21
|
| | | | |
| | |
| | September 30, 2017 |
Assets: | | |
Construction in progress | | $ | 73,400 |
|
Cash and cash equivalents | | 1 |
|
Other assets | | 2,591 |
|
Total assets | | $ | 75,992 |
|
Liabilities and equity: | | |
Accounts payable | | $ | 9,615 |
|
Notes payable, net | | 23,004 |
|
Other liabilities | | 258 |
|
Members’ capital | | 43,115 |
|
Total liabilities and equity | | $ | 75,992 |
|
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
6. INVESTMENT IN AN UNCONSOLIDATED ENTITY (CONTINUED)
AsThe SREIT reports its financial statements in accordance with the International Financial Reporting Standards and uses the US dollar as its reporting currency, as such, the Company must make certain adjustments to the SREIT’s financial information to reflect U.S. GAAP before applying the equity method of accounting. Summarized financial information for the SREIT in accordance with U.S. GAAP follows (in thousands):
| | | | | | | | | | | | | | |
| | As of |
| | September 30, 2021 | | December 31, 2020 |
Real estate, net | | $ | 1,521,812 | | | $ | 1,318,527 | |
Total assets | | 1,574,268 | | | 1,383,372 | |
Notes payable, net | | 642,466 | | | 480,352 | |
Total liabilities | | 709,475 | | | 546,486 | |
Total equity | | 864,793 | | | 836,886 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Total revenues | $ | 40,603 | | | $ | 36,623 | | | $ | 114,922 | | | $ | 108,993 | |
Net income (loss) | 2,179 | | | 2,144 | | | 14,446 | | | (12,830) | |
Company’s share of net income (loss) (1) | $ | 540 | | | $ | 588 | | | $ | 3,890 | | | $ | (3,504) | |
_____________________
(1) The Company’s share of net income for the three and nine months ended September 30, 2017 and December 31, 2016,2021 excludes the $1.1 million gain recorded to reflect the net effect to the Company’s notes payable consistedinvestment as a result of the following (dollarsnet proceeds raised by the SREIT in thousands):a private offering in July 2021, which was classified in equity in income from an unconsolidated entity on the consolidated statement of operations. The Company’s share of net loss for the nine months ended September 30, 2020 excludes the $2.1 million gain recorded to reflect the net effect to the Company’s investment as a result of the net proceeds raised by the SREIT in a private offering in February 2020, which was classified in equity in loss from an unconsolidated entity on the consolidated statement of operations.
|
| | | | | | | | | | | | | | | | |
| | Book Value as of September 30, 2017 | | Book Value as of December 31, 2016 | | Contractual Interest Rate as of September 30, 2017 (1) | | Effective Interest Rate as of September 30, 2017 (1) | | Payment Type | | Maturity Date (2) |
Town Center Mortgage Loan | | $ | 75,000 |
| | $ | 75,000 |
| | One-month LIBOR + 1.85% | | 2.87% | | Interest Only | | 03/27/2018 (3) |
Portfolio Loan (5) | | 163,460 |
| | 127,500 |
| | One-month LIBOR + 1.90% | | 3.14% | | Interest Only | | 06/01/2019 |
RBC Plaza Mortgage Loan | | 75,434 |
| | 75,930 |
| | One-month LIBOR + 1.80% | | 3.04% | | Principal & Interest | | 02/01/2018 (3) |
National Office Portfolio Mortgage Loan (6) | | 170,602 |
| | 170,602 |
| | One-month LIBOR + 1.50% | | 2.84% | | Interest Only | | 07/01/2018 (3) |
500 West Madison Mortgage Loan (7) | | 235,000 |
| | 215,000 |
| | One-month LIBOR + 1.65% | | 3.13% | | Interest Only | | 12/16/2018 (3) |
222 Main Mortgage Loan | | 99,946 |
| | 101,343 |
| | 3.97% | | 3.97% | | Principal & Interest | | 03/01/2021 |
Anchor Centre Mortgage Loan | | 50,000 |
| | 50,000 |
| | One-month LIBOR + 1.50% | | 3.18% | | Interest Only | | 06/01/2018 |
171 17th Street Mortgage Loan | | 85,479 |
| | 83,778 |
| | One-month LIBOR + 1.45% | | 2.83% | | Interest Only(4) | | 09/01/2018 |
Reston Square Mortgage Loan | | 29,800 |
| | 23,840 |
| | One-month LIBOR + 1.50% | | 3.63% | | Interest Only | | 02/01/2018 |
Ten Almaden Mortgage Loan | | 66,555 |
| | 65,853 |
| | One-month LIBOR + 1.65% | | 3.43% | | Interest Only | | 01/01/2018 (3) |
Towers at Emeryville Mortgage Loan (8) | | 153,524 |
| | 145,379 |
| | One-month LIBOR + 1.75% | | 3.96% | | Interest Only | | 01/15/2018 (3) |
101 South Hanley Mortgage Loan | | 40,557 |
| | 37,502 |
| | One-month LIBOR + 1.55% | | 3.75% | | Interest Only(4) | | 01/01/2020 |
3003 Washington Boulevard Mortgage Loan | | 90,378 |
| | 90,378 |
| | One-month LIBOR + 1.55% | | 3.54% | | Interest Only | | 02/01/2020 |
Rocklin Corporate Center Mortgage Loan | | 21,689 |
| | 20,868 |
| | One-month LIBOR + 1.50% | | 2.74% | | Interest Only | | 06/05/2018 |
201 17th Street Mortgage Loan | | 64,428 |
| | 58,063 |
| | One-month LIBOR + 1.40% | | 3.32% | | Interest Only | | 08/01/2018 |
CrossPoint at Valley Forge Mortgage Loan | | 51,000 |
| | 51,000 |
| | One-month LIBOR + 1.50% | | 3.33% | | Interest Only(4) | | 09/01/2022 |
The Almaden Mortgage Loan | | 93,000 |
| | 93,000 |
| | 4.20% | | 4.20% | | Interest Only | | 01/01/2022 |
Promenade I & II at Eilan Mortgage Loan | | 37,300 |
| | 37,300 |
| | One-month LIBOR + 1.75% | | 3.57% | | Interest Only | | 10/01/2022 |
515 Congress Mortgage Loan | | 68,381 |
| | 67,500 |
| | One-month LIBOR + 1.70% | | 2.94% | | Interest Only | | 11/01/2020 |
201 Spear Street Mortgage Loan | | 100,000 |
| | 100,000 |
| | One-month LIBOR + 1.66% | | 2.90% | | Interest Only | | 01/01/2019 |
Carillon Mortgage Loan | | 90,248 |
| | 76,440 |
| | One-month LIBOR + 1.65% | | 3.25% | | Interest Only | | 02/01/2020 |
3001 Washington Boulevard Mortgage Loan | | 28,404 |
| | 27,129 |
| | One-month LIBOR + 1.60% | | 2.84% | | Interest Only | | 02/01/2019 |
Hardware Village Loan Facility (9) | | 8,712 |
| | — |
| | One-month LIBOR + 3.25% | | 4.49% | | Interest Only | | 02/23/2020 |
Total notes payable principal outstanding | | 1,898,897 |
| | 1,793,405 |
| | | | | | | | |
Deferred financing costs, net | | (7,455 | ) | | (9,937 | ) | | | | | | | | |
Total notes payable, net | | $ | 1,891,442 |
| | $ | 1,783,468 |
| | | | | | | | |
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
7. NOTES PAYABLE
As of September 30, 2021 and December 31, 2020, the Company’s notes payable consisted of the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Book Value as of September 30, 2021 | | Book Value as of December 31, 2020 | | Contractual Interest Rate as of September 30, 2021 (1) | | Effective Interest Rate as of September 30, 2021 (1) | | Payment Type | | Maturity Date (2) |
The Almaden Mortgage Loan (3) | | $ | 123,000 | | | $ | 123,000 | | | 3.65% | | 3.65% | | Interest Only | | 12/01/2023 |
201 Spear Street Mortgage Loan | | 125,000 | | | 125,000 | | | One-month LIBOR + 1.45% | | 1.53% | | Interest Only | | 01/05/2024 |
Carillon Mortgage Loan (4) | | 105,800 | | | 88,800 | | | One-month LIBOR +1.40% | | 1.48% | | Interest Only | | 04/11/2024 |
Modified Portfolio Loan Facility (5) | | 496,950 | | | 472,950 | | | One-month LIBOR + 1.80% | | 1.88% | | Interest Only | | 11/03/2021 |
Modified Portfolio Revolving Loan Facility (6) | | 286,840 | | | 162,500 | | | One-month LIBOR + 1.50% | | 1.58% | | Interest Only | | 03/01/2023 |
3001 & 3003 Washington Mortgage Loan | | 143,245 | | | 143,245 | | | One-month LIBOR + 1.45% | | 1.53% | | Interest Only (7) | | 06/01/2024 |
Accenture Tower Revolving Loan (8) | | 281,250 | | | 281,250 | | | One-month LIBOR + 2.25% | | 2.33% | | Interest Only | | 11/02/2023 |
Unsecured Credit Facility (9) | | 37,500 | | | — | | | One-month LIBOR + 2.10% | | 2.18% | | Interest only | | 07/30/2023 |
Total notes payable principal outstanding | | $ | 1,599,585 | | | $ | 1,396,745 | | | | | | | | | |
Deferred financing costs, net | | (5,763) | | | (8,380) | | | | | | | | | |
Total Notes Payable, net | | $ | 1,593,822 | | | $ | 1,388,365 | | | | | | | | | |
_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2017.2021. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2017 (consisting2021, consisting of the contractual interest rate and the effect of interest rate swaps and caps, if applicable), using interest rate indices as of September 30, 2017,2021, where applicable. For further information regarding the Company'sCompany’s derivative instruments, see Note 7,8, “Derivative Instruments.”
(2) Represents the maturity date as of September 30, 2017;2021; subject to certain conditions, the maturity dates of certain loans may be extended beyond the dates shown.
(3)On November 3, 2017, As of September 30, 2021, The Almaden Mortgage Loan has 2 12-month extension options, subject to certain terms, conditions and fees as described in the loan documents. The Almaden Mortgage Loan bears interest at a fixed rate of 3.65% for the initial term of the loan and a floating rate of 350 basis points over one-month LIBOR during the extension options, subject to a minimum interest rate of 3.65%.
(4) As of September 30, 2021, the face amount of the Carillon Mortgage Loan was $111.0 million, of which $88.8 million is term debt and $22.2 million is revolving debt. As of September 30, 2021, the outstanding balance under the loan consisted of $88.8 million of term debt and $17.0 million of revolving debt. As of September 30, 2021, an additional $5.2 million of revolving debt remained available for future disbursements, subject to certain terms and conditions set forth in the loan documents.
(5) As of September 30, 2021, the Modified Portfolio Loan Facility was secured by RBC Plaza, Preston Commons, Sterling Plaza, Towers at Emeryville, Ten Almaden and Town Center. As of September 30, 2021, the face amount of the Modified Portfolio Loan Facility was $630.6 million, of which $472.9 million is term debt and $157.7 million is revolving debt. As of September 30, 2021, the outstanding balance under the loan consisted of $472.9 million of term debt and $24.0 million of revolving debt. As of September 30, 2021, an additional $133.7 million of revolving debt remained available for future disbursements, subject to certain terms and conditions contained in the loan documents. The Modified Portfolio Loan Facility has 1 additional 12-month extension option, subject to certain terms and conditions as described in the loan documents. Subsequent to September 30, 2021, the Company paid offrefinanced the outstanding balances under these loans using proceeds from theModified Portfolio Loan Facility. See Note 11,“Subsequent12, “Subsequent Events - Financing Subsequent toAmended and Restated Portfolio Loan Facility”.
(6) As of September 30, 20172021, the Modified Portfolio Revolving Loan Facility was secured by 515 Congress, Domain Gateway, the McEwen Building, Gateway Tech Center and 201 17th Street. As of September 30, 2021, the face amount of the Modified Portfolio Revolving Loan Facility was $325.0 million, of which $162.5 million is term debt and $162.5 million is revolving debt. As of September 30, 2021, the outstanding balance under the loan consisted of $162.5 million of term debt and $124.3 million of revolving debt. As of September 30, 2021, an additional $38.2 million of revolving debt remained available upon satisfaction of certain loan conditions set forth in the loan documents. The Modified Portfolio Revolving Loan Facility has 2 12-month extension options, subject to certain terms, conditions and fees as described in the loan documents. On November 2, 2021, in connection with the disposition of Domain Gateway, the Company repaid $69.7 million of principal due under this loan and Domain Gateway was released as security from the Modified Portfolio Revolving Loan Facility. See Note 12, “Subsequent Events - Portfolio Loan Facility.”Disposition of Domain Gateway”
(4)(7)Represents the payment type required under the loan as of September 30, 2017.2021. Certain future monthly payments due under these loansthe loan also include amortizing principal payments. For more information on the Company’s contractual obligations under its notes payable, see the five-year maturity table below.
(5)(8) As of September 30, 2017, the Portfolio Loan was secured by Domain Gateway, the McEwen Building, Gateway Tech Center, the Tower on Lake Carolyn, Park Place Village and Village Center Station. The face amount of the Portfolio Loan is $255.0 million, of which $127.5 million is term debt and $127.5 million is revolving debt. As of September 30, 2017,2021, the outstanding balance under the loanAccenture Tower Revolving Loan consisted of $127.5$281.3 million of term debt and $36.0an additional $93.7 million of revolving debt. As of September 30, 2017, an additional $90.5 million of revolving debt remained available for immediate future disbursements, subject to certain conditions set forth in the loan agreement. The remaining $1.0 million of revolving debt is available for future disbursements upon the Company meeting certain financial coverage ratios and subject to certain conditions set forth in the loan agreement. During the remaining term of the Portfolio Loan, the Company has an option, which may be exercised up to two times, to increase the loan amount to a maximum of $350.0 million, of which 50% would be term debt and 50% would be revolving debt, with the addition of one or more properties to secure the Portfolio Loan, subject to certain conditions contained in the loan documents.
(6) The National Office Portfolio Mortgage Loan was secured by One Washingtonian Center, Preston Commons and Sterling Plaza. See footnote 3 above.
(7) As of September 30, 2017, $235.0 million of term debt was outstanding and $20.0 million remained available for future disbursements, subject to certain terms and conditions contained in the loan documents. See footnote 3 above.
(8) As of September 30, 2017, $153.5 million had been disbursed to2021, the Company and $21.5 million remained available for future disbursements,Accenture Tower Revolving Loan has 2 12-month extension options, subject to certain terms and conditions contained in the loan documents.
(9) See footnote 3 above.
(9) As of September 30, 2017, $8.7 million had been disbursed and $65.3 million remained available for future disbursements, subject to certain conditions contained in the loan documents.
As of September 30, 2017, the Company’s deferred financing costs were $7.6 million, net of amortization, of which $7.5 million was included in notes payable, net, and $0.1 million was included in prepaid expenses and other assets on the accompanying consolidated balance sheets. As of December 31, 2016, the Company’s deferred financing costs were $10.0 million, net of amortization, of which $9.9 million was included in notes payable, net, and $0.1 million was included in prepaid expenses and other assets on the accompanying consolidated balance sheets.
During the three and nine months ended September 30, 2017, the Company incurred $15.5 million and $45.3 million of interest expense, respectively. During the three and nine months ended September 30, 2016, the Company incurred $10.0 million and $53.9 million of interest expense, respectively. Included in interest expense was: (i) the amortization of deferred financing costs of $1.3 million and $3.8 million for three and nine months ended September 30, 2017 and $1.3 million and $3.8 million for the three and nine months ended September 30, 2016, respectively, (ii) the capitalization of interest to construction in progress, which decreased interest expense by $0.7 million and $1.5 million for the three and nine months ended September 30, 2017 and $0.1 million and $0.1 million for the three and nine months ended September 30, 2016, respectively, (iii) the interest expense (including gains and losses) incurred as a result of the Company’s derivative instruments, which increased interest expense by $0.4 million and $3.1 million for the three and nine months ended September 30, 2017, respectively, and $20.5 million for the nine months ended September 30, 2016, and decreased interest expense by $1.3 million for the three months ended September 30, 2016. As of September 30, 2017 and December 31, 2016, $5.3 million and $4.3 million of interest expense were payable, respectively.
below, “- Recent Financing Transaction - Unsecured Credit Facility.”
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
7. NOTES PAYABLE (CONTINUED)
During the three and nine months ended September 30, 2021, the Company incurred $9.7 million and $25.4 million of interest expense, respectively. During the three and nine months ended September 30, 2020, the Company incurred $8.9 million and $71.5 million of interest expense, respectively. Included in interest expense was: (i) the amortization of deferred financing costs of $1.0 million and $3.0 million for the three and nine months ended September 30, 2021, respectively, and $1.1 million and $3.2 million for the three and nine months ended September 30, 2020, respectively, and (ii) interest expense (including gains and losses) incurred as a result of the Company’s derivative instruments, which increased interest expense by $0.7 million for the three months ended September 30, 2021 and decreased interest expense by $0.3 million for the nine months ended September 30, 2021, respectively, and increased interest expense by $0.3 million and $38.9 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, $4.1 million and $4.0 million of interest expense were payable, respectively.
