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KBS Sees Growth in Value Across its Portfolios

NEWPORT BEACH (January 30, 2019) —KBS, one of the largest commercial office owners globally, announced today the net asset value of its portfolio increased 6.15% in 2018. KBS’ real estate portfolio consists of 118 properties located in prime urban markets throughout the United States valued in excess of $11 billion as of December 31, 2018. The assets are held through five public non-traded REITs as well as eight funds managed for two institutional separate account relationships. During 2018 KBS completed the full liquidation of two of its public non-traded REITs.

 

In addition to growing the value of its real estate, KBS made weighted average distributions to investors for its public non-traded REITs (excluding its opportunistic REITs) of nearly 6.0% and for its institutional funds in excess of 7.0% on invested capital.

KBS CEO Chuck Schreiber commented, “While we hear a general consensus that the commercial real estate market is softening, the substantial and disciplined growth of KBS’ portfolio suggests there is still ample opportunity for continued growth and return for owners who are strategic with respect to the markets and the type of office property purchased and operated.”

 

KBS’ strategy focuses on investments in urban markets that are attracting tech and creative users and have a wide range of amenities that help companies attract today’s top-tier talent. These include markets with good public transportation as well as entertainment, housing and dining amenities.

 

 

“In many of these markets, we are seeing limited supply due to the cost and constraints on new construction, and as a result rental rates continue to climb,” said Schreiber. “It has not been uncommon in the last year for existing tenants to approach us seeking to renew their space early and even seeking to secure additional space in anticipation of growth in their office needs to hedge against rising rental rates.”

According to Cushman & Wakefield’s Q3 2018 Marketbeat report on the U.S. office market, office-using employment increased by 600,000 jobs and unemployment declined from 4.4% to 3.9%. While national vacancy rates are projected to increase slightly, rental rates are projected to climb. According to the report, average asking rents have increased over 27% since the second quarter of 2011, the lowest level in recent years. The fastest growth has been in the tech sector led by San Francisco where rents have doubled.

 

In 2018, KBS became one of the first large-scale operators to offer a direct investment real estate fund for accredited investors online. The KBSDirect.com platform is a user-friendly portal where accredited investors can invest in an institutional-quality portfolio of diversified multi-tenant office buildings without paying any up-front commissions.

“We saw an opportunity to better serve retail investors by offering them a means to invest in institutional quality real estate with lower fees and greater transparency so they can do their own research and make their own self-directed investments,” said Schreiber. “This essentially means that 100% of investors’ invested capital goes to the real estate, thus providing opportunity for enhanced returns.”

KBS is also working with registered investment advisers (RIAs) to introduce them to KBS and the level of transparency KBS provides and placing the commission-free fund on their own platforms as an alternative investment vehicle that can hedge against higher risk investments.

“We are very excited about the coming year and the opportunities to serve our tenants with exceptional space in some of the best locations in the U.S.,” concluded Schreiber. “We are also excited about growing our direct investment efforts so that accredited investors and registered investment advisors have the opportunity to invest in risk-adjusted, institutional-quality real estate without upfront commissions.”

 

About KBS
KBS is a private equity real estate company and an SEC-registered investment adviser. Founded in 1992 by Peter Bren and Chuck Schreiber, it is recognized as one of the largest commercial office owners globally. Since inception, KBS-affiliated companies have completed transactional activity of approximately $40 billion via 16 separate accounts and six commingled funds, for government and corporate pension funds. Additionally, KBS has sponsored five sovereign wealth funds and seven SEC-registered, non-traded REITs. For more information on KBS, its properties and real estate portfolios, please visit KBS.com. For information about KBS’ current offering, please visit KBSDIRECT.com.

 

Forward-Looking Statements
The foregoing includes forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its 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. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes 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. Actual results may differ materially from those contemplated by such forward-looking statements. The REIT makes no representation or warranty (express or implied) about the accuracy of any such forward-looking statements. These statements are based on a number of assumptions involving the judgment of management.

