	%	4.0
Mezzanine loans	55,932		55,817		3	100.0		9.5		11.5		2.9
	681,570		674,596		10	100.0		4.8		6.9		3.9
Loans held-for-sale
Mezzanine loans	26,230		26,230		6	—		10.6		11.3		6.5
	26,230		26,230		6	—		10.6		11.3		6.5
	$	707,800	$	700,826	16	96.3	%	5.0	%	7.1	%	4.0

(A) Average weighted by outstanding face amount of loan. Weighted average coupon assumes applicable floating benchmark rates as of June 30, 2017.

(B) Average weighted by carrying value of loan. Weighted average yield assumes applicable floating benchmark rates as of June 30, 2017.

(C) The weighted average life of each loan is based on the expected timing of the receipt of contractual cash flows.

(D) A joint venture consolidated as a VIE in which a third-party owns a 5.0% redeemable noncontrolling interest (Note 6) holds (i) seven commercial mezzanine loans, held-for-investment, with a $61.2 million outstanding face amount and carrying value as of June 30, 2017.

14

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Concentration of Credit Risk — The following tables present the geographies and property types of collateral underlying KREF's commercial mortgage loans as a percentage of the loans' carrying values, net of noncontrolling interests:

Loans Held-for-Investment

	June 30, 2017		December 31, 2016			June 30, 2017		December 31, 2016
Geography					Collateral Property Type
New York	26.3	%	25.9	%	Office	51.4	%	39.2	%
California	26.1		20.3		Retail	24.5		37.2
Oregon	11.3		17.6		Multifamily	13.9		8.8
Georgia	10.4		9.8		Industrial	6.3		9.8
Washington D.C.	7.2		10.6		Hospitality	3.9		5.0
Texas	5.9		—		Total	100.0	%	100.0	%
Tennessee	5.0		7.9
Florida	3.9		5.1
Illinois	1.7		2.4
Colorado	1.5		—
South Carolina	0.1		0.2
Alabama	—		0.2
Other U.S.	0.6		—
Total	100.0	%	100.0	%

Loans Held-for-Sale

	June 30, 2017		December 31, 2016			June 30, 2017		December 31, 2016
Geography					Collateral Property Type
Florida	—	%	30.5	%	Multifamily	—	%	32.2	%
California	—		21.2		Hospitality	—		30.5
Michigan	—		16.3		Retail	—		21.0
Texas	—		11.1		Office	—		16.3
Iowa	—		8.9		Total	—	%	100.0	%
Illinois	—		5.9
Oklahoma	—		3.9
Missouri	—		2.2
Total	—	%	100.0	%

Activities — Activities related to the carrying value of KREF’s commercial mortgage loans were as follows:

	Held-for-Investment			Held-for-Sale			Total
Balance at December 31, 2016	$	674,596		$	26,230		$	700,826
Purchases and originations, net(A)	416,631			—			416,631
Transfer to held-for-investment(B)	26,230			(26,230		)	—
Proceeds from principal repayments	(1,685		)	—			(1,685		)
Proceeds from principal repaid upon loan sale	(60,991		)	—			(60,991		)
Accretion of loan discount and other amortization, net(C)	1,302			—			1,302
Balance at June 30, 2017	$	1,056,083		$	—		$	1,056,083

(A) Net of applicable premiums, discounts and deferred loan origination costs.

(B) Non-cash transfer of commercial mortgage loans, as management no longer intends to sell, and has the ability to hold-to-maturity, the loans originally placed for sale. 

(C) Includes amortization and accretion of applicable premiums, discounts and deferred loan origination costs.