The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of September 30, 20172021 (in thousands):
| | | | | | | | |
October 1, 2021 through December 31, 2021 | | $ | 496,950 | |
2022 | | — | |
2023 | | 728,590 | |
2024 | | 374,045 | |
2025 | | — | |
Thereafter | | — | |
| | $ | 1,599,585 | |
|
| | | | |
October 1, 2017 through December 31, 2017 | | $ | 874 |
|
2018 | | 1,029,540 |
|
2019 | | 294,445 |
|
2020 | | 299,491 |
|
2021 | | 93,957 |
|
Thereafter | | 180,590 |
|
| | $ | 1,898,897 |
|
The Company’s notes payable contain financial debt covenants. As of September 30, 2017,2021, the Company was in compliance with these debt covenants.
Recent Financing Transaction
Unsecured Credit Facility
On July 30, 2021, the Company, through KBS REIT Properties III, an indirect wholly owned subsidiary, entered into a two-year unsecured credit facility with two unaffiliated lenders for a committed amount of up to $75.0 million (the “Unsecured Credit Facility”), of which $37.5 million is term debt and $37.5 million is revolving debt. Subject to certain conditions contained in the loan documents, the Company may on three occasions request an increase of the aggregate committed amount, provided that the aggregate commitment under the Unsecured Credit Facility may not exceed $100.0 million and that the election to fund any such additional amounts shall be in the sole discretion of the lenders. At closing, $37.5 million of term debt was funded. As of September 30, 2021, the outstanding balance under the Unsecured Credit Facility consisted of $37.5 million of term debt and an additional $37.5 million of revolving debt remained available for future disbursements, subject to certain terms and conditions contained in the loan documents.
The Unsecured Credit Facility matures on July 30, 2023, with 1 12-month extension option, subject to certain terms and conditions contained in the loan documents. The Unsecured Credit Facility bears interest at a floating rate of 210 basis points over one-month LIBOR. The Unsecured Credit Facility includes provisions for a “LIBOR Successor Rate” in the event LIBOR is unascertainable or ceases to be available. Monthly payments are interest only with the entire balance and all outstanding interest and fees due at maturity. The Company has the right to prepay the loan, without penalty or premium (other than any break funding or swap breakage fees), in part and in whole subject to certain conditions contained in the loan documents.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2021
(unaudited)
7. NOTES PAYABLE (CONTINUED)
In addition, the Unsecured Credit Facility contains customary representations and warranties, financial and other affirmative and negative covenants, events of default and remedies typical for this type of facility, including without limitation: a maximum leverage ratio, a maximum secured recourse indebtedness ratio, a limitation on other unsecured indebtedness, a minimum consolidated net worth requirement, a minimum fixed charge coverage ratio, a minimum liquidity requirement, and a cross default to the borrower’s other material indebtedness and to the borrower’s other agreements with the administrative agent and the lenders (excluding swaps, unless a swap termination fee has not been paid when due). If an event of default exists under the Unsecured Credit Facility, the Company’s ability to pay dividends would be limited to the amount necessary to maintain the Company’s status as a REIT.
8. DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.
The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero.
TheAs of September 30, 2021, the Company entershas entered into 8 interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2017
(unaudited)
swaps, which were not designated as hedging instruments. The following table summarizes the notional amount and other information related to the Company’s interest rate swaps and cap as of September 30, 20172021 and December 31, 2016.2020. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | | | Weighted-Average Fix Pay Rate | | Weighted-Average Remaining Term in Years |
Derivative Instruments | | Number of Instruments | | Notional Amount | | Number of Instruments | | Notional Amount | | Reference Rate as of September 30, 2021 | | |
Derivative instruments not designated as hedging instruments | | | | | | | | |
Interest rate swaps | | 8 | | $ | 1,120,690 | | | 8 | | $ | 1,121,590 | | | One-month LIBOR/ Fixed at 0.70% - 2.11% | | 1.7% | | 1.5 |
|
| | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | | | Weighted-Average Fix Pay Rate | | Weighted-Average Remaining Term in Years |
Derivative Instruments | | Number of Instruments | | Notional Amount | | Number of Instruments | | Notional Amount | | Reference Rate as of September 30, 2017 | | |
Derivative instruments designated as hedging instruments | | | | | | | | |
Interest Rate Swaps | | 6 | | $ | 508,400 |
| | 7 | | $ | 625,130 |
| | One-month LIBOR/ Fixed at 0.86% - 1.68% | | 1.42% | | 0.9 |
Derivative instruments not designated as hedging instruments | | | | | | | | |
Interest Rate Swaps (1) | | 12 | | $ | 658,183 |
| | 12 | | $ | 658,183 |
| | One-month LIBOR/ Fixed at 1.39% - 2.37% | | 1.99% | | 2.9 |
Interest Rate Cap (2) | | — | | $ | — |
| | 1 | | $ | 147,340 |
| | (2) | | (2) | | (2) |
_____________________
(1) Included in these amounts are two forward interest rate swaps with an aggregate notional amount of $91.5 million that were not yet in effect as of September 30, 2017. These two interest rate swaps will become effective at various times during the remainder of 2017 through 2018.
(2) The interest rate cap matured on January 1, 2017.
The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of September 30, 20172021 and December 31, 20162020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | September 30, 2021 | | December 31, 2020 |
Derivative Instruments | | Balance Sheet Location | | Number of Instruments | | Fair Value | | Number of Instruments | | Fair Value |
Derivative instruments not designated as hedging instruments | | | | |
| | | | | | | | | | |
Interest rate swaps | | Other liabilities, at fair value (1) | | 8 | | $ | (21,591) | | | 8 | | $ | (35,331) | |
|
| | | | | | | | | | | | | | |
| | | | September 30, 2017 | | December 31, 2016 |
Derivative Instruments | | Balance Sheet Location | | Number of Instruments | | Fair Value | | Number of Instruments | | Fair Value |
Derivative instruments designated as hedging instruments | | | | |
Interest Rate Swaps | | Prepaid expenses and other assets, at fair value | | 3 | | $ | 142 |
| | 1 | | $ | 42 |
|
Interest Rate Swaps | | Other liabilities, at fair value | | 3 | | $ | (121 | ) | | 6 | | $ | (2,340 | ) |
| | | | | | | | | | |
Derivative instruments not designated as hedging instruments | | | | |
Interest Rate Swaps | | Prepaid expenses and other assets, at fair value | | 4 | | $ | 1,358 |
| | 4 | | $ | 1,588 |
|
Interest Rate Swaps | | Other liabilities, at fair value | | 8 | | $ | (4,579 | ) | | 8 | | $ | (7,388 | ) |
Interest Rate Cap | | Prepaid expenses and other assets, at fair value | | — | | $ | — |
| | 1 | | $ | — |
|
_____________________
(1) As of September 30, 2021 and December 31, 2020, other liabilities included a $4.8 million and $7.8 million liability, respectively, related to the fair value of 2 off-market interest rate swaps determined to be hybrid financial instruments for which the Company elected to apply the fair value option.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
8. DERIVATIVE INSTRUMENTS (CONTINUED)
The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) and as other comprehensive income on the accompanying consolidated statements of equity. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flows. The change in fair value of the ineffective portion is recognized directly in earnings. With respect to swap agreements that are terminated for which it remains probable that the original hedged forecasted transactions (i.e., LIBOR-based debt service payments) will occur, the loss related to the termination of these swap agreements is included in accumulated other comprehensive income (loss) and is reclassified into earnings over the period of the original forecasted hedged transaction. The change in fair value of a derivative instrument that is not designated as a cash flow hedge is recorded as interest expense in the accompanying consolidated statements of operations. The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Derivatives not designated as hedging instruments | | | | | | | | |
Realized loss recognized on interest rate swaps | | $ | 4,571 | | | $ | 4,798 | | | $ | 13,437 | | | $ | 9,427 | |
Unrealized (gain) loss on interest rate swaps (1) | | (3,910) | | | (4,532) | | | (13,740) | | | 29,484 | |
Increase (decrease) in interest expense as a result of derivatives | | $ | 661 | | | $ | 266 | | | $ | (303) | | | $ | 38,911 | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Income statement related | | | | | | | |
Derivatives designated as hedging instruments | | | | | | | |
Amount of expense recognized on interest rate swaps (effective portion) | $ | 253 |
| | $ | 1,363 |
| | $ | 1,717 |
| | $ | 4,252 |
|
| 253 |
| | 1,363 |
| | 1,717 |
| | 4,252 |
|
| | | | | | | |
Derivatives not designated as hedging instruments | | | | | | | |
Realized loss recognized on interest rate swaps | 1,108 |
| | 1,040 |
| | 3,966 |
| | 1,398 |
|
Unrealized (gain) loss on interest rate swaps | (1,004 | ) | | (3,745 | ) | | (2,579 | ) | | 14,810 |
|
Unrealized loss on interest rate cap | — |
| | — |
| | — |
| | 3 |
|
| 104 |
| | (2,705 | ) | | 1,387 |
| | 16,211 |
|
Increase (decrease) in interest expense as a result of derivatives | $ | 357 |
| | $ | (1,342 | ) | | $ | 3,104 |
| | $ | 20,463 |
|
| | | | | | | |
Other comprehensive income related | | | | | | | |
Unrealized income (losses) on derivative instruments | $ | 13 |
| | $ | 1,784 |
| | $ | 602 |
| | $ | (6,695 | ) |
_____________________During(1) For the three and nine months ended September 30, 20172021, unrealized gain on interest rate swaps included a $0.6 million and 2016, there was no ineffective portion$3.0 million unrealized gain, respectively, related to the change in fair value of the derivative2 off-market interest rate swaps determined to be hybrid financial instruments designated as cash flow hedges. During the next 12 months,for which the Company expectselected to recognize additional interest expense related to derivative instruments designated as cash flow hedges. The presentapply the fair value of the additional interest expense expected to be recognized over the next 12 months related to derivative instruments designated as cash flow hedges totaled $0.1 million as of September 30, 2017 and was included in accumulated other comprehensive income (loss).option.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2017
(unaudited)
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
•Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.
The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of assets and liabilities for which it is practicable to estimate the fair value:
Cash and cash equivalents, restricted cash, rent and other receivables, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2021
(unaudited)
9. FAIR VALUE DISCLOSURES (CONTINUED)
Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk. The fair value of interest rate caps (floors) are determined using the market standard methodology of discounting the future expected cash payments (receipts) which would occur if variable interest rates rise above (below) the strike rate of the caps (floors). The variable interest rates used in the calculation of projected payments (receipts) on the cap (floors) are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.
Notes payable: The fair values of the Company’s notes payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2017
(unaudited)
The following were the face values, carrying amounts and fair values of the Company’s notes payable as of September 30, 20172021 and December 31, 2016,2020, which carrying amounts generally do not approximate the fair values (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
| | Face Value | | Carrying Amount | | Fair Value | | Face Value | | Carrying Amount | | Fair Value |
Financial liabilities: | | | | | | | | | | | | |
Notes payable | | $ | 1,599,585 | | | $ | 1,593,822 | | | $ | 1,598,284 | | | $ | 1,396,745 | | | $ | 1,388,365 | | | $ | 1,380,143 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
| | Face Value | | Carrying Amount | | Fair Value | | Face Value | | Carrying Amount | | Fair Value |
Financial liabilities: | | | | | | | | | | | | |
Notes payable | | $ | 1,898,897 |
| | $ | 1,891,442 |
| | $ | 1,889,296 |
| | $ | 1,793,405 |
| | $ | 1,783,468 |
| | $ | 1,775,953 |
|
Disclosure of the fair values of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Low levels of transaction volume for certain financial instruments have made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.
As of September 30, 2017,2021, the Company measured the following assets and liabilitiesderivative instruments at fair value (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurements Using |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Recurring Basis: | | | | | | | | |
Liability derivatives - interest rate swaps (1) | | $ | (21,591) | | | $ | — | | | $ | (21,591) | | | $ | — | |
_____________________
(1) Includes a $4.8 million liability related to the fair value of 2 off-market interest rate swaps determined to be hybrid financial instruments for which the Company elected to apply the fair value option.
|
| | | | | | | | | | | | | | | | |
�� | | | | Fair Value Measurements Using |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Recurring Basis: | | | | | | | | |
Asset derivatives - interest rate swaps | | $ | 1,500 |
| | $ | — |
| | $ | 1,500 |
| | $ | — |
|
Liability derivatives - interest rate swaps | | (4,700 | ) | | — |
| | (4,700 | ) | | — |
|
| |
9. | RELATED PARTY TRANSACTIONS |
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2021
(unaudited)
10. RELATED PARTY TRANSACTIONS
The Company has entered into the Advisory Agreement with the Advisor and the Dealer Manager Agreement with the Dealer Manager. These agreements entitled the Advisor and/or the Dealer Manager to specified fees upon the provision of certain services with regard to the Offering and reimbursement of organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company and entitle the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate investments, the management of those investments, among other services, and the disposition of investments, as well as entitle the Advisor and/or the Dealer Manager to reimbursement of offering costs related to the dividend reinvestment plan incurred by the Advisor and the Dealer Manager on behalf of the Company and certain costs incurred by the Advisor in providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. The Company has also entered into a fee reimbursement agreement with the Dealer Manager pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the DTCC Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve or served as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust II, Inc. (“KBS REIT I”II”), KBS Real Estate Investment Trust II, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc. and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2017
(unaudited)
On January 6, 2014,1, 2020, the Company, together with KBS REIT I,II, KBS Real Estate Investment Trust II, Inc., KBS Strategic OpportunityGrowth & Income REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc., the Dealer Manager, the Advisor and other KBS-affiliated entities, had entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage arewere shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT, Inc. was added to the insurance program at terms similar to those described above. In June 2017,2021, the Company renewed its participation in the program, and theprogram. The program is effective through June 30, 2018. As KBS REIT I is implementing its plan of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage.2022.
During the three and nine months ended September 30, 2017 and 2016, no other business transactions occurred between the Company and KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust II, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc. and KBS Growth & Income REIT, Inc.
Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 20172021 and 2016,2020, respectively, and any related amounts payable as of September 30, 20172021 and December 31, 20162020 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Incurred | | Payable as of |
| Three Months Ended September 30, | | Nine Months Ended September 30, | | September 30, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Expensed | | | | | | | | | | | |
Asset management fees | $ | 6,587 |
| | $ | 6,286 |
| | $ | 19,223 |
| | $ | 18,646 |
| | $ | 2,158 |
| | $ | 2,126 |
|
Reimbursement of operating expenses (1) | 59 |
| | 68 |
| | 255 |
| | 261 |
| | 70 |
| | 139 |
|
Real estate acquisition fees | — |
| | — |
| | — |
| | 1,473 |
| | — |
| | — |
|
Capitalized | | | | | | | | | | | |
Acquisition fee on development project | 64 |
| | 28 |
| | 234 |
| | 87 |
| | 355 |
| | 121 |
|
Acquisition fee on unconsolidated joint venture | 120 |
| | — |
| | 497 |
| | — |
| | 173 |
| | — |
|
Asset management fee on development project | — |
| | — |
| | 48 |
| | — |
| | — |
| | 11 |
|
Asset management fee on unconsolidated joint venture | — |
| | — |
| | 14 |
| | — |
| | — |
| | — |
|
| $ | 6,830 |
| | $ | 6,382 |
| | $ | 20,271 |
| | $ | 20,467 |
| | $ | 2,756 |
| | $ | 2,397 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Incurred | | Payable as of |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | September 30, | | December 31, |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Expensed | | | | | | | | | | | |
Asset management fees (1) | $ | 5,019 | | | $ | 5,311 | | | $ | 14,858 | | | $ | 15,704 | | | $ | 8,784 | | | $ | 8,529 | |
Reimbursement of operating expenses (2) | 101 | | | 105 | | | 432 | | | 348 | | | 228 | | | 97 | |
Disposition fees (3) | — | | | — | | | 1,005 | | | 213 | | | — | | | — | |
Capitalized | | | | | | | | | | | |
Acquisition fee on development project | — | | | — | | | — | | | 34�� | | | — | | | — | |
| $ | 5,120 | | | $ | 5,416 | | | $ | 16,295 | | | $ | 16,299 | | | $ | 9,012 | | | $ | 8,626 | |
_____________________
(1) See “Deferral of Asset Management Fees” below.
