Tuesday, 25 October 2011

KBS REIT Seen Postponing Liquidity Event

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Commercial Real Estate Direct Staff Report

Continued market volatility is likely to prompt KBS REIT Inc. to postpone a decision to list its shares or sell its assets.

The REIT, whose shares do not trade on any exchange, has raised nearly $1.9 billion of capital from investors and has leveraged that to make $3.1 billion of investments in 63 office, industrial and research buildings that are 82 percent leased as well as interests in a variety of debt instruments, including mezzanine loans.

The company was launched in 2005 by KBS Realty Advisors. And it made the bulk of its investments before 2008.

Its goal was to have a liquidity event - a sale of assets, merger or listing of its shares - in 2012. Such a plan is common in the non-traded REIT world, where investors give up a substantial amount of liquidity, but receive relatively healthy dividends.

But in a recent regulatory filing, the REIT said, "the continuing impact of the disruptions in the financial markets" on the value of investments it has made would make it "increasingly likely" that the REIT would put off its liquidity event "in order to improve the prospects for investors to have their capital returned and to realize a profit on their investment, likely through sales of individual or pooled assets."

As of the end of last year, KBS' shares were valued by the company at $7.32 each. That compares to the $10 that shareholders paid for them during the company's stock offering.

Among its investments was a $500 million mezzanine loan provided to Gramercy Capital Corp. It bought the loan for $496 million from Goldman Sachs and Citigroup, which financed the sale through repurchase agreements that remain in place. Those agreements require KBS to pay down the debt, restricting its cash flow and operations through April 2013.

The loan to Gramercy defaulted earlier this year when Gramercy couldn't refinance it when it came due. KBS last month started taking over some 815 properties, including 524 bank branches and 291 office buildings that Gramercy had assumed through its 2007 acquisition of American Financial Realty Trust in a $3.4 billion deal. As part of that transaction, KBS is assuming $1.4 billion of debt on the properties.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.

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