 The valuation methodology for the Company’s real estate properties assumes the properties realize the projected cash flows and expected exit cap rates and that investors would be willing to invest in such properties at yields equal to the expected discount rates. Though the valuation estimates used in determining the real estate values are based on real estate appraisals provided by Duff & Phelps’, CBRE, Cushman & Wakefield, Colliers’ or the Company’s and/or the Advisor’s best estimates of value, the Company can give no assurance in this regard. These statements also depend on factors such as: future economic, competitive and market conditions; the Company’s ability to maintain occupancy levels and rental rates at its real estate properties; the borrowers under the Company’s real estate debt securities investment continuing to make required payments; and other risks identified in Part I, Item IA of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and subsequent periodic reports, as filed with the SEC. Actual events may cause the value and returns on the investments to be less than that used for the purposes of estimated net asset per share values.

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KBS signs largest lease in Denver in 2018

KBS continues strategy of successfully upgrading

Class A office buildings in its portfolios

 

KBS, based in Newport Beach, California, announced the signing of 384,716 square feet in leasing at Granite Tower in Denver during the fourth quarter of 2018.

Among these leases is a 12-year extension for 295,743 square feet with Anadarko Petroleum Corp., the largest lease signed in Denver in 2018. Other new tenants at the property include Inflection Energy LLC, MountainView Financial and Causey Demgen & Moore P.C. Granite Tower.

“KBS’ overall strategy has been to acquire high quality office assets that are well located, then implement aggressive renovations to properly compete with significant developments occurring across the country. Our thoughtful and forward-thinking renovations at Granite Tower have proven key to attracting and retaining premier tenants at the property,” said Rodney Richerson, Western regional president for KBS. “We look forward to fostering long-term relationships with our new and existing tenants while continuously working to meet their changing needs.”

KBS continues its strategy of identifying Core and Core-plus commercial office buildings, and then upgrading those assets with tenant amenities that the current workforce, and employers now expect.  KBS has executed on this strategy nationwide.  Examples of this strategy can be found in several assets like the Commonwealth building in Portland, Oregon, where the lobby was completely changed, bike rooms, a gym and showers were installed, along with better floor layouts and common areas for all tenants to use.  Leasing levels have risen to over 95% occupancy, and at rates higher than only a few years ago. The Commonwealth building in Portland is an asset in KBS Growth and Income REIT, which is currently the only KBS REIT open to investors at this time, There are no commissions charged to investors to invest into the KBS REIT.

Granite Tower in Denver is part of the KBS REIT II portfolio, which is closed to new investors and has already sold several assets, returning capital to investors.  Granite Tower is a 31-story, Class A office tower located in Denver’s Central Business District (CBD). The property is in close proximity to Coors Field, home to the Colorado Rockies, and Union Station, a lively neighborhood known for its dining and shopping options.

“The bustling area provides access to a balanced professional and personal life,” said Clint Copulos, senior vice president for KBS and asset manager for the property. “Tenants can enjoy the office amenities while being within walking distance to restaurants, retail and more.”

 

 About KBS

KBS is a private equity real estate company and an SEC-registered investment adviser. Founded in 1992 by Peter Bren and Chuck Schreiber, it is recognized as one of the largest commercial office owners globally. Since inception, KBS-affiliated companies have completed transactional activity of approximately $40 billion. KBS has managed these investments via 16 separate accounts and six commingled funds, including sovereign wealth funds and corporate pension funds. Additionally, KBS has sponsored seven SEC-registered, non-traded REITs. For more information on KBS, its properties and real estate portfolios, please visit KBS.com. For information about KBS’ current offering, please visit KBSDIRECT.com.

This release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, including KBS REIT II’s ability to invest in and manage a diverse portfolio, the performance of Granite Tower and the performance of the Denver real estate market. These statements are subject to known and unknown risks, uncertainties and other factors which may cause KBS REIT II’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

* Prior performance is no guarantee of future results. Estimated portfolio values are as of December 31, 2017. Assets shown in prior KBS funds may not be representative of assets in current open offerings. Prior funds are listed to illustrate KBS historical acquisition and disposition activity and geographic distribution and may not be representative of future investment activity.