(2) Reimbursable operating expenses primarily consists of internal audit personnel costs, accounting software costs and cybersecurity related expenses incurred by the Advisor under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $49,000$100,000 and $169,000$332,000 for the three and nine months ended September 30, 2017,2021, respectively, and $51,000$86,000 and $145,000$271,000 for the three and nine months ended September 30, 2016,2020, respectively, and were the only type of employee costs reimbursed under the Advisory Agreement for the three and nine months ended September 30, 20172021 and 2016,2020, respectively. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition or origination fees or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company's direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company.
(3) Disposition fees with respect to real estate sold are included in the gain on sale of real estate, net, in the accompanying consolidated statements of operations.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the Offering, the Company’s sponsorsMessrs. Bren, Hall, McMillan and Schreiber agreed to provide additional indemnification to one of the participating broker-dealers. The Company agreed to add supplemental coverage to its directors’ and officers’ insurance coverage to insure the sponsors’Messrs. Bren, Hall, McMillan and Schreiber’s obligations under this indemnification agreement in exchange for reimbursement by the sponsorsMessrs. Bren, Hall, McMillan and Schreiber to the Company for all costs, expenses and premiums related to this supplemental coverage. During the nine months ended September 30, 2017,2021 and 2020, the Advisor incurred $0.1 million$79,000 and $74,000, respectively, for the costs of the supplemental coverage obtained by the Company. During
Deferral of Asset Management Fees
Pursuant to the nine months endedAdvisory Agreement, with respect to asset management fees accruing from March 1, 2014, the Advisor has agreed to defer, without interest, the Company’s obligation to pay asset management fees for any month in which the Company’s modified funds from operations (“MFFO”) for such month, as such term is defined in the practice guideline issued by the Institute for Portfolio Alternatives (formerly known as the Investment Program Association) in November 2010 and interpreted by the Company, excluding asset management fees, does not exceed the amount of distributions declared by the Company for record dates of that month. The Company remains obligated to pay the Advisor an asset management fee in any month in which the Company’s MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an “MFFO Surplus”); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the Advisory Agreement. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the Advisory Agreement.
However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as the Company’s stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8.0% per year cumulative, noncompounded return on such net invested capital (the “Stockholders’ 8% Return”) and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to the Company’s share redemption program. The Stockholders’ 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of the Company’s stockholders to have received any minimum return in order for the Advisor to receive deferred asset management fees.
As of September 30, 2016,2021 and December 31, 2020, the Advisor incurred $0.1Company had accrued $8.8 million for the costsand $8.5 million of the supplemental coverage obtained by the Company.
During the nine months endedasset management fees, respectively, of which $8.0 million and $7.2 million were deferred as of September 30, 2017,2021 and December 31, 2020, respectively, pursuant to the Advisor paidprovision for deferral of asset management fees under the Company a $0.2 million property insurance rebate. During the nine months ended September 30, 2016, the Advisor paid the Company a $0.2 million property insurance rebate and $0.1 million for legal and professional fees due from the Advisor. Advisory Agreement as described above.
Lease to Affiliate
On May 29, 2015, the indirect wholly owned subsidiary (the “Lessor”) of the Company that owns 3003 Washington Boulevard entered into a lease with an affiliate of the Advisor (the “Lessee”) for 5,046 rentable square feet, or approximately 2.3%2.4% of the total rentable square feet, at 3003 Washington Boulevard. The lease commenced on October 1, 2015 and terminateswas to terminate on August 31, 2019.
On March 14, 2019, the Lessor entered into a First Amendment to Deed of Lease with the Lessee to extend the lease period commencing on September 1, 2019 and terminating on August 31, 2024 (the “Amended Lease”) and set the annual base rent during the extension period. The annualized base rent which represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent) and rent increases from the lease’s inception through the balancecommencement of the lease term, for this leaseAmended Lease is approximately $0.2$0.3 million, and the average annual rental rate (net of rental abatements) over the lease term of the Amended Lease through its termination is $46.38$62.55 per square foot.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2021
(unaudited)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
During the three and nine months ended September 30, 2017,2021, the Company recognized $61,000$81,000 and $180,000$245,000 of revenue related to this lease, respectively. During the three and nine months ended September 30, 2016,2020, the Company recognized $59,000$80,000 and $176,000$241,000 of revenue related to this lease, respectively.
Prior to their approval of the lease and the Amended Lease, the Company’s conflicts committee and board of directors determined the lease to be fair and reasonable to the Company.
| |
10. | COMMITMENTS AND CONTINGENCIES |
On July 18, 2019, the Company sold the Singapore Portfolio to the SREIT, which is affiliated with Charles J. Schreiber, Jr., a director and executive officer of the Company. See Note 6, “Investment in an Unconsolidated Entity” for information related to the Company’s investment in the SREIT. The SREIT is externally managed by an entity (the “Manager”) in which Charles J. Schreiber, Jr. currently holds an indirect ownership interest. Mr. Schreiber is also a director of the Manager. The SREIT pays the Manager an annual base fee of 10% of annual distributable income and an annual performance fee of 25% of the increase in distributions per unit of the SREIT from the preceding year. For acquisitions other than the Singapore Portfolio, the SREIT pays the Manager an acquisition fee of 1% of the acquisition price. The SREIT will also pay the Manager a divestment fee of 0.5% of the sale price of any real estate sold and a development management fee of 3% of the total project costs incurred for development projects. A portion of the fees paid to the Manager are paid to KBS Realty Advisors LLC, an entity controlled by Mr. Schreiber, for sub-advisory services. The Schreiber Trust, a trust whose beneficiaries are Charles J. Schreiber, Jr. and his family members, and the Linda Bren 2017 Trust also acquired units in the SREIT. The Schreiber Trust agreed it will not sell any portion of its units in the SREIT unless it has received the consent of the Company’s conflicts committee. The Linda Bren 2017 Trust has agreed it will not sell $5.0 million of its investment in the SREIT unless it has received the consent of the Company’s conflicts committee.
During the nine months ended September 30, 2021 and 2020, no other business transactions occurred between the Company and KBS REIT II, KBS Growth & Income REIT, the Advisor, the Dealer Manager or other KBS-affiliated entities. See Note 11 “Commitments and Contingencies - Participation Fee Liability”.
11. COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide the respective services, the Company will be required to obtain such services from other sources.
Legal Matters
From time to time, the Company may be party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of September 30, 2017.
2021.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Participation Fee Liability
In accordance with the Advisory Agreement with the Advisor, the Advisor is entitled to receive a participation fee equal to 15.0% of the Company’s net cash flows, whether from continuing operations, net sale proceeds or otherwise, after the Company’s stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to the share redemption program, and (ii) an 8.0% per year cumulative, noncompounded return on such net invested capital. Net sales proceeds means the net cash proceeds realized by the Company after deduction of all expenses incurred in connection with a sale, including disposition fees paid to the Advisor. The 8.0% per year cumulative, noncompounded return on net invested capital is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 8.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 8.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 8.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of the Company’s stockholders to have received any minimum return in order for the Advisor to participate in the Company’s net cash flows. In fact, if the Advisor is entitled to participate in the Company’s net cash flows, the returns of the Company’s stockholders will differ, and some may be less than an 8.0% per year cumulative, noncompounded return. This fee is payable only if the Company is not listed on an exchange.
On January 9, 2020, the Company filed a definitive proxy statement with the SEC seeking approval from its stockholders of, among other proposals, two proposals related to the Company’s pursuit of conversion to a non-listed, perpetual-life “NAV REIT.” On May 7, 2020 at the Company’s annual meeting of stockholders, the Company’s stockholders approved the proposal to accelerate the payment of incentive compensation to the Advisor, upon the Company’s conversion to an NAV REIT. With respect to the incentive fee structure currently in effect with the Advisor, the triggering events for payment of the incentive fee are generally expected to occur, if ever, upon a listing of the Company’s shares of stock on a national securities exchange or a significant distribution of cash in connection with a sale of all or a substantial amount of the Company’s assets. These triggering events are inconsistent with a perpetual-life NAV REIT that intends to provide liquidity to its stockholders through a share redemption program and/or periodic self-tender offers. If the Company converts to an NAV REIT, in order to properly align the Advisor’s and its affiliates’ incentive fee compensation structure with the Company’s proposed perpetual-life strategy, the Company intends to revise its incentive fee structure. With respect to the historical performance period from inception through conversion to an NAV REIT, the Company sought and obtained stockholder approval to accelerate the payment of the incentive compensation upon conversion to a perpetual-life NAV REIT, subject to certain conditions. If the Company converts to an NAV REIT, such accelerated payment is subject to further approval of the conflicts committee of the Company’s board of directors, after the proposed amount of the accelerated payment of the incentive fee has been determined. In connection with the determination of the November 1, 2021 estimated value per share of the Company’s common stock, the Advisor determined that there would be no liability related to the subordinated participation in net cash flows at that time, based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties; however, changes to the fair values of assets and liabilities could have a material impact to the incentive fee calculation.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2021
(unaudited)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company’s conflicts committee and board of directors continue to evaluate various alternatives available to the Company, including whether or not to convert to an NAV REIT. Based on their assessment of alternatives available to the Company, market conditions and their further assessment of the Company’s capital raising prospects, the Company’s conflicts committee and board of directors may conclude that it would be in the best interest of the Company’s stockholders to (i) convert to an NAV REIT, (ii) continue to operate as a going concern under the Company’s current business plan, or (iii) adopt a plan of liquidation that would involve the sale of the Company’s remaining assets (in which event such plan would be presented to stockholders for approval). The Company can provide no assurances as to whether or when any alternative being considered by the Company’s board of directors will be consummated.
12. SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the consolidated financial statements are issued.
Distributions Paid
On October 2, 2017,1, 2021, the Company paid distributions of $9.7$7.9 million,, which related to distributions declared for daily record dates for each day in the period fromamount of $0.04983333 per share of common stock to stockholders of record as of the close of business on September 1, 2017 through September 30, 2017.20, 2021. On November 1, 2017,2021, the Company paid distributions of $10.0$7.8 million,, which related to distributions declared for daily record dates for each day in the period fromamount of $0.04983333 per share of common stock to stockholders of record as of the close of business on October 1, 2017 through October 31, 2017.20, 2021.
Distributions DeclaredAuthorized
On October 9, 2017,November 1, 2021, the Company’s board of directors authorized distributions baseda November 2021 distribution in the amount of $0.04983333 per share of common stock to stockholders of record as of the close of business on daily record dates for the period from November 1, 2017 through November 30, 2017,19, 2021, which the Company expects to pay in December 2017. On November 14, 2017,2021, and a December 2021 distribution in the Company’s boardamount of directors authorized distributions based$0.04983333 per share of common stock to stockholders of record as of the close of business on daily record dates for the period from December 1, 2017 through December 31, 2017,20, 2021, which the Company expects to pay in January 2018, and distributions based on daily record dates for the period from January 1, 2018 through January 31, 2018, which the Company expects to pay in February 2018. 2022.
Investors may choose to receive cash distributions or purchase additional shares through the Company’s dividend reinvestment plan.
DistributionsUpdated Estimated Value Per Share
On November 1, 2021, the Company’s board of directors approved an estimated value per share of the Company’s common stock of $10.78 based on the estimated value of the Company’s assets less the estimated value of the Company’s liabilities divided by the number of shares outstanding, all as of September 30, 2021, with the exception of adjustments to the Company’s net asset value to give effect to (i) the change in the estimated value of the Company’s investment in units of the SREIT (SGX-ST Ticker: OXMU) as of October 22, 2021 and (ii) the contractual sales price less estimated disposition costs and fees of 1 property that was under contract to sell as of November 1, 2021. For a full description of the limitations, methodologies and assumptions used to value the Company’s assets and liabilities in connection with the calculation of the Company’s estimated value per share, see the Company’s Current Report on Form 8-K, filed with the SEC on November 4, 2021.
Updated Dividend Reinvestment Plan Pricing
Pursuant to the Company’s dividend reinvestment plan, participants in the dividend reinvestment plan will acquire shares of the Company’s common stock under the plan at a price equal to 95% of the estimated value per share of the Company’s common stock. As such, commencing on the next dividend reinvestment plan purchase date, which is December 1, 2021, participants will acquire shares of the Company’s common stock under the plan at a price equal to 95% of $10.78, or $10.24 per share.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2021
(unaudited)
12. SUBSEQUENT EVENTS (CONTINUED)
If a participant wishes to terminate participation in the Company’s dividend reinvestment plan effective for these periodsthe December 1, 2021 purchase date, participants must notify the Company in writing of such decision, and the Company must receive the notice by the close of business on November 23, 2021.
Updated Share Redemption Program Pricing
In accordance with the Company’s share redemption program, the redemption price for shares eligible for redemption is calculated based upon the updated estimated value per share. Under the Amended Share Redemption Program, Special Redemptions are made at a price per share equal to the most recent estimated value per share of the Company’s common stock as of the applicable redemption date. Ordinary Redemptions are made at a price per share equal to 96% of the most recent estimated value per share of the Company’s common stock as of the applicable redemption date.
Effective for the November 2021 redemption date, which is November 30, 2021, the redemption price for all stockholders will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082 per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 6.11% annualized rate based on the Company's December 9, 2016November 2021 estimated value per shareshare. For a stockholder’s shares to be eligible for redemption in a given month or to withdraw a redemption request, the Company must receive a written notice from the stockholder or from an authorized representative of $10.63.the stockholder in good order and on a form approved by the Company at least five business days before the redemption date.
Financing SubsequentDisposition of Domain Gateway
On September 29, 2011, the Company, through an indirect wholly owned subsidiary, purchased a five-story office building containing 183,911 rentable square feet located on approximately 4.3 acres of land in Austin, Texas (“Domain Gateway”). On November 2, 2021, the Company completed the sale of Domain Gateway to September 30, 2017a purchaser unaffiliated with the Company or the Advisor, for $143.0 million, before third-party closing costs, closing credits and disposition fees payable to the Advisor. The aggregate cost of Domain Gateway, which includes the initial purchase price plus capital expenditures since acquisition and acquisition fees and expenses, but excludes any reductions to the net book value of the property due to historical depreciation and amortization expense, was $69.1 million. In connection with the disposition of Domain Gateway, the Company paid down $69.7 million of principal balance due under the Modified Portfolio Revolving Loan Facility.
Amended and Restated Portfolio Loan Facility
On November 3, 2017,2021, the Company, through indirect wholly owned subsidiaries (each a “Borrower” and together, the “Borrowers”), entered into a three-yeartwo-year loan facilityagreement with Bank of America, N.A., as administrative agent; Merril Lynch Pierce Fenner & Smith Incorporated,BofA Securities, Inc., Wells Fargo Securities, LLC and U.S. Bank, N.A.,Capital One, National Association as joint lead arrangers and joint book runners; Wells Fargo Bank, NA,N.A., as syndication agent, and each of the financial institutions a signatory thereto (the “Lenders”“Amended and Restated Portfolio Loan Facility Lenders”), for an amount of up to $1.01 billion (the “Portfolio Loan Facility”),$613.2 million, of which $757.5$459.9 million is term debt and $252.5$153.3 million is revolving debt. Proceeds from thedebt (the “Amended and Restated Portfolio Loan Facility”). At closing, $459.9 million of term debt and $57.1 million of revolving debt were used to pay off and address the upcoming 2018 loan maturities for the existing Town Center Mortgage Loan, RBC Plaza Mortgage Loan, National Office Portfolio Mortgage Loan, 500 West Madison Mortgage Loan, Ten Almaden Mortgage Loan and Towers at Emeryville Mortgage Loan. At closing, $787.5 million was funded, of which $776.0 million was used to pay off in full the Company’s existing mortgage loans (listed above) and the remaining amount was used to pay origination fees and accrued interest. The $787.5 million funded consisted of $757.5 million of term debt and $30.0 million of revolving debt. TheModified Portfolio Loan Facility, may be used for the repayment of debt, for tenant improvements, leasing commissions and capital improvements, for working capital or liquidity managementan additional $96.2 million of the Company and for other purposes described in the loan agreement. During the term of the Portfolio Loan Facility, the Company has an option to increase the aggregate loan amount by up to an additional $400.0 million in increments of $25.0 million, to a maximum of $1.41 billion, 25% of which would be revolving debt and 75% of which would be term debt, subject to certain conditions contained in the loan agreement.