15

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 4. Preferred Interest in Joint Venture

During 2015, KREF invested in a joint venture that entered into a lending agreement with an entity engaged in the management of a multi-family tower. The consolidated joint venture classifies that lending agreement as a debt security held-to-maturity. See Note 2 for additional information regarding KREF's accounting for the joint venture's investment treated as a debt security under GAAP. The following table summarizes the joint venture's investment as of June 30, 2017 and December 31, 2016:

	June 30, 2017														December 31, 2016
					Gross Unrealized Holding
Investment	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses		Total OTTI		Net Carrying Amount		Fair Value		Net Carrying Amount
Preferred interest in joint venture, held-to-maturity(A)	$	37,090	$	37,090	$	259	$	—	$	—	$	37,090	$	37,349	$	36,445
	$	37,090	$	37,090	$	259	$	—	$	—	$	37,090	$	37,349	$	36,445

(A) The preferred interest has a preferred return between 3.5% fixed accrual rate and LIBOR plus 7.0%, subject to a LIBOR floor of 1.0%, and initially matures in February 2020. The borrower may extend the maturity to February 2022, subject to certain conditions and rate increases of fixed accrual rate of 4.0% and LIBOR plus 8.0% and LIBOR plus 9.0% in each extension year.

16

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

Note 5. Debt

The following table summarizes KREF's secured financing agreements and other consolidated debt obligations in place as of June 30, 2017 and December 31, 2016:

	June 30, 2017																			December 31, 2016
	Facility												Collateral							Facility
										Weighted Average(B)
	Month Issued	Outstanding Face Amount		Carrying Value(A)			Maximum Facility Size		Final Stated Maturity	Funding Cost		Life (Years)	Outstanding Face Amount		Amortized Cost Basis		Carrying Value		Weighted Average Life (Years)(C)	Carrying Value(A)
Secured Financing Agreements(D)
Master Repurchase Agreements
Wells Fargo(E)	Oct 2015	$	143,150	$	139,909		$	750,000	Apr 2022	3.4	%	1.7	$	612,568	$	607,934	$	607,934	4.2	$	262,883
Morgan Stanley(F)	Dec 2016	40,000		38,375			500,000		Dec 2020	3.8		2.4	355,806		352,160		352,160		4.4	177,764
JP Morgan(G)	Oct 2015	—		(1,086		)	250,000		Oct 2018	0.4		0.0	n.a.		n.a.		n.a.		n.a.	(1,503		)
Goldman Sachs(H)	Sep 2016	—		—			250,000		Sep 2019	0.2		0.0	n.a.		n.a.		n.a.		n.a.	—
Revolving Credit Agreement
Barclays(I)	May 2017	—		—			75,000		May 2020	1.9		0.0	n.a.		n.a.		n.a.		n.a.	n.a.
		183,150		177,198			1,825,000			3.5	%	2.1								439,144
VIE Liabilities
CMBS(J)	Various	5,024,443		5,351,985			n.a.		Mar 2048 to Feb 2049	4.3	%	7.7	5,333,602		n.a.		5,467,095		7.7	5,313,574
		5,024,443		5,351,985			n.a.			4.3		7.7								5,313,574
Total / Weighted Average		$	5,207,593	$	5,529,183		$	1,825,000		4.3	%	7.5								$	5,752,718

(A) Net of $6.0 million and $6.4 million unamortized debt issuance costs as of June 30, 2017 and December 31, 2016, respectively.

(B) Average weighted by the outstanding face amount of borrowings.

(C) Average based on the fully extended loan maturity, weighted by the outstanding face amount of the collateral.

(D) Borrowings under these repurchase agreements are collateralized by senior loans, held-for-investment, and bear interest equal to the sum of (i) a floating rate index, subject to a floor of no less than zero, equal to one-month LIBOR, or an index approximating LIBOR, and (ii) a margin, based on the collateral. As of June 30, 2017 and December 31, 2016, the percentage of the outstanding face amount of the collateral sold and not borrowed under these repurchase agreements, or average "haircut" weighted by outstanding face amount of collateral, was 81.1% and 28.8%, respectively (or 25.6% and 25.9%, respectively, if KREF had borrowed the maximum amount approved by its repurchase agreement counterparties as of such dates).

(E) In April 2017, KREF and Wells Fargo Bank, National Association ("Wells Fargo") amended the repurchase agreement to extend the facility maturity date and to increase the maximum facility size from $500.0 million to $750.0 million. The current stated maturity of the facility is April 2020, which does not reflect two, twelve-month facility term extensions available to KREF, which is contingent upon certain covenants and thresholds. As of June 30, 2017, the collateral-based margin was between 1.80% and 2.15%.