KBS Holdings LLC intends to sponsor an offering pursuant to Regulation A under the Securities Act of 1933, as amended. No money or other consideration is being solicited at this time with respect to such offering, and if sent in response to these materials for such an offering, it will not be accepted. No offer to buy securities can be accepted and no part of the purchase price can be received for an offering under Regulation A until an offering statement is qualified by the U. S. Securities and Exchange Commission, and any such offer may be withdrawn or revoked, without obligation or commitment of any kind, at any time before notice of its acceptance given after the qualification date. An indication of interest made by a prospective investor in a Regulation A offering is non-binding and involves no obligation or commitment of any kind. There are no guarantees regarding future performance. See Risk Factors. Securities offered through North Capital Private Securities (NCPS). Investment risk – liquidity, risk of loss; not tax, investment, accounting advice; past performance not indicative of future results; consult with a professional (attorney, advisor, accountant); conduct your own research and due diligence; forward looking statements; information believed to be correct but don’t rely upon it / no warranty; not an offer to sell securities; information may not be complete; investments not suitable for all investors; not a recommendation; platforms are not brokers; member FINRA and SIPC.

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Fear of being a late cycle CRE investor

When speaking with investors, and at real estate investment conferences, the common theme from participants is the fear of investing in commercial office buildings and other income producing CRE, currently, when there is a perceived ‘top of the cycle’ for commercial real estate.

 

The term ‘cycle’ implies that once CRE reaches the ‘top of its cycle’, then there will be a downturn to CRE assets and thus lower returns or incur losses for investors.

 

Debunking certain terms for CRE:

 

But what if the term ‘cycle’ is an inaccurate description of the dynamics for performance of CRE assets? Some investors and consultants may be making a mistake to use the term ‘late cycle’ for ‘Real Estate’. That is a generic characterization of all real estate.

Let’s take commercial office as an example.  Do commercial office buildings share the same economic dynamics as retail malls, residential homes, multifamily rentals, etc.? The answer is no.  Within the commercial office market, do Class A office buildings in major markets share the same economic dynamics as a Class B suburban office building in a second-tier market? No, it does not.

So, the word ‘cycle’ assumes that investment in CRE will peak and then turn down or trend negative.  At many investment conferences, consultants will put up a chart showing a curve with a cycle that turns negative for CRE, at certain point.  In actuality, there is not a smooth cycle for CRE sponsors and investors. What has happened to the consultants and their charts when they predicted the end of the ‘cycle’ for CRE investment in 2015? 2016? 2017? 2018?

 

Confusing ‘Cycle Downturn’ with lower return expectations

 

One should be careful about confusing a strong and tight CRE market, with a pending ‘downturn in the CRE cycle’.  These are not the same things.  One example of this is where fully leased Class A office buildings have experienced gains in their value due to tighter markets, low supply and little to no new construction in the market.  This scenario should not be confused with a consultant speaking at a conference about the top of the cycle and thus a downturn for the ‘cycle’. This is not how sponsors and investors view the market.  These top assets are kept for their cash flow and ‘in-place’ tenant leases in an area that is experiencing job growth and economic expansion. This is not necessarily the beginning of a downturn.

The difference in this example is that there is no cycle to the specific asset/building if the in-place tenant leases are long term and there is little to no supply of comparable buildings in the immediate market.  The return profile for a new investor investing in that type of asset will be lower, but that does not mean that the cycle is turning down. If the market for Class A office is tight and returns to investors are 4% – 8% depending on leverage used, then that is the market.  It does not mean the end of a ‘cycle’.  This is a common mistake made by some media pundits and bloggers, and some consultants, when they describe a strong/tight CRE market as ‘late cycle’ just because the return profile is lower than a previous period when the markets were less tight and not as strong as they are currently.  There were some ‘experts’ talking about late cycle investments being made in 2015 – 2017. They advised investors to avoid these types of investments because of a pending ‘downturn in the cycle’.  So far those ‘experts’ have not been right, and the institutional investors who made those investments are holding their investments and collecting their cash flow as the assets remain stabilized in a tight market.