The Portfolio Loan Facility matures on November 3, 2020, with two 12-month extension options,remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. The Portfolio Loan Facility bears interest at a floating rate of 180 basis points over one-month LIBOR during the initial term of the loan and monthly payments are interest only with the entire balance and all outstanding interest and fees due at maturity, assuming no prior prepayment. The Company will have the right to prepay all of the Portfolio Loan Facility, subjectSubject to certain expenses potentially incurred by the Lenders as a result of the prepaymentterms and subject to certain conditions contained in the loan documents.documents, the Amended and Restated Portfolio Loan Facility may be used for (i) paying closing costs and other expenses related to the loan, (ii) for the return of equity to certain indirect owners of Borrowers, (iii) to pay or reimburse Borrowers for certain other costs and expenses, including tenant improvement costs, leasing commissions, and capital improvement costs at the properties securing the loan, (iv) working capital or liquidity management of the Company, and (v) for any other lawful purpose, provided that $25.0 million of the revolving debt is to be used for tenant improvements, tenant allowances or any other work required pursuant to the terms of a specified lease described in the loan documents, although this restriction is released as the Company completes such projects. In addition, the Amended and Restated Portfolio Loan Facility contains customary representations and warranties, financial and other affirmative and negative covenants (including maintenance of an ongoing debt service coverage ratio), events of default and remedies typical for this type of facility.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 20172021
(unaudited)
12. SUBSEQUENT EVENTS (CONTINUED)
On November 3, 2017, KBS REIT Properties III, LLC (“REIT Properties III”), an indirect wholly owned subsidiary of the Company, entered into three interest rate swap agreements with a current aggregate notional amount of $451.5 million. As of November 3, 2017, the Company had three existing interest rate swaps related to the paid off loans with a current notional amount in the aggregate of $306.0 million. As the existing interest rate swaps expire at various times from January 1, 2018 through January 1, 2020, the notional amount of the new interest rate swaps in the aggregate will increase to maintain a notional amount of $757.5 million. The newAmended and existing interest rate swaps, in the aggregate, effectively fix the interest rate on the term portion of theRestated Portfolio Loan Facility at a blended rate of 3.861%, effective frommatures on November 3, 2017 through November2023, with 1 2022.additional 12-month extension option, subject to certain terms and conditions as described in the loan documents. The Amended and Restated Portfolio Loan Facility bears interest at the Bloomberg Short-Term Bank Yield Index rate plus 180 basis points per annum. Monthly payments are interest only with the entire balance and all outstanding interest and fees due at maturity. The Company will have the right to prepay the loan in part and in whole, without fee, premium or penalty, subject to certain conditions contained in the loan documents.
The Amended and Restated Portfolio Loan Facility is secured by RBC Plaza, Preston Commons, Sterling Plaza, One Washingtonian Center, Towers at Emeryville, Ten Almaden and Town Center and 500 West Madison.Center. The Company has the right to substitute properties securing the Amended and Restated Portfolio Loan Facility at any time, subject to approval of the Amended and Restated Portfolio Loan Facility Lenders and compliance with the terms and conditions described in the loan agreement.
Under the guaranty agreement related to the Portfolio Loan Facility (the “Guaranty”),KBS REIT Properties III, (i) providesLLC (“REIT Properties III”), the Company’s indirect wholly owned subsidiary, is providing a guaranty of among other sums described in the Guaranty, all principal and interest outstanding under the Portfolio Loan Facility in the event of certain bankruptcy or insolvency proceedings involving REIT Properties III, any Borrower or any of their affiliates and (ii) guarantees(i) payment of, and agrees to protect, defend, indemnify and hold harmless each Amended and Restated Portfolio Loan Facility Lender for, from and against, any liability, obligation, deficiency, loss, damage, costs and expenses (including reasonable attorney’s fees), and any litigation which may at any time be imposed upon, incurred or damage suffered by anythe Amended and Restated Portfolio Loan Facility Lender because of (a) certain intentional acts committed by any Borrowerthe Borrowers, (b) fraud or (b)intentional misrepresentations by the Borrowers or REIT Properties III in connection with the loan documents as described in the guaranty agreement, and (c) certain bankruptcy or insolvencyliquidation proceedings involvingunder state or federal law, and (ii) payment for liability that is incurred and related to certain environmental matters. In addition, REIT Properties III is providing a principal guaranty for up to 10% of the outstanding balance of the Amended and Restated Portfolio Loan Facility, but in no event exceeding $61.3 million, which may be reduced from time to time in connection with any Borrower or anyrepayment of their affiliates,principal that results in a mutually agreed upon reduction to the commitment of the Amended and Restated Portfolio Loan Facility as such acts are describedset forth in the Guaranty.
guaranty agreement.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Real Estate Investment Trust III, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Real Estate Investment Trust III, Inc., a Maryland corporation, and, as required by context, KBS Limited Partnership III, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Real Estate Investment Trust III, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law. Moreover, you should interpret many of the risks identified in this report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•The COVID-19 pandemic, together with the resulting measures imposed to help control the spread of the virus, has had a negative impact on the economy and business activity globally. The extent to which the COVID-19 pandemic impacts our operations and those of our tenants and our investment in Prime US REIT (the “SREIT”) depends on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.
•We are dependent on KBS Capital Advisors LLC (“KBS Capital Advisors”), our advisor, to manageconduct our investments and for the disposition of our investments.operations.
•All of our executive officers, our affiliated directorsdirector and other key real estate and debt finance professionals are also officers, affiliated directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor our dealer manager and/or other KBS-affiliated entities. As a result, our executive officers, our affiliated directors, some of our key real estate and debt finance professionals,these individuals, our advisor and its affiliates face conflicts of interest, including significant conflicts created by our advisor’s and its affiliates’ compensation arrangements with us and other KBS-sponsoredKBS programs and KBS-advised investors and conflicts in allocating time among us and these other programs and investors. Furthermore, these individuals may become employees of another KBS-sponsored program in an internalization transaction or, if we internalize our advisor, may not become our employees as a result of their relationship with other KBS-sponsored programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
•Our advisor and its affiliates currently receive fees in connection with transactions involving the purchase or origination, management and managementdisposition of our investments. TheseAcquisition and asset management fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us and increases our stockholders’ risk of loss. In addition, we have paid substantial fees to and expenses of our advisor, its affiliates and participating broker-dealers in connection with our now-terminated primary initial public offering, which payments increase the risk that our stockholders will not earn a profit on their investment. We may also pay significant fees during our listing/liquidation stage. Although most of the fees payable during our listing/liquidation stage are contingent on our stockholders first enjoying agreed-upon investment returns, the investment return thresholds may be reduced subject to approval by our conflicts committee and our charter limitations. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase the risk of loss to other limitations in our charter.
stockholders. Our charter permits us to pay distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital),conflicts committee and our charter doesboard of directors continue to evaluate various alternatives available to us, including whether or not limit the amount of funds we may use from any source to pay such distributions. As of September 30, 2017, we had usedconvert to a combination of cash flow from operations, proceeds from debt financing and proceeds from an advance from our advisor to fund distributions. From time to time during our operational stage, we expect to use proceeds from third party financings to fund at least a portion of distributions in anticipation of cash flow to be received in later periods. We may also fund such distributions from the sale of assets or from the maturity, payoff or settlement of debt investments, to the extent we make any such additional investments.perpetual-life net asset value “NAV” REIT. If we convert to an NAV REIT, we would implement a revised advisory fee structure.
•We cannot guarantee that we will pay distributions. We have and may in the future fund distributions from sources other than our cash flow from operations, including, without limitation, the overallsale of assets, borrowings, return to our stockholdersof capital or offering proceeds. We have no limits on the amounts we may be reduced.
pay from such sources.•We may incur debt until our total liabilities would exceed 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), and we may exceed this limit with the approval of the conflicts committee of our board of directors. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt such that our total liabilities would exceed this limit. High debt levels could limit the amount of cash we have available to distribute and could result in a decline in the value of an investment in us.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
•We depend on tenants for the revenue generated by our real estate investments and, accordingly, the revenue generated by our real estate investments is dependent upon the success and economic viability of our tenants.investments. Revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases), rent deferrals or abatements, tenants becoming unable to pay their rent and/or lower rental rates, making it more difficult for us to meet our debt service obligations and limiting our ability to pay distributions to our stockholders. Since March 2020, we have granted rent relief to a number of tenants as a result of the pandemic, and these tenants or additional tenants may request rent relief in future periods or become unable to pay rent.
•Our significant investment in the equity securities of the SREIT, a traded Singapore real estate investment trust, is subject to the risks associated with real estate investments as well as the risks inherent in investing in traded securities, including, in this instance, risks related to the quantity of units held by us relative to the trading volume of the units. The COVID-19 pandemic has caused significant negative pressure in the financial markets. Since March 2020, the trading price of the common units of the SREIT has experienced substantial volatility; however, the units have recovered a substantial portion of their losses since the low in March 2020.
•Because investment opportunities that are suitable for us may also be suitable for other KBS programs or investors, our advisor and its affiliates face conflicts of interest relating to the purchase of investments.
•We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes including, but not limited to: the repurchase of shares under our share redemption program; capital expenditures, tenant improvement costs and leasing costs related to our real estate properties; reserves required by any financings of our real estate investments; the acquisition or origination of real estate investments, which include payment of acquisition or origination fees to our advisor; and the repayment of debt.purposes. If such funds are not available, from our dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.
Disruptions•Continued disruptions in the financial markets, changes in the demand for office properties and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to stockholders. In addition,
•Our conflicts committee and our real estate investments may be affectedboard of directors continue to evaluate various alternatives available to us. There is no assurance that any alternative being considered by unfavorable real estate market and general economic conditions, which could decrease the valueour board of those assets and reduce the investmentdirectors will provide a return to stockholders that equals or exceeds the Company’s estimated value per share as of November 1, 2021, and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our stockholders.board of directors will be consummated.
•Our charter does not require us to liquidate our assets and dissolve by a specified date, nor does our charter require our directors to list our shares for trading by a specified date. No public market currently exists for our shares of common stock, and we have no plans at this time to list our sharesstock. There are limits on a national securities exchange. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. Any sale must comply with applicable state and federal securities laws. In addition, our charter prohibits the ownership and transferability of more than 9.8% of our stock, unless exempted by our board of directors, which may inhibit large investors from purchasing our shares. Our shares cannot be readily sold and, if our stockholders are able to sell their shares, they would likely have to sell them at a substantial discount fromdiscount.
•In December 2019, our board of directors determined to temporarily suspend Ordinary Redemptions under the priceshare redemption program, and Ordinary Redemptions remained suspended through June 30, 2021. Ordinary Redemptions are all redemptions other than those that qualify for the special provisions for redemptions sought in connection with a stockholder’s death, “Qualifying Disability” or “Determination of Incompetence” (each as defined in the share redemption program and, together, “Special Redemptions”). Upon suspension, all Ordinary Redemption requests that had been received were cancelled and no Ordinary Redemption requests were accepted or collected during the suspension of the share redemption program. Further, on June 3, 2021, we announced that, in connection with the approval of the Self-Tender (defined below), our stockholders paidboard of directors had approved a temporary suspension of all redemptions under the share redemption program, including Special Redemptions. Upon suspension, all outstanding redemption requests under the share redemption program were cancelled, and no requests were accepted or collected under the share redemption program. As such, Special Redemptions under the share redemption program were suspended for the June 30, 2021 redemption date, meaning no Special Redemptions were made under the share redemption program in June 2021. On July 14, 2021, our board of directors approved an amended and restated share redemption program (the “Amended Share Redemption Program”) and Ordinary Redemptions and Special Redemptions under the Amended Share Redemption Program resumed effective for the July 30, 2021 redemption date. As of November 1, 2021, we had approximately 3.4 million shares available for redemption for the remainder of 2021 under the Amended Share Redemption Program, including the reserve for Special Redemptions. We cannot predict future redemption demand with any certainty. Moreover, our share redemption program includes numerous restrictions that limit our stockholders’ ability to acquiresell their shares to us. If future redemption requests exceed the sharesamount of funding available under our share redemption program, the number of rejected redemption requests will increase over time.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and from our estimated value per share.Analysis of Financial Condition and Results of Operations (continued)
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162020 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2021, each as filed with the Securities and Exchange Commission (the “SEC”) and in Part II, Item 1A herein..
Overview
We were formed on December 22, 2009 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2011 and we intend to continue to operate in such a manner. We conduct our business primarily through our Operating Partnership, of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by our advisor pursuant to an advisory agreement and our advisor conducts our operations and manages our portfolio of real estate investments. Our advisor owns 20,00020,857 shares of our common stock. We have no paid employees.
We have invested in a diverse portfolio of real estate investments. As of September 30, 2017,2021, we owned 2817 office properties (one of which was held for sale and subsequently sold on November 2, 2021), one mixed-use office/retail property and had madean investment in the equity securities of the SREIT, which is accounted for as an investment in an unconsolidated joint venture to develop and subsequently operate an office/retail property, which is currentlyentity under construction. Additionally, asthe equity method of September 30, 2017, we had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project, which is currently under construction.accounting.
On February 4, 2010, we filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of up to 280,000,000 shares, or up to $2,760,000,000 of shares, of common stock for sale to the public, of which up to 200,000,000 shares, or up to $2,000,000,000 of shares, were registered in our primary offering and up to 80,000,000 shares, or up to $760,000,000 of shares, were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on May 29, 2015 and terminated the primary offering on July 28, 2015 upon the completion of review of subscriptions submitted in accordance with our processing procedures. 2015.
We sold 169,006,162 shares of common stock in our now-terminated primary initial public offering for gross offering proceeds of $1.7 billion. As of September 30, 2017,2021, we had also sold 21,438,40639,883,754 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $210.1 million.$412.1 million. Also as of September 30, 2017,2021, we had redeemed 10,620,360or repurchased 59,684,490 shares sold in our initial public offering for $107.2$636.1 million.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Additionally, on October 3, 2014, we issued 258,462 shares of common stock, for $2.4 million, in private transactions exempt from the registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933.
We continue to offer shares of common stock under our dividend reinvestment plan. In some states, we will need to renew the registration statement annually or file a new registration statement to continue the dividend reinvestment plan offering. We may terminate our dividend reinvestment plan offering at any time.
Market Outlook – Real EstateOur conflicts committee and Real Estate Finance Markets
The following discussion is basedour board of directors continue to evaluate various alternatives available to us, including whether or not to convert to an “NAV REIT.” Our conflicts committee and board of directors remain focused on management’s beliefs, observationsproviding stable distributions and expectations with respectenhanced liquidity to stockholders. In the real estatenear term, while our conflicts committee and real estate finance markets.
The global economy is broadly improving albeit atboard of directors explore alternatives available to us, we may market certain of our assets for sale. Based on our assessment of alternatives available to us, market conditions and our further assessment of our capital raising prospects, our conflicts committee and board of directors may conclude that it would be in the best interest of our stockholders to (i) convert to an uneven pace. European economic growth has recently picked up, with improving employment data in most of the European Union countries. The U.K. and China remain areas of concern. The U.K. is working through its BREXIT process, whereas the Chinese economy has shown signs of stabilization, but is still struggling with uncertainty in its banking system in relation“NAV REIT,” (ii) continue to bad loans. Against this backdrop, the central banks of the world’s major industrialized economies are beginning to back away from their strong monetary accommodation. Quantitative easing (“QE”) in Japan and Europe is slowing, but the liquidity generated from these programs continues to impact the global capital markets.
Atoperate as a duration of 100 months (as of the end of third quarter 2017), thegoing concern under our current business cycle,plan, or (iii) adopt a plan of liquidation that would involve the sale of our remaining assets (in which commencedevent such plan would be presented to stockholders for approval). There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds the Company’s estimated value per share as of November 1, 2021, and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in June 2009, is the third longest in U.S. history, behind only the periods between 1961 - 1969 and 1991 - 2001. In June 2017, the U.S. Federal Reserve (the “Fed”) increased interest rates for the fourth time in three years. Expectations are that the Fedthis regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will increase rates again in December, citing low unemployment and strong economic growth. The Fed is still attempting to normalize the level of interest rates in the United States. U.S. interest rates are relatively high when compared to Europe, where the European Central Bank is still engaging in QE. Global inflation is starting to show signs of life as U.S. inflation has grown to approximately 1.9% versus 2.9% in the U.K. and 1.5% in the Eurozone. Real gross domestic product (“GDP”) in the United States has had two consecutive quarters of 3.0% or greater growth, and the U.S. unemployment rate is currently a relatively low 4.2%. Personal income growth has started to pick up and unemployment statistics indicate that labor market conditions are finally showing real improvements. Political uncertainty surrounding the current administration’s budget, tax reform plans, and the continued weakness in retailers, all may adversely impact business and consumer confidence.
In 2017 the U.S. commercial real estate market has seen a decline in transaction volume and a slowing of price increases. In the aggregate, property level operating income growth has begun to slow, while lending standards have tightened. The United States continues to benefit from inflows of foreign capital, albeit at a slowing rate. The capital flows from China have dropped as the Chinese government has successfully imposed constraints on capital leaving the country. The industrial property sector is a standout for investors, as internet sales volumes continue to increase the demand for warehouses and logistics-related assets. Traditional sources of capital are favoring a “risk-off” approach, as capital flows have shifted equity towards debt, or secured, investing. Commercial real estate returns are increasingly being driven by property income (yield), as opposed to price appreciation through cap rate compression.