(F) In December 2016, KREF entered into a $500.0 million repurchase facility with Morgan Stanley Bank, N.A. ("Morgan Stanley"). The current stated maturity of the facility is December 2019, which does not reflect one, twelve-month facility term extension available to KREF, which is contingent upon certain covenants and thresholds and, even if such covenants and thresholds are satisfied, is at the sole discretion of Morgan Stanley. As of June 30, 2017, the collateral-based margin was between 2.25% and 2.45%.

(G) The current stated maturity of the facility is October 2018, which does not reflect facility term extensions available to KREF at the discretion of JPMorgan Chase Bank, National Association ("JP Morgan"). In December 2016, KREF used the $500.0 million repurchase facility with Morgan Stanley to repurchase all of the senior loans financed by the master repurchase facility with JP Morgan. The negative carrying value reflects unamortized debt issuance costs presented in KREF's Condensed Consolidated Balance Sheets as a direct deduction from the carrying amount of the recognized debt liability in accordance with ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.

(H) In September 2016, KREF entered into a $250.0 million repurchase facility with Goldman Sachs Bank USA ("Goldman Sachs"). The facility has a revolving period of one year, and a three-year term on a per-asset basis as those assets are pledged to the facility. As of June 30, 2017, the carrying value excluded $0.4 million unamortized debt issuance costs presented as "Assets — Other assets" in KREF's Condensed Consolidated Balance Sheets.

(I) In May 2017, KREF entered into a $75.0 million corporate secured revolving credit facility administered by Barclays Bank PLC ("Barclays "). The current stated maturity of the facility is May 2019, which does not reflect one, twelve-month facility term extension available to KREF at the discretion of Barclays. Borrowings under the facility bear interest at a per annum rate equal to the sum of (i) a floating rate index and (ii) a fixed margin. Amounts borrowed under this facility are 100% recourse to KREF. As of June 30, 2017, the carrying value excluded $1.4 million unamortized debt issuance costs presented as "Assets — Other assets" in KREF's Condensed Consolidated Balance Sheets.

(J) Facility amounts represent CMBS issued by five trusts that KREF consolidates, but that are not beneficially owned by KREF's stockholders. The facility and collateral carrying amounts included $19.2 million accrued interest payable and $20.3 million accrued interest receivable as of June 30, 2017. As of December 31, 2016, the facility and collateral carrying amounts included $18.8 million accrued interest payable and $19.9 million accrued interest receivable. The final stated maturity date represents the rated final distribution date of CMBS issued by trusts that KREF consolidates, but that are not beneficially owned by KREF's stockholders.

17

KKR Real Estate Finance Trust Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(dollars in tables in thousands, except per share amounts)

As of June 30, 2017 and December 31, 2016, KREF had outstanding repurchase agreements where the amount at risk with any individual counterparty, or group of related counterparties, exceeded 10.0% of KREF’s stockholders' equity. The amount at risk under repurchase agreements is the net counterparty exposure, defined as the excess of the carrying amount (or market value, if higher than the carrying amount) of the assets sold under agreement to repurchase, including accrued interest plus any cash or other assets on deposit to secure the repurchase obligation, over the amount of the repurchase liability, adjusted for accrued interest. The following table summarizes certain characteristics of KREF's repurchase agreements where the amount at risk with any individual counterparty, or group of related counterparties, exceeded 10.0% of KREF’s stockholders' equity as of June 30, 2017 and December 31, 2016:

	Outstanding Face Amount		Net Counterparty Exposure		Percent of Stockholders' Equity		Weighted Average Life (Years)(A)
June 30, 2017
Wells Fargo Bank, National Association	$	143,150	$	472,063	44.3	%	1.7
Morgan Stanley Bank, N.A.	40,000		316,948		29.8		2.4
Total / Weighted Average	$	183,150	$	789,011	74.1	%	2.1
December 31, 2016
Wells Fargo, National Association	$	265,650	$	107,664	21.6	%	2.0
Morgan Stanley Bank, N.A.	179,932		65,533		13.2		3.0
Total / Weighted Average	$	445,582	$	173,197	34.8