 

Publicly traded REITs and the confusion they cause for Private/Direct CRE investments

 

Publicly traded REITs have many investors and media analysts who follow them.  All too often publicly traded REITs are confused with private CRE investment.  Both modes of investment into CRE are completely different.  But since publicly traded REITs receive more of the media coverage than private CRE investment funds, statements like ‘late cycle investing’ and ‘the CRE cycle is poised for downturn’ get picked up in the media and are promoted by many media consultants and advisors.

If one looks at the media coverage of publicly traded REITS from 2018, there was plenty of reporting and coverage of publicly traded REITs that discussed significant volatility, loses in share price due to market liquidations and fear, and concern of retail CRE imploding and going bankrupt.  These headlines for publicly traded REITs had very little to do with the strong performance achieved in the Class A commercial office sector and other CRE strategies, and more importantly, the stability of the pricing and asset values of private CRE investment.  While many bloggers and newsletter writers spoke about how the publicly traded REIT index out performed the S&P 500 index in 2018, very few articles mentioned that the vast majority of publicly traded REITS were down on the year.

For the institutional investors who focus on private CRE investment, their returns had very little crossover or correlation with the negative returns of publicly traded REITs.   Many people just equate the negative performance of publicly traded REITs with all CRE investment, and that is completely wrong. In the private CRE investment world, savvy institutional investors do not pay a market multiple for liquidity, whereas retail investors buying publicly traded REITs, do.  The worst part for these investors in publicly traded REITs is they can suffer the losses of the REITs trading at discounts to the actual NAV of the RE assets due to swings in the market, and in some cases, the discounts to the NAV can be at significant levels, with very little chance of ever recovering to the true NAV. There are only two ways for publicly traded REIT investors to recoup losses due to heavy selling pressure: 1) many new investors enter the market to purchase that specific REIT, thus closing the negative discount spread, or 2) a takeover and purchase of the entire REIT at a value close to the real NAV.

 

Don’t be misled by inaccurate generic terms for CRE

 

CRE investors of all types should not be misled by terms that don’t really pertain to actual direct investing into incoming-producing CRE.  Private/direct investment in to Class A commercial office buildings outperformed publicly traded REITs in 2018.  Don’t be misled by ‘experts’ talking about how bad things were for generic CRE investing. That just was not the case.  Every deal and market is unique with specific economics and targets.  There is no generic ‘cycle’ to all real estate. Do your own analysis of the specific investment opportunities and try not to pay any commission to make an investment into professionally managed CRE.

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Will Direct Investment into CRE Finally Get Respect?

In 2018, direct investment into most income producing commercial real estate outperformed U.S. equity markets according to a December 17 release by the National Council of Real Estate And Investment Fiduciaries (NCREIF). The volatility of the U.S. equity markets was significantly higher than the volatility of private direct investment into income producing CRE. Even most publicly traded REITs underperformed most private direct investment into CRE.

 

“Will investing directly into income producing commercial real estate finally get more attention by individual investors in 2019?”

 

Most investors are aware of the increased volatility in the global equity markets, and it looks like volatility could continue in 2019.  Thus, as many investors plan their investment strategies for 2019, many will be concerned about potential volatility and uncertainty of returns and dividends.

 

Individual investors, who are concerned about the volatility in traded markets, may want to look at how some large institutional investors mitigate their exposure to traded market volatility.  The institutional investors who allocated capital at the end of 2017 and in 2018, to mainly Class A multitenant commercial office buildings (with high tenant occupancies), experienced stable cash flow derived from rental income, net of the operating costs of the assets.  The dividends and distributions paid to investors were generally constant and met expectations because the relative stability of income from in-place leases spread over many different tenants.