Lenders with long memories remain disciplined in their underwriting of investments. For balance sheet lenders, such as banks and insurance companies, underwriting standards for commercial real estate have tightened. This has resulted in lower loan-to-value and higher debt coverage ratios. CMBS originations rebounded in the third quarter as banks and insurance companies tightened loan terms. CMBS volumes are on pace to beat 2016 issuance volumes. This is a positive for the U.S. commercial real estate markets as it illustrates the virtues of having a diversified set of funding sources.
be consummated.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Section 5.11 of our charter requires that we seek stockholder approval of our liquidation if our shares of common stock are not listed on a national securities exchange by September 30, 2020, unless a majority of the conflicts committee of our board of directors, composed solely of all of our independent directors, determines that liquidation is not then in the best interest of our stockholders. Pursuant to our charter requirement, the conflicts committee assessed our portfolio of investments, and with consideration of the then current market conditions, including the uncertainty as a result of the COVID-19 pandemic and lack of liquidity in the marketplace, as well as our conflicts committee’s and board of directors’ continuing review and evaluation of various alternatives available to us, on August 30, 2021, our conflicts committee unanimously determined to postpone approval of our liquidation. Section 5.11 of our charter requires that the conflicts committee revisit the issue of liquidation at least annually. At our annual meeting of stockholders held on May 7, 2020, our stockholders approved the removal of Section 5.11 of our charter. As set forth in the proxy statement for our annual meeting of stockholders, implementation of this amendment to our charter and our conversion to an NAV REIT remain subject to further approval of our conflicts committee.
Impact on Our
Market Outlook – Real Estate Investmentsand Real Estate Finance Markets
The volatilityVolatility in the global financial markets and changing political environment continues toenvironments can cause a level of uncertaintyfluctuations in our outlook for the performance of the U.S. commercial real estate markets. Both the investing and leasing environments are highly competitive. While foreign capital continues to flow into U.S. real estate markets, albeit at a slower rate, concerns regarding the political, regulatory and economic environments have introduced uncertainty into the markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows. Historically low interest rates could help offset some of the impact of these potential decreases in operating cash flow for properties financed with variable rate mortgages; however, interest rates in the United States have started to increase. The Fed raised interest rates four times between the period December 2015 and June 2017. The real estate and finance markets anticipate further rate increases if the economy remains strong, but a flattening U.S. treasury yield curve is signaling a weakening in economic conditions, and highlights the degree of uncertainty surrounding the near-term U.S. economic prospects. Management continuously reviews our debt financing strategies to optimize the cost of our debt exposure.
Impact on Our Financing Activities
In light of the risks associated with potentially volatile operating cash flows from someinvestment properties. Further, revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of our real estate properties,tenant leases and non-renewal of existing tenant leases), rent deferrals or abatements, tenants being unable to pay their rent and/or lower rental rates. To the increaseextent there are increases in the cost of financing due to higher interest rates, wethis may havecause difficulty in refinancing some of our debt obligations prior to or at maturity or we may not be able to refinance these obligations at terms as favorable as the terms of our existing indebtedness. Short-termFurther, increases in interest rates inwould increase the United States have increased, andamount of our debt payments on our variable rate debt to the extent the interest rates on such debt are expected to increase againnot fixed through interest rate swap agreements or limited by the end of the year.interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investments.investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure. Most recently, the COVID-19 pandemic has had a negative impact on the real estate market as discussed below.
COVID-19 Pandemic and Portfolio Outlook
As of September 30, 2017,2021, the novel coronavirus, or COVID-19, pandemic is ongoing. During 2020, the COVID-19 pandemic created disruption in the U.S. and global economies, adversely impacting many industries, including the U.S. office real estate industry and the industries of our tenants, directly or indirectly. In 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus.
The outbreak of COVID-19 and its impact on the current financial, economic, capital markets and real estate market environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. Although a recovery is partially underway, it continues to be gradual, uneven and characterized by meaningful dispersion across sectors and regions, and could be hindered by persistent or resurgent infection rates. The most recent round of U.S. fiscal stimulus could provide meaningful support, along with continued accommodative monetary policy and wider distribution of vaccines. Issues with respect to the distribution and acceptance of vaccines or the spread of new variants of the virus could adversely impact the recovery. Overall, there remains significant uncertainty regarding the timing and duration of the economic recovery, which precludes any prediction as to the ultimate adverse impact COVID-19 may have on our business.
During the year ended December 31, 2020 and the nine months ended September 30, 2021, we did not experience significant disruptions in our operations from the COVID-19 pandemic. Many of our tenants have suffered reductions in revenue since March 2020. Rent collections for the quarter ended September 30, 2021 were approximately 98%. We have granted a number of lease concessions related to the effects of the COVID-19 pandemic but these lease concessions did not have a material impact to our consolidated balance sheet as of September 30, 2021 or consolidated statements of operations for the three and nine months ended September 30, 2021. As of September 30, 2021, we had debt obligationsentered into lease amendments related to the effects of the COVID-19 pandemic, granting $4.1 million of rent deferrals for the period from March 2020 through August 2021 and granting $2.4 million in rental abatements.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
As of September 30, 2021, 81 tenants were granted rental deferrals, rental abatements and/or rent restructures, of which 47 of these tenants have begun to pay rent in accordance with their lease agreements subsequent to the deferral and/or abatement period, five of these tenants early terminated their leases and eight of these tenant leases were modified at lower rental rates and/or based on a percentage of the tenant’s gross receipts. As of September 30, 2021, two of the 81 tenants continue to be in the aggregate principal amountrental deferral and/or rental abatement periods as granted in accordance with their agreements. Through September 30, 2021, $2.3 million of rent previously deferred has been billed to the tenants, of which $2.0 million was collected.
As of September 30, 2021, we had $1.9 billion,million of receivables for lease payments that had been deferred as lease concessions related to the effects of the COVID-19 pandemic, of which $1.5 million was reserved for payments not probable of collection, which were included in rent and other receivables, net on the accompanying consolidated balance sheet. For the three and nine months ended September 30, 2021, we recorded $0.1 million and $0.7 million, respectively, of rental abatements granted to tenants as a result of the COVID-19 pandemic. For the three and nine months ended September 30, 2020, we recorded $0.3 million and $0.9 million of rental abatements granted to tenants as a result of the COVID-19 pandemic. Subsequent to September 30, 2021, we have not seen a material impact on our rent collections. We are in discussions with several retail tenants to extend additional short-term deferrals. We will continue to evaluate any additional short-term rent relief requests from tenants on an individual basis. Not all tenant requests will ultimately result in modified agreements, nor are we forgoing our contractual rights under our lease agreements. In most cases, it is in our best interest to help our tenants remain in business and reopen when restrictions are lifted. Current collections and rent relief requests to date may not be indicative of collections or requests in any future period.
During the nine months ended September 30, 2020, we recognized an impairment charge of $19.9 million for an office/retail property due to the continued deterioration of retail demand at the property which was further impacted by the COVID-19 pandemic.
We have also made a weighted-average remaining term of 1.6 years. The maturity dates of certain loans may be extended beyond their current maturity date, subject to certain terms and conditions containedsignificant investment in the loan documents. Our debt obligations consistedcommon units of $192.9the SREIT. Since early March 2020, the trading price of the common units of the SREIT has experienced substantial volatility; however, the units have recovered a substantial portion of their losses since the low in March 2020. For purposes of the November 1, 2021 estimated value per share, we valued our investment in units of the SREIT at $227.3 million, based on the Singapore Exchange Securities Traded Limited (the “SGX-ST”) trading price of fixed rate notes payablethe units of the SREIT as of closing on October 22, 2021 less a discount for the holding period risk due to the quantity of units held by us relative to the normal level of trading volume in the SREIT units. As of November 3, 2021, the aggregate value of our investment in the units of the SREIT was $250.5 million, which was based solely on the closing price of the units on the SGX-ST of $0.87 per unit as of November 3, 2021 and $1.7 billiondid not take into account any potential discount for the holding period risk due to the quantity of variable rate notes payable. We planunits we hold.
Should we experience significant reductions in rental revenue in the future related to the impact of the COVID-19 pandemic, this may limit our ability to draw on our revolving credit facilities or exercise our extension options available underdue to covenants described in our loan agreements or pay down or refinance the related notes payable prior to their maturity dates. As of September 30, 2017, the interest ratesagreements. However, we believe that our cash flow from operations, cash on $1.1 billion of our variable rate notes payable were effectively fixed through interest rate swap agreements. In addition, we entered into two interest rate swaps with an aggregate notional amount of $91.5 million, which will become effective at various times during the remainder of 2017 through 2018. On November 3, 2017, we entered into a three-year $1.01 billion loan facility to pay off the upcoming 2018 loan maturities for six of our existing loans which had an aggregate outstanding balance of $776.0 million, see “Subsequent Events - Financing Subsequent to September 30, 2017 - Portfolio Loan Facility.”
Liquidity and Capital Resources
We sold 169,006,162 shares of common stock in our now-terminated primary initial public offering for gross offering proceeds of $1.7 billion. As of September 30, 2017, we had also sold 21,438,406 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $210.1 million. Also as of September 30, 2017, we had redeemed 10,620,360 shares sold in our initial public offering for $107.2 million. We ceased offering shares of common stock in our primary offering on May 29, 2015 and terminated our primary offering on July 28, 2015.
We continue to offer shares under our dividend reinvestment plan. In some states, we will need to renew the registration statement annually or file a new registration statement to continue the dividend reinvestment plan offering. We may terminate our dividend reinvestment plan offering at any time.
We have invested all of the proceeds from our now-terminated primary initial public offering, net of selling commissions and dealer manager fees and other organization and offering costs, and proceeds from debt financing in a diverse portfolio of real estate investments. To date,hand, proceeds from our dividend reinvestment plan, have been used primarilyproceeds from asset sales and current and anticipated financing activities are sufficient to fund redemptionsmeet our liquidity needs for the foreseeable future.
Our business, like all businesses, is being impacted by the uncertainty regarding the COVID-19 pandemic, the effectiveness of shares underpolicies introduced to neutralize the disease, and the impact of those policies on economic activity. While there are weakening macroeconomic conditions and some negative impact to our share redemption programtenants, we believe with our diverse portfolio of core real estate properties with tenants across various industries, and for capital expenditures onwith creditworthy tenants and limited retail exposure in our real estate investments.portfolio, we are positioned to navigate this unprecedented period.
Liquidity and Capital Resources
Our principal demands for funds during the short and long-term are and will be for operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; capital commitments and development expenses under our joint venture agreements; and payments of distributions to stockholders. Our primary sources of capital for meeting our cash requirements are as follows:
•Cash flow generated by our real estate and real estate-related investments;
•Debt financings (including amounts currently available under existing loan facilities);
•Proceeds from the sale of our real estate properties and real estate-related investments; and
•Proceeds from common stock issued under our dividend reinvestment plan.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Our real estate properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate properties is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectability of rent and operating recoveries from our tenants and how well we manage our expenditures.
Our investment in the SREIT units generates cash flow in the form of dividend income. As of September 30, 2017,2021, the aggregate value of our investment in the SREIT units, which was based solely on the closing price of the units on the SGX-ST of $0.86 per unit as of September 30, 2021 and did not take into account any potential discount for the holding period risk due to the quantity of units we hold, was $247.6 million and the carrying value was $218.7 million.
As of September 30, 2021, we had mortgage debt obligations in the aggregate principal amount of $1.9$1.6 billion, with a weighted-average remaining term of 1.61.4 years. The maturity dates of certain loans may be extended beyond their current maturity date, subject to certain terms and conditions contained in the loan documents. Assuming ourAs of September 30, 2021, we had $497.0 million of notes payable are fully extended underrelated to the terms of the respective loan agreements and other loan documents, we have $171.8 million of debt obligationsModified Portfolio Loan Facility maturing during the 12 months ending September 30, 2018.2022. Subsequent to September 30, 2021, we refinanced the Modified Portfolio Loan Facility, see Part II, Item 5 “Other Information,” for more information about our Amended and Restated Portfolio Loan Facility. We plan to exercise our extension options available under our loan agreements, or pay down or refinance the related notes payable prior to their maturity dates. As of September 30, 2017,2021, our debt obligations consisted of $123.0 million of fixed rate notes payable and $1.5 billion of variable rate notes payable. As of September 30, 2021, the interest rates on $1.1 billion of our variable rate notes payable were effectively fixed through interest rate swap agreements. As of September 30, 2021, we had $90.5$278.3 million of revolving debt available for immediate future disbursement under a portfolio loan,various loans, subject to certain conditions set forth in the loan agreement. On November 3, 2017,agreements.
In order to provide stockholders with additional liquidity that is in excess of that permitted under our share redemption program, on June 4, 2021, we entered intocommenced a three-year $1.01 billion loan facilityself-tender offer (the “Self-Tender”) for up to pay off the upcoming 2018 loan maturities for six33,849,130 shares of our common stock at a price of $10.34 per share, or approximately $350.0 million of shares. On July 12, 2021, we accepted for purchase 26,377,990 shares properly tendered and not properly withdrawn at a purchase price of $10.34 per share, or approximately $272.7 million of shares, excluding fees and expenses relating to the tender offer. We funded the purchase of shares in the offer with approximately $100.0 million of available cash on hand and by drawing on our existing loans which hadcredit facilities in an aggregate outstanding balanceamount of $776.0approximately $172.7 million. As of November 3, 2017, the loan facility had $222.5 million of revolving debt available for immediate disbursement, see “Subsequent Events - Financing Subsequent to September 30, 2017 - Portfolio Loan Facility.”
We paid cash distributions to our stockholders during the nine months ended September 30, 20172021 using cash flow from operations from current and prior periods.periods and proceeds from the sale of real estate. We believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from the sale of real estateasset sales and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future.
Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters ended September 30, 20172021 did not exceed the charter-imposed limitation.
Cash Flows from Operating Activities
We commenced operations in connection with our first investment on June 24, 2011. As of September 30, 2017, we owned 28 office properties and one mixed-use office/retail property and had made an investment in an unconsolidated joint venture to develop and subsequently operate an office/retail property, which is currently under construction. In addition, we had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project, which is currently under construction. During the nine months ended September 30, 2017,2021 and 2020, net cash provided by operating activities was $90.6$76.2 million compared to netand $73.4 million, respectively. Net cash provided by operating activities of $82.1 millionwas higher in 2021 primarily due to a decrease in interest payments during the nine months ended September 30, 2016. Net cash provided by operating activities increased in 2017 primarily as a result of an increase in lease termination fees, rental rates, operating expense recoveries and property tax recoveries.2021.
Cash Flows from Investing Activities
Net cash used inprovided by investing activities was $124.2$47.1 million for the nine months ended September 30, 20172021 and primarily consisted of the following:
•$54.098.0 million of net proceeds from the sale of Anchor Centre; offset by
•$50.9 million used for improvements to real estate;
$33.4 million to make an investment in an unconsolidated joint venture;
$33.0 million used for construction in progress related to Hardware Village (defined below); and
$3.8 million of escrow deposits for tenant improvements.
Cash Flows from Financing Activities
Our cash flows from financing activities consist primarily of debt financings, redemptions and distributions paid to our stockholders. During the nine months ended September 30, 2017, net cash provided by financing activities was $6.2 million and primarily consisted of the following:
$104.2 million of net cash provided by debt financing as a result of proceeds from notes payable of $107.4 million, partially offset by principal payments on notes payable of $1.9 million and payments of deferred financing costs of $1.3 million;
$54.7 million of cash used for redemptions of common stock; and
$43.4 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $45.1 million.
estate.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Cash Flows from Financing Activities
During the nine months ended September 30, 2021, net cash used in financing activities was $162.1 million and primarily consisted of the following:
•$313.8 millionof cash used for redemptions and repurchases of common stock, including $272.7 million of shares repurchased pursuant to the Self-Tender;
•$202.4 million of net cash provided by debt financing as a result of proceeds from notes payable of $241.2 million, partially offset by principal payments on notes payable of $38.4 million and payments of deferred financing costs of $0.4 million;
•$47.7 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $32.8 million;
•$2.2 million used for interest rate swap settlements for off-market swap instruments; and
•Payment of other organization and offering costs of $0.9 million related to our pursuit of conversion to an NAV REIT.
We expect that our debt financing and other liabilities will be between 35%45% and 65% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). We expect our debt financing related to the acquisition of core real estate properties to be between 45% and 65% of the aggregate cost of all such assets. We expect our debt financing related to the acquisition or origination of real estate-related investments to be between 0% and 65% of the aggregate cost of all such assets, depending upon the availability of such financings in the marketplace. There is no limitation on the amount we may borrow for the purchase of any single asset. We limit our total liabilities to 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), meaning that our borrowings and other liabilities may exceed our maximum target leverage of 65% of the cost of our tangible assets without violating these borrowing restrictions. We may exceed the 75% limit only if a majority of the conflicts committee approves each borrowing in excess of this limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt in excess of this limit. From time to time, our total liabilities could also be below 35%45% of the cost of our tangible assets due to the lack of availability of debt financing. As of September 30, 2017,2021, our borrowings and other liabilities were approximately 57%56% of both the cost (before deducting depreciation and other noncash reserves) and book value (before deducting depreciation) of our tangible assets, respectively.assets.
