The liquidation strategy promoted by the Board of KBS Growth & Income REIT in August 2020 through asset sales, which they were hoping to present to shareholders for a vote within six months, seems to have met an unlikely end as a result of a ‘significant decrease’ as termed in the letter sent to shareholders advising the change in plans and the rationale thereof, in the Net Asset Value (NAV) per share. KBS REIT liquidation plan has now been halted ‘until market conditions improve’ per the same letter.
This is causing a huge problem for many investors that want to sell their KBS REIT shares. For most, the only option is to sell the shares on the secondary markets where they will be paid pennies on the dollar. There are multiple lawsuits from investors against financial advisors and broker-dealers that sold KBS REITs.
The REIT’s letter to the shareholders states, “As a result of the current adverse market conditions caused by the civil unrest and disruption in Portland and Chicago, where several of the company’s properties are located, and the ongoing uncertainty and business disruptions related to the COVID-19 pandemic, the board believes it is in the best interest of stockholders to delay any proposal to liquidate the company.”
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For the record, KBS is a non-traded publicly registered REIT. $76.8 million had been raised by it in June 2015 in its initial private offering that was launched in June 2015 and closed in April 2016. This was followed by an initial public offering between April 2016 and June 2017 that raised $3.9 million. Thereafter, its second private offering launched in October 2017 had raised $5.4 million till September 2019, via KBSDirect.com after which, in December 2019, the Board suspended this private offering as part of its strategic plans.
After clocking an NAV, or valuation, of $8.43 per share end of 2019, it has been a downward spiral for KBS, ending at an NAV of $4.90 in December 2020.
The NAV estimation is based on a valuation (estimation) of the REIT’s assets from which the estimated value of its liabilities is subtracted, and the resultant spread equally over the number of shares. For 2020, all figures used are as of 30th September, 2020. A third-party valuer, Duff & Phelps, supported the process.
This is how the property valuations moved between 2019 and 2020, and the reasons for the same as explained to shareholders in the letter:
|The Offices in Houston, Texas||$57 million||$48.5 million||Largest tenant marked 84,000 square feet, out of 136,000 for sublease. Impact on value owing to projected cost and downtime at the time of backfilling in 2025 and later.Covid-19 impact on Oil and Gas, resulting in increased vacancies, Houston is the energy capital of the world. Further stress on the property caused by the ‘downward shock’ on commodity prices.|
|Commonwealth Building in Portland, Oregon||$84.6 million||$65.3 million||Racked by months of social unrest, with frequent rioting leading to damage to businesses and properties in business districts, many downtown businesses in Portland have listed their properties for sublease with a view to reducing the burn in the short term. Some have relocated out while still others have resorted to telecommuting.Though currently 87% leased, occupancy could further decline to 60% by the end of 2021. To make matters worse, rentals for the occupied portions will be lower owing to higher vacancies.|
|213 West Institute in Chicago||$41.9 million||$35.9 million||On average, rental realization rates have dropped from $33 per square foot to $31. Additionally, the take-off of leased properties is slow owing to the Covid-19 overhang of lockdowns and restrictions. Five current tenants, adding up to more than 21000 square feet of space, have given notices that they will vacate at the end of their lease terms.|
KBS reiterated its inability to raise “substantial” funds to shareholders as they were “impacted early on by regulatory changes, and the inability to significantly improve its size and scale in order to help offset the costs of operating a non-traded REIT.”
Apart from three properties, as of September 30, 2020, the company had also made an investment in an unconsolidated joint venture. $147 million was their total asset valuation for the third quarter of 2020.
Looking forward to 2021, the company plans to focus on lease renewals and leasing out vacant spaces, in order to improve cash flows. In addition, they hope to continue with value-enhancing capital projects that facilitate the maintenance of a high occupancy level. Of course, they will continue to evaluate the timing for the liquidation.