 

The key variables to total return for investors in Class A office buildings (with high tenant occupancy) are:

 

  1. Income from rent collected less operating expenses
  2. Any change in valuation of the asset, or the sale or re-financing of the assets/buildings.

 

This is very different than investors buying publicly traded stocks which trade at a multiple to their cash flows and in most cases at a multiple to their book value. A stock market investor can perform all the analysis on a publicly traded company, and estimate what a company may be worth, and what the earnings might be, but there is no way for investors to determine what the multiple or premium will be for a specific stock at any given time.  The multiple will be determined by other investors and market participants and their willingness to pay a premium for an actual set of cash flows.

 

This is different than income producing Class A commercial real estate assets where there is typically much less fluctuation in the actual NAV of the building in the short run, because there are few fundamental changes to a building and its cash flow in the short run, and since there is no traded premium attached to the asset, there is no risk of massive multiple contraction, as there can be in publicly traded stock valuations.  In the traded equity markets, the fundamentals can be exactly the same for a specific company, but if investors suddenly decide that they will no-longer pay 25x earnings and will only pay 20x or 15x earnings, the stock price is going to decline significantly in the short run.

 

In 2018, total returns for a large cross-section of Class A Office assets, in markets that KBS follows, ranged from 3% to 15%. The total return comprised of dividends and distributions ranging from 3% to 7%.  Valuation gains on buildings and assets ranged from 1% to 9% for a large cross-section of Class A office assets.

 

So many of these investors in Class A commercial real estate achieved total returns in 2018 of 6% to 12% with minimal volatility in the return stream and valuation of the assets. This 6% to 12% total return in 2018 compares favorably to the negative return of -4.4% for the S&P 500 Index in 2018.  In addition, there was minimal volatility with the total return of the CRE investments, whereas the U.S. equity markets were quite volatile, especially in Q4 2018. In December 2018, the U.S. equity markets experienced a significant decline, (S&P 500 Index -9%), as investors fled the markets. Fundamentals of the entire market did not change that much to warrant a decline of over 20% in Q4 for most averages.

 

Measuring Risk/reward and the certainty of distributions to investors

 

When most investors analyze the risk of an investment, they are concerned with:

  1. Return of capital
  2. Dividends and distributions
  3. Gains on the value of the asset
  4. Liquidity or sale of the asset

 

When analyzing these factors for Class A commercial office buildings, there is the ability to analyze each one of these factors with more certainty than the vast majority of publicly traded equities.  The biggest difference being that investing in income producing Class A office buildings does not have the risk of paying a market multiple that can fluctuate or evaporate just because investors are selling at a moment in time.

 

In a diversified portfolio of several Class A office buildings consisting of several tenants in each building, an investor can better analyze the certainty of the cash flow and distributions compared to a portfolio of stocks.  The value of the portfolio of Class A office buildings will typically not fluctuate very much as the asset is not liquid and might be valued 1-2 times a year.  This can compare favorably to a portfolio of stocks that can fluctuate with significant volatility in the short term, depending on market conditions.

 

Instant Liquidity vs. Longer Term Hold

 

Liquidity is the biggest differentiating factor between direct investment into CRE and investing into equity markets.  Direct investment into CRE is not for investors who will need their investment capital returned in two years or less. Direct investment into Class A commercial office buildings is usually made by institutional investors and some individual investors who are looking for some certainty of distributions from rental income, lower volatility of asset values and a more predictable approach to try and achieve a target total return objective.

 

2019 Investment Strategy Options: Class A CRE

 

If individual investors are setting their investment plans for 2019 and are concerned about experiencing a significant amount of volatility while trying to achieve high single digit returns, they may want to consider evaluating direct investment in to a diversified portfolio of Class A commercial office buildings where there is transparency provided by the owner with regard to financing of the building, tenant composition, lease terms/lengths and the sponsor’s view and evaluation of the local market.  Finally, if an investor does review and analyze a vehicle to make direct investments into Class A CRE, the investor should try not to pay a commission to invest into the vehicle.  There are options to invest directly into CRE without paying a commission to do so.