In addition to making investments in accordance with our investment objectives, weWe also expect to use our capital resources to make certain payments to our advisor and we have made certain payments to our dealer manager. During our operational stage, we expect toadvisor. We currently make payments to our advisor in connection with the acquisition of investments, the management of our investments and costs incurred by our advisor in providing services to us. We also pay fees to our advisor in connection with the disposition of investments. We reimburse our advisor and dealer manager for certain stockholder services. In addition, our advisor is entitled to an incentive fee upon achieving certain performance goals.
Among the fees payable to our advisor is an asset management fee. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition expenses related thereto (but excludes acquisition fees paid or payable to our advisor). In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment (but excluding acquisition fees paid to our advisor). With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination expenses related thereto but is exclusive of acquisition or origination fees paid or payable to our advisor) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination expenses related to the acquisition or funding of such investment (excluding acquisition or origination fees paid or payable to our advisor), as of the time of calculation. We currently do not pay asset management fees to our advisor on our investment in units of the SREIT.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Pursuant to the advisory agreement, with respect to asset management fees accruing from March 1, 2014, our advisor agreed to defer, without interest, our obligation to pay asset management fees for any month in which our modified funds from operations (“MFFO”) for such month, as such term is defined in the practice guideline issued by the Investment Program AssociationInstitute for Portfolio Alternatives (“IPA”) in November 2010 and interpreted by us, excluding asset management fees, does not exceed the amount of distributions declared by us for record dates of that month. We remain obligated to pay our advisor an asset management fee in any month in which our MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an “MFFO Surplus”); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the advisory agreement. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the advisory agreement.
As of September 30, 2017, we had reimbursed our advisor for all accrued and deferred asset management fees in accordance with the terms noted above. The amount of asset management fees deferred, if any, will vary on a month-to-month basis and the total amount of asset management fees deferred as well as the timing of the deferrals and repayments are difficult to predict as they will depend on the amount of and terms of the debt we use to acquire assets, the level of operating cash flow generated by our real estate investments and other factors. In addition, deferrals and repayments may occur in the same period, and it is possible that there could be additional deferrals in the future. As of September 30, 2017, we had $2.2 million of asset management fees payable related to asset management fees incurred for the month of September 2017, which were subsequently paid in November 2017.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8% per year cumulative, noncompounded return on net invested capital (the “Stockholders’ 8% Return”) and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program. The Stockholders’ 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to receive deferred asset management fees.
As of September 30, 2021, we had accrued $8.8 million of asset management fees, of which $8.0 million was deferred as of September 30, 2021, pursuant to the provision for deferral of asset management fees under the Advisory Agreement. The amount of asset management fees deferred, if any, will vary on a month-to-month basis and the total amount of asset management fees deferred as well as the timing of the deferrals and repayments are difficult to predict as they will depend on the amount of and terms of the debt we use to acquire assets, the level of operating cash flow generated by our real estate investments and other factors. In addition, deferrals and repayments may occur in the same period, and it is possible that there could be additional deferrals in the future.
On September 27, 2017,2021, we and our advisor renewed the advisory agreement. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee.
Participation Fee Liability and Potential Change in Fee Structure
Pursuant to our advisory agreement currently in effect with our advisor, our advisor is due a subordinated participation in our net cash flows (the “Subordinated Participation in Net Cash Flows”) upon meeting certain performance goals. After our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program, and (ii) an 8.0% per year cumulative, noncompounded return on such net invested capital, our advisor is entitled to receive 15.0% of our net cash flows, whether from continuing operations, net sale proceeds or otherwise. Net sales proceeds means the net cash proceeds realized by us after deduction of all expenses incurred in connection with a sale, including disposition fees paid to our advisor. The 8.0% per year cumulative, noncompounded return on net invested capital is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 8.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 8.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 8.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to participate in our net cash flows. In fact, if our advisor is entitled to participate in our net cash flows, the returns of our stockholders will differ, and some may be less than an 8.0% per year cumulative, noncompounded return. This fee is payable only if we are not listed on an exchange.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
On January 9, 2020, we filed a definitive proxy statement with the SEC in connection with the annual meeting of stockholders to vote on, among other proposals, two proposals related to our pursuit of conversion to an NAV REIT. On May 7, 2020 at our annual meeting of stockholders, our stockholders approved the proposal to accelerate the payment of incentive compensation to our advisor, upon our conversion to an NAV REIT. If we convert to an NAV REIT, the proposed acceleration of the payment of incentive compensation to our advisor remains subject to further approval of the conflicts committee, after the proposed amount of the accelerated payment of the incentive fee has been determined. In connection with the determination of the November 1, 2021 estimated value per share of our common stock, our advisor determined that there would be no liability related to the Subordinated Participation in Net Cash Flows at that time, based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties; however, changes to the fair values of assets and liabilities could have a material impact to the incentive fee calculation.
Our conflicts committee and our board of directors continue to evaluate various alternatives available to us, including whether or not to convert to an “NAV REIT.” Our conflicts committee and board of directors remain focused on providing stable distributions and enhanced liquidity to stockholders. In the near term, while our conflicts committee and board of directors explore alternatives available to us, we may market certain of our assets for sale. Based on our assessment of alternatives available to us, market conditions and our further assessment of our capital raising prospects, our conflicts committee and board of directors may conclude that it would be in the best interest of our stockholders to (i) convert to an “NAV REIT,” (ii) continue to operate as a going concern under our current business plan, or (iii) adopt a plan of liquidation that would involve the sale of our remaining assets (in which event such plan would be presented to stockholders for approval). There is no assurance that any alternative being considered by our board of directors will provide a return to stockholders that equals or exceeds the Company’s estimated value per share as of November 1, 2021, and although we remain focused on providing enhanced liquidity to stockholders while maximizing returns to stockholders, we can provide no assurances in this regard. We also can provide no assurances as to whether or when any alternative being considered by our board of directors will be consummated.
Contractual Commitments and ContingenciesObligations
The following is a summary of our contractual obligations as of September 30, 20172021 (in thousands):
| | | | | | Payments Due During the Years Ended December 31, | | Payments Due During the Years Ended December 31, |
Contractual Obligations | | Total | | Remainder of 2017 | | 2018-2019 | | 2020-2021 | | Thereafter | Contractual Obligations | | Total | | Remainder of 2021 | | 2022-2023 | | 2024-2025 | | Thereafter |
Outstanding debt obligations (1) | | $ | 1,898,897 |
| | $ | 874 |
| | $ | 1,323,985 |
| | $ | 393,448 |
| | $ | 180,590 |
| Outstanding debt obligations (1) | | $ | 1,599,585 | | | $ | 496,950 | | | $ | 728,590 | | | $ | 374,045 | | | $ | — | |
Interest payments on outstanding debt obligations (2) | | 110,066 |
| | 16,772 |
| | 67,684 |
| | 23,407 |
| | 2,203 |
| |
Development obligations | | 51,935 |
| | (3) | | (3) | | — |
| | — |
| |
Interest payments on outstanding debt obligations (2) (4) | | Interest payments on outstanding debt obligations (2) (4) | | 46,379 | | | 6,432 | | | 38,568 | | | 1,379 | | | — | |
Interest payments on interest rate swaps (3) (4) | | Interest payments on interest rate swaps (3) (4) | | 24,239 | | | 4,558 | | | 19,681 | | | — | | | — | |
Acquisition•Loss from extinguishment of debt. A loss from extinguishment of debt, which includes prepayment fees and expenses. Prior to our early adoption of ASU No. 2017-01 on January 1, 2017, acquisition fees and expenses related to the acquisitionextinguishment of real estate were generally expensed. Althoughdebt, represents the difference between the carrying value of any consideration transferred to the lender in return for the extinguishment of a debt and the net carrying value of the debt at the time of settlement. We have excluded the loss from extinguishment of debt in our calculation of MFFO because these amounts reduce net income, we exclude them from MFFO to more appropriately presentlosses do not impact the ongoingcurrent operating performance of our investments and do not provide an indication of future operating performance; and
•Provision for credit loss on real estate investmentsloan receivable. A provision for credit loss on a comparative basis. Additionally, acquisition feesreal estate loan receivable represents a write-down of the carrying value of a real estate loan to reflect the net amount expected to be collected. Although these losses are included in the calculation of net income (loss), we have excluded the provision for credit loss in our calculation of MFFO because the provision for credit loss does not impact the current operating performance of our investment, and expenses have been funded from the proceeds from our now-terminated initial public offering and debt financings andmay or may not from our operations.provide an indication of future operating performance. We believe this exclusionit is useful to investors to have a supplemental metric that addresses core operating performance directly and therefore excludes such things as it allows investors to more accurately evaluate the sustainabilityprovision for credit loss on real estate loans receivable.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculation of MFFO and Adjusted MFFO, for the three and nine months ended September 30, 20172021 and 2016,2020, respectively (in thousands). No conclusions or comparisons should be made from the presentation of these periods.
|
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net (loss) income attributable to common stockholders | | $ | (3,151 | ) | | $ | 3,859 |
| | $ | 267 |
| | $ | (14,872 | ) |
Depreciation of real estate assets | | 21,729 |
| | 19,652 |
| | 63,793 |
| | 57,291 |
|
Amortization of lease-related costs | | 19,422 |
| | 20,326 |
| | 60,577 |
| | 62,797 |
|
FFO attributable to common stockholders (1) | | 38,000 |
| | 43,837 |
| | 124,637 |
| | 105,216 |
|
Straight-line rent and amortization of above- and below-market leases, net | | (4,140 | ) | | (5,655 | ) | | (13,176 | ) | | (20,812 | ) |
Amortization of discounts and closing costs | | — |
| | — |
| | — |
| | 15 |
|
Unrealized (gains) losses on derivative instruments | | (1,004 | ) | | (3,745 | ) | | (2,579 | ) | | 14,813 |
|
Real estate acquisition fees to affiliate | | — |
| | — |
| | — |
| | 1,473 |
|
Real estate acquisition fees and expenses | | — |
| | 5 |
| | — |
| | 306 |
|
MFFO attributable to common stockholders (1) | | $ | 32,856 |
| | $ | 34,442 |
| | $ | 108,882 |
| | $ | 101,011 |
|
_____________________ | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net (loss) income attributable to common stockholders | $ | (2,235) | | | $ | 1,119 | | | $ | 25,276 | | | $ | (18,276) | |
Depreciation of real estate assets | 22,132 | | | 21,027 | | | 64,890 | | | 61,834 | |
Amortization of lease-related costs | 6,166 | | | 6,852 | | | 18,727 | | | 20,795 | |
Impairment charges on real estate | — | | | — | | | — | | | 19,896 | |
Gain on sale of real estate, net | — | | | (21) | | | (20,459) | | | (50,959) | |
Adjustments for noncontrolling interests - consolidated entity (1) | — | | | — | | | — | | | 6,144 | |
Adjustment for investment in an unconsolidated entity (2) | 3,804 | | | 4,515 | | | 12,833 | | | 11,496 | |
FFO attributable to common stockholders (3) | 29,867 | | | 33,492 | | | 101,267 | | | 50,930 | |
Straight-line rent and amortization of above- and below-market leases, net | (1,202) | | | (1,755) | | | (5,918) | | | (6,178) | |
Amortization of discount and closing costs | — | | | (642) | | | — | | | (1,172) | |
Loss from extinguishment of debt | — | | | — | | | — | | | 188 | |
Unrealized (gains) losses on derivative instruments | (3,910) | | | (4,532) | | | (13,740) | | | 29,484 | |
Provision for credit loss on real estate loan receivable | — | | | — | | | — | | | 680 | |
Adjustment for investment in an unconsolidated entity (2) | (428) | | | (170) | | | (3,141) | | | 4,928 | |
MFFO attributable to common stockholders (3) | 24,327 | | | 26,393 | | | 78,468 | | | 78,860 | |
Adjustment for a contractual rent payment received but deferred (4) | — | | | 1,142 | | | — | | | 2,666 | |
Adjusted MFFO attributable to common stockholders (3) | $ | 24,327 | | | $ | 27,535 | | | $ | 78,468 | | | $ | 81,526 | |
_____________________
(1) Reflects adjustments to eliminate the noncontrolling interest holder’s share of the adjustments to convert our net income (loss) attributable to common stockholders to FFO.
(2) Reflects our noncontrolling interest share of adjustments to convert our net income (loss) attributable to common stockholders to FFO and MFFO includes $1.0for our equity investment in an unconsolidated entity.
(3) FFO, MFFO and Adjusted MFFO include $0.2 million and $7.0$1.2 million of lease termination income for the three and nine months ended September 30, 2017, respectively. FFO2021, respectively, and MFFO includes $0.3$0.4 million and $0.7$0.5 million of lease termination income for the three and nine months ended September 30, 2016,2020, respectively.
(4) Adjustment for rent contractually due and collected per the terms of a lease agreement, but deferred and not recognized into rental income for purposes of GAAP as the tenant improvements were under construction. We began recognizing this deferred revenue over the term of the lease beginning January 1, 2021.
Our calculation of Adjusted MFFO above includes amounts related to the operations of an office property sold on January 19, 2021, the operations of the multifamily apartment complex held by the Hardware Village joint venture that was sold on May 7, 2020, interest income from our real estate loan receivable paid off in full on December 11, 2020 and the operations of a property that was held for sale as of September 30, 2021. Please refer to the table below with respect to the proportion of Adjusted MFFO related to the real estate properties sold, the property held for sale as of September 30, 2021 and the real estate loan receivable paid off (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Adjusted MFFO by component: | | | | | | | |
Assets held for investment | $ | 23,153 | | | $ | 25,143 | | | $ | 74,604 | | | $ | 76,683 | |
Real estate properties sold | 30 | | | 1,138 | | | 16 | | | 3,261 | |
Real estate property held for sale | 1,144 | | | 98 | | | 3,848 | | | (113) | |
Real estate loan receivable paid off | — | | | 1,156 | | | — | | | 1,695 | |
Adjusted MFFO | $ | 24,327 | | | $ | 27,535 | | | $ | 78,468 | | | $ | 81,526 | |
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
FFO and MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Distributions
From time to time during our operational stage, we may not pay distributions solely from our cash flow from operating activities or FFO, in which case distributions may be paid in whole or in part from debt financing. Distributions declared, distributions paid and cash flow from operating activities were as follows for the first, second and third quarters of 20172021 (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Distributions Declared (1) | | Distributions Declared Per Share (1) (2) | | Distributions Paid (3) | | Cash Flow from Operating Activities |
Period | | | | Cash | | Reinvested | | Total | |
First Quarter 2017 | | $ | 29,080 |
| | $ | 0.160 |
| | $ | 14,067 |
| | $ | 14,987 |
| | $ | 29,054 |
| | $ | 19,097 |
|
Second Quarter 2017 | | 29,421 |
| | 0.162 |
| | 14,640 |
| | 15,110 |
| | 29,750 |
| | 39,521 |
|
Third Quarter 2017 | | 29,650 |
| | 0.164 |
| | 14,689 |
| | 15,001 |
| | 29,690 |
| | 31,947 |
|
| | $ | 88,151 |
| | $ | 0.486 |
| | $ | 43,396 |
| | $ | 45,098 |
| | $ | 88,494 |
| | $ | 90,565 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Distributions Declared | | Distributions Declared Per Share (1) | | Distributions Paid (2) | | Cash Flow from Operating Activities |
| | | Cash | | Reinvested | | Total | |
First Quarter 2021 | | $ | 27,640 | | | $ | 0.149 | | | $ | 16,274 | | | $ | 11,326 | | | $ | 27,600 | | | $ | 16,295 | |
Second Quarter 2021 | | 27,755 | | | 0.149 | | | 22,024 | | | 14,959 | | | 36,983 | | | 27,698 | |
Third Quarter 2021 | | 23,863 | | | 0.150 | | | 9,434 | | | 6,507 | | | 15,941 | | | 32,247 | |
| | $ | 79,258 | | | $ | 0.448 | | | $ | 47,732 | | | $ | 32,792 | | | $ | 80,524 | | | $ | 76,240 | |
_____________________
| |
(1) Assumes share was issued and outstanding on each monthly record date for distributions during the period presented. For each monthly record date for distributions during the period from January 1, 2021 through September 30, 2021, distributions were calculated at a rate of $0.04983333 per share. (2) Distributions are generally paid on a monthly basis. Distributions for the monthly record date of a given month are paid on or about the first business day of the following month; however, we accelerated the payment of the June 2021 distributions due to the timing of the Self-Tender. (1)
| Distributions for the period from January 1, 2017 through September 30, 2017 were based on daily record dates and were calculated at a rate of $0.00178082 per share per day. |
| |
(2)
| Assumes share was issued and outstanding each day during the period presented. |
| |
(3)
| Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid on or about the first business day of the following month. |
For the nine months ended September 30, 2017,2021, we paid aggregate distributions of $88.5$80.5 million, including $43.4$47.7 million of distributions paid in cash and $45.1$32.8 million of distributions reinvested through our dividend reinvestment plan. Our net income attributable to common stockholders for the nine months ended September 30, 20172021 was $0.3$25.3 million. FFO for the nine months ended September 30, 20172021 was $124.6$101.3 million and cash flow from operating activities was $90.6$76.2 million. See the reconciliation of FFO to net (loss) income attributable to common stockholders above. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $78.5$59.9 million of cash flow from current operating activities, and $10.0$4.2 million of cash flow from operating activities in excess of distributions paid during 2016.prior periods and $16.4 million of proceeds from the sale of real estate. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.
Over the long-term, we generally expect that a greater percentage of our distributions will be paid from current cash flow from operating activities from current periods or prior periods (except with respect to distributions related to sales of our assets and distributions related to the sales or repayment of principal under any real estate-related investments we make)investments). From time to time during our operational stage, we may not pay distributions solely from our cash flow from operating activities.activities, in which case distributions may be paid in whole or in part from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities, the overall return to our stockholders may be reduced. Further, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including those discussed under “Forward-Looking Statements” and “Market, “-Market Outlook - Real Estate and Real Estate Finance Markets”Markets,” “-Liquidity and Capital Resources,” and “-Results of Operations” herein, and the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2020 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2021, each as filed with the SEC. Those factors include: the future operating performance of our real estate investments in the existing real estate and financial environment; the success and economic viability of our tenants; our ability to refinance existing indebtedness at comparable terms; changes in interest rates on any variable rate debt obligations we incur; and the level of participation in our dividend reinvestment plan.plan; and the extent to which the COVID-19 pandemic impacts our operations and those of our tenants and our investment in the SREIT. In the event our FFO and/or cash flow from operating activities decrease in the future, the level of our distributions may also decrease. In addition, future distributions declared and paid may exceed FFO and/or cash flow from operating activities.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Critical Accounting Policies
Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 20162020 filed with the SEC. There have been no significant changes to our policies during 2017 except2021.
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial statements are issued.
Distributions Paid
On October 1, 2021, we paid distributions of $7.9 million, which related to distributions in the amount of $0.04983333 per share of common stock to stockholders of record as of the close of business on September 20, 2021. On November 1, 2021, we paid distributions of $7.8 million, which related to distributions in the amount of $0.04983333 per share of common stock to stockholders of record as of the close of business on October 20, 2021.
Distributions Authorized
On November 1, 2021, our board of directors authorized a November 2021 distribution in the amount of $0.04983333 per share of common stock to stockholders of record as of the close of business on November 19, 2021, which we expect to pay in December 2021, and a December 2021 distribution in the amount of $0.04983333 per share of common stock to stockholders of record as of the close of business on December 20, 2021, which we expect to pay in January 2022.
Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.
Updated Estimated Value Per Share
On November 1, 2021, our board of directors approved an estimated value per share of our common stock of $10.78 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2021, with the exception of adjustments to our net asset value to give effect to (i) the change in the estimated value of our investment in units of the SREIT (SGX-ST Ticker: OXMU) as of October 22, 2021 and (ii) the contractual sales price less estimated disposition costs and fees of one property that was under contract to sell as of November 1, 2021. For a full description of the limitations, methodologies and assumptions used to value our assets and liabilities in connection with the calculation of our estimated value per share, see our Current Report on Form 8-K, filed with the SEC on November 4, 2021.
Updated Dividend Reinvestment Plan Pricing
Pursuant to our dividend reinvestment plan, participants in the dividend reinvestment plan will acquire shares of our common stock under the plan at a price equal to 95% of the estimated value per share of our common stock. As such, commencing on the next dividend reinvestment plan purchase date, which is December 1, 2021, participants will acquire shares of our common stock under the plan at a price equal to 95% of $10.78, or $10.24 per share.
If a participant wishes to terminate participation in our dividend reinvestment plan effective for the additionDecember 1, 2021 purchase date, participants must notify us in writing of an accounting policysuch decision, and we must receive the notice by the close of business on November 23, 2021.
Updated Share Redemption Program Pricing
In accordance with respectour share redemption program, our redemption price for shares eligible for redemption is calculated based upon the updated estimated value per share. Under the Amended Share Redemption Program, Special Redemptions are made at a price per share equal to investments in unconsolidated joint ventures under the equity method.
most recent estimated value per share of our common stock as of the applicable redemption date. Ordinary Redemptions are made at a price per share equal to 96% of the most recent estimated value per share of our common stock as of the applicable redemption date.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
Investments in Unconsolidated Joint Ventures
We account for investments in unconsolidated joint ventures over which we may exercise significant influence, but do not control, using the equity method of accounting. Under the equity method, the investment is initially recorded at cost and subsequently adjusted to reflect additional contributions or distributions and our proportionate share of equity in the joint venture’s income (loss). We recognize our proportionate share of the ongoing income or loss of the unconsolidated joint venture as equity in income (loss) of unconsolidated joint venture on the consolidated statements of operations. On a quarterly basis, we evaluate our investment in an unconsolidated joint venture for other-than-temporary impairments.
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial statements are issued.
Distributions Paid
On October 2, 2017, we paid distributions of $9.7 million, which related to distributions declared for daily record dates for each day in the period from September 1, 2017 through September 30, 2017. On November 1, 2017, we paid distributions of $10.0 million, which related to distributions declared for daily record dates for each day in the period from October 1, 2017 through October 31, 2017.
Distributions Declared
On October 9, 2017, our board of directors authorized distributions based on daily record datesEffective for the period from November 1, 2017 through2021 redemption date, which is November 30, 2017, which we expect to pay in December 2017. On November 14, 2017, our board of directors authorized distributions based on daily record dates2021, the redemption price for the period from December 1, 2017 through December 31, 2017, which we expect to pay in January 2018, and distributions based on daily record dates for the period from January 1, 2018 through January 31, 2018, which we expect to pay in February 2018. Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.
Distributions for these periodsall stockholders will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082 per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 6.11% annualized rate based on our December 9, 2016the November 2021 estimated value per shareshare. For a stockholder’s shares to be eligible for redemption in a given month or to withdraw a redemption request, we must receive a written notice from the stockholder or from an authorized representative of $10.63.the stockholder in good order and on a form approved by us at least five business days before the redemption date.
Financing SubsequentDisposition of Domain Gateway
On September 29, 2011, we, through an indirect wholly owned subsidiary, purchased a five-story office building containing 183,911 rentable square feet located on approximately 4.3 acres of land in Austin, Texas (“Domain Gateway”). On November 2, 2021, we completed the sale of Domain Gateway to September 30, 2017a purchaser unaffiliated with us or our advisor, for $143.0 million, before third-party closing costs, closing credits and disposition fees payable to our advisor. The aggregate cost of Domain Gateway, which includes the initial purchase price plus capital expenditures since acquisition and acquisition fees and expenses, but excludes any reductions to the net book value of the property due to historical depreciation and amortization expense, was $69.1 million. In connection with the disposition of Domain Gateway, we paid down $69.7 million of principal balance due under the Modified Portfolio Revolving Loan Facility.
Amended and Restated Portfolio Loan Facility
On November 3, 2017,2021, we, through indirect wholly owned subsidiaries, (each a “Borrower”), entered into a three-yeartwo-year loan facilityagreement with Bank of America, N.A., as administrative agent; Merril Lynch Pierce Fenner & Smith Incorporated,BofA Securities, Inc., Wells Fargo Securities, LLC and U.S. Bank, N.A.,Capital One, National Association as joint lead arrangers and joint book runners; Wells Fargo Bank, NA,N.A., as syndication agent, and each of the financial institutions a signatory thereto, (the “Lenders”), for an amount of up to $1.01 billion (the “Portfolio Loan Facility”),$613.2 million, of which $757.5$459.9 million is term debt and $252.5$153.3 million is revolving debt. Proceeds from theAt closing, $459.9 million of term debt and $57.1 million of revolving debt were used to pay off and address the upcoming 2018 loan maturities for the existing Town Center Mortgage Loan, RBC Plaza Mortgage Loan, National Office Portfolio Mortgage Loan, 500 West Madison Mortgage Loan, Ten Almaden Mortgage Loan and Towers at Emeryville Mortgage Loan. At closing, $787.5 million was funded, of which $776.0 million was used to pay off thein full our existing mortgage loans (listed above) and the remaining amount was used to pay origination fees and accrued interest. The $787.5 million funded consisted of $757.5 million of term debt and $30.0 million of revolving debt. TheModified Portfolio Loan Facility, may be used for the repayment of debt, for tenant improvements, leasing commissions and capital improvements, for working capital or liquidity managementan additional $96.2 million of the company and for other purposes described in the loan agreement. During the term of the Portfolio Loan Facility, we have an option to increase the aggregate loan amount by up to an additional $400.0 million in increments of $25.0 million, to a maximum of $1.41 billion, 25% of which would be revolving debt and 75% of which would be term debt, subject to certain conditions contained in the loan agreement.
The Portfolio Loan Facility matures on November 3, 2020, with two 12-month extension options,remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. TheSee Part II, Item 5 “Other Information,” for more information about our Amended and Restated Portfolio Loan Facility bears interest at a floating rate of 180 basis points over one-month LIBOR during the initial term of the loan and monthly payments are interest only with the entire balance and all outstanding interest and fees due at maturity, assuming no prior prepayment. We will have the right to prepay all of the Portfolio Loan Facility, subject to certain expenses potentially incurred by the Lenders as a result of the prepayment and subject to certain conditions contained in the loan documents. In addition, the Portfolio Loan Facility contains customary representations and warranties, financial and other affirmative and negative covenants (including maintenance of an ongoing debt service coverage ratio), events of default and remedies typical for this type of facility.Facility.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
On November 3, 2017, KBS REIT Properties III, LLC (“REIT Properties III”), an indirect wholly owned subsidiary of us, entered into three interest rate swap agreements with a current aggregate notional amount of $451.5 million. As of November 3, 2017, we had three existing interest rate swaps related to the paid off loans with a current notional amount in the aggregate of $306.0 million. As the existing interest rate swaps expire at various times from January 1, 2018 through January 1, 2020, the notional amount of the new interest rate swaps in the aggregate will increase to maintain a notional amount of $757.5 million. The new and existing interest rate swaps, in the aggregate, effectively fix the interest rate on the term portion of the Portfolio Loan Facility at a blended rate of 3.861%, effective from November 3, 2017 through November 1, 2022.
The Portfolio Loan Facility is secured by RBC Plaza, Preston Commons, Sterling Plaza, One Washingtonian Center, Towers at Emeryville, Ten Almaden, Town Center and 500 West Madison. We have the right to substitute properties securing the Portfolio Loan Facility at any time, subject to approval of the Lenders and compliance with the terms and conditions described in the loan agreement.
Under the guaranty agreement related to the Portfolio Loan Facility (the “Guaranty”), REIT Properties III (i) provides a guaranty of, among other sums described in the Guaranty, all principal and interest outstanding under the Portfolio Loan Facility in the event of certain bankruptcy or insolvency proceedings involving REIT Properties III, any Borrower or any of their affiliates and (ii) guarantees payment of, and agrees to protect, defend, indemnify and hold harmless each Lender for, from and against, any deficiency, loss or damage suffered by any Lender because of (a) certain intentional acts committed by any Borrower or (b) certain bankruptcy or insolvency proceedings involving REIT Properties III, any Borrower or any of their affiliates, as such acts are described in the Guaranty.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the future acquisition and origination of mortgage and other loans. Our profitability and the value of our real estate investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that variable rate exposure is kept at an acceptable level or we may utilizeby utilizing a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for the payment of distributions to our stockholders and that the losses may exceed the amount we invested in the instruments.
We borrow funds and make investments at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt, or fixed rate real estate loans receivable, if any, unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of September 30, 2017,2021, the fair value of our fixed rate debt was $193.5$126.5 million and the outstanding principal balance of our fixed rate debt was $192.9$123.0 million. The fair value estimate of our fixed rate debt is calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loan was originated as of September 30, 2017.2021. As we expect to hold our fixed rate instruments to maturity (unless the property securing the debt is sold and the loan is repaid) and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations. As of September 30, 2017, we did not own any fixed rate loans receivable.
Conversely, movements in interest rates on our variable rate debt would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of variable rate instruments. As of September 30, 2017,2021, we were exposed to market risks related to fluctuations in interest rates on $630.9$355.9 million of variable rate debt outstanding after giving consideration to the impact of interest rate swap agreements on approximately $1.1 billion of our variable rate debt. This amount does not take into account the impact of $91.5 million of forward interest rate swap agreements that were not yet effective as of September 30, 2017. Based on interest rates as of September 30, 2017,2021, if interest rates were 100 basis points higher or lower during the 12 months ending September 30, 2018,2022, interest expense on our variable rate debt would increase or decrease by $6.3$3.6 million. As of September 30, 2017, we did not own any variable
The interest rate loans receivable.
Theand weighted-average effective interest ratesrate of our fixed rate debt and variable rate debt as of September 30, 20172021 were 4.1%3.7% and 3.2%3.0%, respectively. The weighted-average effective interest rates representrate represents the actual interest rate in effect as of September 30, 20172021 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable), using interest rate indices as of September 30, 20172021 where applicable.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures about Market Risk (continued)
We are exposed to financial market risk with respect to our investment in the SREIT (SGX-ST Ticker: OXMU). Financial market risk is the risk that we will incur economic losses due to adverse changes in our investment’s security price. Our exposure to changes in security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from our carrying value. Fluctuation in the market prices of a security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. The SREIT’s units were first listed for trading on the SGX-ST on July 19, 2019. If an active trading market for the units does not develop or is not sustained, it may be difficult to sell our units. The market for Singapore REITs may trade a small number of securities and may be unable to respond effectively to increases in trading volume, potentially making prompt liquidation of our investment in the SREIT difficult. Even if an active trading market develops or we are able to negotiate block trades, if we or other significant investors sell or are perceived as intending to sell a substantial amount of units in a short period of time, the market price of our remaining units could be adversely affected. In addition, as a foreign equity investment, the trading price of units of the SREIT may be affected by political, economic, financial and social factors in the Singapore and Asian markets, including changes in government, economic and fiscal policies. Furthermore, we may be limited in our ability to sell our investment in the SREIT if our advisor and/or its affiliates are deemed to have material, non-public information regarding the SREIT. Charles J. Schreiber, Jr., the Chairman of our Board, our Chief Executive Officer, our President and our affiliated director, is a director of the external manager of the SREIT, and an affiliate of our advisor services as the U.S. asset manager to the SREIT. We do not currently engage in derivative or other hedging transactions to manage our investment’s security price risk. As of September 30, 2021, we held 289,561,899 units of the SREIT which represented 24.8% of the outstanding units of the SREIT. As of September 30, 2021, the aggregate value of our investment in the units of the SREIT was $247.6 million, which was based solely on the closing price of the SREIT units on the SGX-ST of $0.86 per unit as of September 30, 2021, and did not take into account any potential discount for the holding period risk due to the quantity of units held by us relative to the normal level of trading volume in the units. Based solely on the closing price per unit of the SREIT units as of September 30, 2021, if prices were to increase or decrease by 10% upon sale of all of our 289,561,899 units of the SREIT, our net income would increase by $53.7 million or increase by $4.1 million, respectively.
For a discussion of the interest rate risks related to the current capital and credit markets, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Outlook -– Real Estate and Real Estate Finance Markets” herein and the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2020, as filed with the SEC.
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
In addition to the risk discussed below, pleasePlease see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016,2020 and in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2021, each as filed with the SEC.
Because of certain limitations on the dollar value of shares that may be redeemed under our share redemption program, as of November 1, 2017, we will only able to process an additional $0.3 million of redemptions for the remainder of 2017.
During any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. In 2016, our net proceeds from the dividend reinvestment plan were $61.9 million. As of October 31, 2017, we had redeemed $61.6 million of shares of common stock. Thus, because of this limitation, we are only able to process an additional $0.3 million of redemptions for the remainder of 2017 and we anticipate exhausting this amount on the November 30, 2017 redemption date. If we cannot redeem all shares presented for redemption in any month because of the limitations on redemptions set forth in our share redemption program, then we will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in our currently effective, or the most recently effective, registration statement, as such registration statement has been amended or supplemented, then we would redeem all of such stockholder’s shares.
The annual limitation on the dollar amount of shares that may be redeemed under our share redemption program will be reset on January 1, 2018. For more information on our share redemption program, see Part 2, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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a) | During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933. |
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c) | We have a share redemption program that may enable stockholders to sell their shares to us in limited circumstances. The restrictions of our share redemption program will severely limit our stockholders’ ability to sell their shares should they require liquidity and will limit our stockholders’ ability to recover the value they invested in our common stock or recover an amount equal to or greater than our estimated value per share. |
a).During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.
b).Not applicable.
c).We have a share redemption program that may enable stockholders to sell their shares to us in limited circumstances. The restrictions of our share redemption program will limit our stockholders’ ability to sell their shares should they require liquidity and will limit our stockholders’ ability to recover an amount equal to our estimated value per share.
The following is a description of our share redemption program from January 1, 2021 through June 30, 2021 and the amendments to the program made by the amended and restated share redemption program (the “Amended Share Redemption Program”), which became effective as of the July 30, 2021 redemption date.
In December 2019, our board of directors determined to temporarily suspend Ordinary Redemptions under the share redemption program, and Ordinary Redemptions remained suspended through June 30, 2021. Ordinary Redemptions are all redemptions other than those that qualify for the special provisions for redemptions sought in connection with a stockholder’s death, “Qualifying Disability” or “Determination of Incompetence” (each as defined in the share redemption program and, together, “Special Redemptions”). Upon suspension, all Ordinary Redemption requests that had been received were cancelled and no Ordinary Redemption requests were accepted or collected during the suspension of the share redemption program. Further, on June 3, 2021, we announced that, in connection with the approval of the Self-Tender (defined below), our board of directors approved a temporary suspension of all redemptions under the share redemption program, including Special Redemptions. Upon suspension, all outstanding redemption requests under the share redemption program were cancelled, and no requests were accepted or collected under the share redemption program. As such, Special Redemptions under the share redemption program were suspended for the June 30, 2021 redemption date, meaning no Special Redemptions were made under the share redemption program in June 2021. Ordinary Redemptions and Special Redemptions resumed effective for the July 30, 2021 redemption date under the Amended Share Redemption Program.
In order to provide stockholders with additional liquidity that is in excess of that permitted under our share redemption program, on June 4, 2021, we commenced a self-tender offer (the “Self-Tender”) for up to 33,849,130 shares of common stock at a price of $10.34 per share, or approximately $350.0 million of shares. On July 12, 2021, we accepted for purchase 26,377,990 shares properly tendered and not properly withdrawn at a purchase price of $10.34 per share, or approximately $272.7 million of shares, excluding fees and expenses relating to the tender offer.
PART II. OTHER INFORMATION (CONTINUED)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)
There are several limitations on our ability to redeem shares under our share redemption program:
•Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program document and, together with redemptions sought in connection with a stockholder's death, “Special Redemptions”),Special Redemption, we may not redeem shares unless the stockholder has held the shares for one year.
During•Except as provided otherwise in the Amended Share Redemption Program with respect to calendar year 2021 only, during any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year.year, provided that once we have received requests for redemptions, whether in connection with Special Redemptions or otherwise, that if honored, and when combined with all prior redemptions made during the calendar year, would result in the amount of remaining funds available for the redemption of additional shares in such calendar year being $10.0 million or less, the last $10.0 million of available funds shall be reserved exclusively for Special Redemptions. Notwithstanding anything contained in our share redemption program to the contrary, we may increase or decrease the funding available for the redemption of shares pursuant to the program upon ten business days’ notice to our stockholders. We
•Pursuant to the Amended Share Redemption Program, for calendar year 2021 only, we may provide notice by including such information (a)redeem up to 5% of the weighted-average number of shares outstanding during the 2020 calendar year, provided that once we have received requests for redemptions, whether in a Current Report on Form 8-Kconnection with Special Redemptions or otherwise, that if honored, and when combined with all prior redemptions made during the 2021 calendar year, would result in our annualthe number of remaining shares available for redemption in the 2021 calendar year being 500,000 or quarterly reports, all publicly filed withless, the Securities and Exchange Commission or (b) in a separate mailing to our stockholders.last 500,000 shares available for redemption shall be reserved exclusively for Special Redemptions.
•During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
•We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland General Corporation Law, as amended from time to time, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
PART II. OTHER INFORMATION (CONTINUED)
Item 2. Unregistered Salesdetermining the time period a redeeming stockholder has held each share, the time period begins as of Equity Securities and Usethe date the stockholder acquired the share; provided, that shares purchased by the redeeming stockholder pursuant to our dividend reinvestment plan or received as a stock dividend will be deemed to have been acquired on the same date as the initial share to which the dividend reinvestment plan shares or stock dividend shares relate. The date of Proceeds (continued)
the share’s original issuance by us is not determinative.
For a stockholder’s shares to be eligible for redemption in a given month, the administrator must receive a written redemption request from the stockholder or from an authorized representative of the stockholder setting forth the number of shares requested to be redeemed at least five business days before the redemption date. We redeem shares on the last business day of each month, except that the first redemption date following our establishment of an estimated value per share shall be no less than ten business days after our announcement of such estimated value per share in a filing with the SEC and the redemption date shall be set forth in such filing. If we cannot redeem all shares presented for redemption in any month because of the limitations on redemptions set forth in our share redemption program, then we will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in our currently effective, or the most recently effective, registration statement, as such registration statement has been amended or supplemented, then we would redeem all of such stockholder’s shares.
If we do not completely satisfy a redemption request on a redemption date because the program administrator did not receive the request in time, because of the limitations on redemptions set forth in our share redemption program or because of a suspension of our share redemption program, then we will treat the unsatisfied portion of the redemption request as a request for redemption at the next redemption date funds are available for redemption, unless the redemption request is withdrawn.withdrawn; provided that during the suspension of Ordinary Redemptions and Special Redemptions described above, all redemption requests that had been received were cancelled and no redemption requests were accepted or collected during the suspension. Any stockholder can withdraw a redemption request by sending written notice to the program administrator, provided such notice is received at least five business days before the redemption date.
PART II. OTHER INFORMATION (CONTINUED)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)
Upon a transfer of shares, any pending redemption requests with respect to such transferred shares will be canceled as of the date we accept the transfer. Stockholders wishing us to continue to consider a redemption request related to any transferred shares must resubmit their redemption request.
Pursuant to our share redemption program, redemptions made in connection with Special Redemptions are made at a price per share equal to the most recent estimated value per share of our common stock as of the applicable redemption date. The
Through June 30, 2021, Ordinary Redemptions were made at a price at which we will redeem all other shares eligible for redemption is as follows:
For those shares held by the redeeming stockholder for at least one year, 92.5%per share equal to 95% of our most recent estimated value per share as of the applicable redemption date;
For those shares held bydate. Under the redeeming stockholder forAmended Share Redemption Program, commencing with the July 30, 2021 redemption date, Ordinary Redemptions are made at least two years, 95.0% of our most recent estimated valuea price per share as of the applicable redemption date;
For those shares held by the redeeming stockholder for at least three years, 97.5% of our most recent estimated value per share as of the applicable redemption date; and
For those shares held by the redeeming stockholder for at least four years, 100%equal to 96% of our most recent estimated value per share as of the applicable redemption date.
On December 9, 2016,7, 2020, our board of directors approved an estimated value per share of our common stock of $10.63$10.74 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2016. This2020, with the exception of adjustments to our net asset value to give effect to the change in the estimated value of our investment in units of the SREIT (SGX-ST Ticker: OXMU) as of December 1, 2020. Effective December 7, 2020 and through May 13, 2021, the redemption price for all shares eligible for redemption was calculated based on the December 7, 2020 estimated value per share.
On May 13, 2021, our board of directors approved an estimated value per share became effectiveof our common stock of $10.77 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of March 31, 2021, with the exception of adjustments to our net asset value to give effect to the change in the estimated value of our investment in units of the SREIT (SGX-ST Ticker: OXMU) as of April 29, 2021. Effective May 13, 2021 and through November 1, 2021, the redemption price for all shares eligible for redemption was calculated based on the May 13, 2021 estimated value per share.
On November 1, 2021, our board of directors approved an estimated value per share of our common stock of $10.78 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2021, with the exception of adjustments to our net asset value to give effect to (i) the change in the estimated value of our investment in units of the SREIT (SGX-ST Ticker: OXMU) as of October 22, 2021 and (ii) the contractual sales price less estimated disposition costs and fees of one property that was under contract to sell as of November 1, 2021. Effective for the December 2016November 2021 redemption date, which was Decemberis November 30, 2016.
For purposes of determining2021, and until the time period a redeeming stockholder has held eachestimated value per share is updated, the time period begins as of the date the stockholder acquired the share; provided, thatredemption price for all shares purchased by the redeeming stockholder pursuant to our dividend reinvestment planeligible for redemption will be deemed to have been acquiredcalculated based on the same date as the initial share to which the dividend reinvestment plan shares relate. The date of the share’s original issuance by us is not determinative. In addition, as described above, the shares owned by a stockholder may be redeemed at different prices depending on how long the stockholder has held each share submitted for redemption.November 1, 2021 estimated value per share.
We currently expect to utilize an independent valuation firm to update our estimated value per share inno later than December 2017.2022. We will report the estimated value per share of our common stock in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC. We will also provide information about our estimated value per share on our website, www.kbsreitiii.com (such information may be provided by means of a link to our public filings on the SEC’s website, http://www.sec.gov).
Our board of directors may amend, suspend or terminate our share redemption program upon 30ten business days’ notice to stockholders, provided thatand consistent with SEC guidance and interpretations, we may increase or decrease the funding available for the redemption of shares pursuant to our share redemption program upon 10ten business days’ notice.
The complete share redemption program document is filed as an exhibit to our Annual We may provide notice by including such information (a) in a Current Report on Form 10-K for8-K or in our annual or quarterly reports, all publicly filed with the year ended December 31, 2013 and is available at the SEC’s website at http://www.sec.gov.
SEC or (b) in a separate mailing to our stockholders.
PART II. OTHER INFORMATION (CONTINUED)
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)
During the nine months ended September 30, 2017,2021, we fulfilled all redemption requests eligible for redemption under our share redemption program and received in good order. We funded redemptions under our share redemption program with the net proceeds from our dividend reinvestment plan and wefrom debt financing. We redeemed shares pursuant to our share redemption program as follows:
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| | | | | | | | | |
Month | | Total Number of Shares Redeemed (1) | | Average Price Paid Per Share (2) | | Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program |
January 2017 | | 536,160 |
| | $ | 10.46 |
| | (3) |
February 2017 | | 206,012 |
| | $ | 10.51 |
| | (3) |
March 2017 | | 458,763 |
| | $ | 10.37 |
| | (3) |
April 2017 | | 579,233 |
| | $ | 10.40 |
| | (3) |
May 2017 | | 563,933 |
| | $ | 10.46 |
| | (3) |
June 2017 | | 675,243 |
| | $ | 10.39 |
| | (3) |
July 2017 | | 899,951 |
| | $ | 10.36 |
| | (3) |
August 2017 | | 632,696 |
| | $ | 10.43 |
| | (3) |
September 2017 | | 701,088 |
| | $ | 10.38 |
| | (3) |
Total | | 5,253,079 |
| | | | |
_____________________ | | | | | | | | | | | | | | | | | | | | |
Month | | Total Number of Shares Redeemed (1) | | Average Price Paid Per Share (2) | | Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program |
January 2021 | | 101,887 | | | $ | 10.74 | | | (3) |
February 2021 | | 107,443 | | | $ | 10.74 | | | (3) |
March 2021 | | 80,409 | | | $ | 10.74 | | | (3) |
April 2021 | | 179,398 | | | $ | 10.74 | | | (3) |
May 2021 | | 96,964 | | | $ | 10.77 | | | (3) |
June 2021 | | — | | | $ | — | | | (3) |
July 2021 | | 159,922 | | | $ | 10.50 | | | (3) |
August 2021 | | 1,412,169 | | | $ | 10.39 | | | (3) |
September 2021 | | 1,736,860 | | | $ | 10.38 | | | (3) |
Total | | 3,875,052 | | | | | |
_____________________
(1) We announced the adoption and commencement of the program on October 14, 2010. We announced amendments to the program on March 8, 2013 (which amendment became effective on April 7, 2013) and, on March 7, 2014 (which amendment became effective on April 6, 2014), on May 9, 2018 (which amendment became effective on June 8, 2018), and on July 16, 2021 (which amendment became effective on July 30, 2021).
(2) The prices at which we redeem shares under the program are as set forth above.
(3) We limit the dollar value As of November 1, 2021, we had approximately 3.4 million shares that may be redeemed under the program as described above. One of these limitations is that during each calendar year, our share redemption program limits the number of shares we may redeem to those that we could purchase with the amount of the net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the redemption of shares upon ten business days’ notice to our stockholders. In 2016, our net proceeds from the dividend reinvestment plan were $61.9 million. During the nine months ended September 30, 2017, we redeemed $54.7 million of shares of common stock and $7.2 million was available for redemptions of shares eligible for redemption for the remainder of 2017.2021 under the Amended Share Redemption Program described above, including the reserve for Special Redemptions.
For the months of January 2021 through May 2021, we fulfilled all Special Redemption requests eligible for redemption under our share redemption program and received in good order. For the months of July 2021 through September 2021, we fulfilled all Ordinary Redemption and Special Redemption requests eligible for redemption under our share redemption program and received in good order.
PART II. OTHER INFORMATION (CONTINUED)
Item 3. Defaults uponUpon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5.5 Other Information
None.Amended and Restated Portfolio Loan Facility
On November 3, 2021, we, through indirect wholly owned subsidiaries (each a “Borrower” and together, the “Borrowers”), entered into a two-year loan agreement with Bank of America, N.A., as administrative agent; BofA Securities, Inc., Wells Fargo Securities, LLC and Capital One, National Association as joint lead arrangers and joint book runners; Wells Fargo Bank, N.A., as syndication agent, and each of the financial institutions a signatory thereto (the “Amended and Restated Portfolio Loan Facility Lenders”), for an amount up to $613.2 million, of which $459.9 million is term debt and $153.3 million is revolving debt (the “Amended and Restated Portfolio Loan Facility”). At closing, $459.9 million of term debt and $57.1 million of revolving debt were funded, which was used to pay off in full our existing Modified Portfolio Loan Facility, and an additional $96.2 million of the revolving debt remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. Subject to certain terms and conditions contained in the loan documents, the Amended and Restated Portfolio Loan Facility may be used for (i) paying closing costs and other expenses related to the loan, (ii) for the return of equity to certain indirect owners of Borrowers, (iii) to pay or reimburse Borrowers for certain other costs and expenses, including tenant improvement costs, leasing commissions, and capital improvement costs at the properties securing the loan, (iv) working capital or liquidity management of our company, and (v) for any other lawful purpose, provided that $25.0 million of the revolving debt is to be used for tenant improvements, tenant allowances or any other work required pursuant to the terms of a specified lease described in the loan documents, although this restriction is released as we complete such projects. In addition, the Amended and Restated Portfolio Loan Facility contains customary representations and warranties, financial and other affirmative and negative covenants (including maintenance of an ongoing debt service coverage ratio), events of default and remedies typical for this type of facility.
The Amended and Restated Portfolio Loan Facility matures on November 3, 2023, with one additional 12-month extension option, subject to certain terms and conditions as described in the loan documents. The Amended and Restated Portfolio Loan Facility bears interest at the Bloomberg Short-Term Bank Yield Index rate plus 180 basis points per annum. Monthly payments are interest only with the entire balance and all outstanding interest and fees due at maturity. We will have the right to prepay the loan in part and in whole, without fee, premium or penalty, subject to certain conditions contained in the loan documents.
The Amended and Restated Portfolio Loan Facility is secured by RBC Plaza, Preston Commons, Sterling Plaza, Towers at Emeryville, Ten Almaden and Town Center. We have the right to substitute properties securing the Amended and Restated Portfolio Loan Facility at any time, subject to approval of the Amended and Restated Portfolio Loan Facility Lenders and compliance with the terms and conditions described in the loan agreement.
KBS REIT Properties III, LLC (“REIT Properties III”), our indirect wholly owned subsidiary, is providing a guaranty of (i) payment of, and agrees to protect, defend, indemnify and hold harmless each Amended and Restated Portfolio Loan Facility Lender for, from and against, any liability, obligation, deficiency, loss, damage, costs and expenses (including reasonable attorney’s fees), and any litigation which may at any time be imposed upon, incurred or suffered by the Amended and Restated Portfolio Loan Facility Lender because of (a) certain intentional acts committed by the Borrowers, (b) fraud or intentional misrepresentations by the Borrowers or REIT Properties III in connection with the loan documents as described in the guaranty agreement, and (c) certain bankruptcy or liquidation proceedings under state or federal law, and (ii) payment for liability that is incurred and related to certain environmental matters. In addition, REIT Properties III is providing a principal guaranty for up to 10% of the outstanding balance of the Amended and Restated Portfolio Loan Facility, but in no event exceeding $61.3 million, which may be reduced from time to time in connection with any repayment of principal that results in a mutually agreed upon reduction to the commitment of the Amended and Restated Portfolio Loan Facility as set forth in the guaranty agreement.
PART II. OTHER INFORMATION (CONTINUED)
Item 6. Exhibits
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.