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KBS REITs Default On Loan For Portland Office, Suspend Redemptions

A loan default on a Portland, Oregon, office building is among a slew of bad financial news Newport Beach, California-based KBS and its associated REITs shared with investors in the last month. 

In addition to the default, office-heavy KBS REIT III suspended investor redemptions and is still struggling to sell an LA office property, offering the potential buyer credits to close the deal as it extends deadlines. KBS and its affiliate companies have $7B in assets under management. 

Portland, Oregon

A Dec. 15 filing with the Securities and Exchange Commission indicated that KBS Growth & Income REIT defaulted on a loan for a Portland office property known as the Commonwealth Building. KBS’ website shows that the property is a 224K SF, LEED Gold-certified building, and late 2022 SEC filings indicated it was 51.8% occupied.  

Public records show that KBS bought the property in 2016 for $69M. The original 2018 loan from Metropolitan Life Insurance Co. was for $51.4M and is slated to mature in February 2023. KBS owes $45.7M on the loan at an interest rate of 4.73%, according to the filing.

KBS was not able to provide more details when reached for comment by email Friday. 

The REIT's portfolio consists of four office buildings: the one in Portland, one in Houston and two in Chicago. 

KBS said in its filing that because of reduced occupancy and rent collection at the Portland building, its operating income doesn’t cover the debt service on the loan. KBS doesn’t anticipate a “near-term recovery in value,” in part because of the decreased demand for office space in the downtown area. 

Of course, it isn't just downtown Portland that is seeing a lack of demand for office space. The headwinds facing the office market at large have impacted another of KBS’ nontraded REITs.

KBS REIT III’s board of directors voted on Jan. 17 to suspend redemptions, according to a filing with the SEC. It is canceling all the redemptions it has received and will not take new requests during the suspension period. 

In the last couple of months, KKR & Co., Blackstone and Starwood have limited redemptions, capping the amount that can be taken out of their nontraded REITs as wealthy investors look to pull their money out of the real estate-heavy funds. 

KBS REIT III’s portfolio of nearly 20 office properties is worth about $2.8B, according to a September 2022 estimate

In its filing and in comments to Bisnow, KBS REIT III draws a direct line from the headwinds facing commercial real estate in general — especially office buildings — to the suspension. 

"Significant inflation, rapidly rising interest rates, tenant expirations, a lack of lending activity in the debt markets, as well as other events domestically and globally, have negatively impacted our ongoing cash flows and access to certain credit facilities," KBS Regional President for the Western U.S. Giovanni Cordoves  said via email. "As a result, the share redemption plan was closed in order to effectively manage the KBS REIT III portfolio throughout these challenging times and to bring about the best possible long-term outcome for all our stockholders.  We will continue to reevaluate the suspension as we move forward and market conditions improve."

KBS said in its filing the increasing adoption of hybrid or remote working arrangements, “most notably in the San Francisco Bay Area where the Company owns several large assets, have had direct and material impacts on the Company’s ability to access certain credit facilities which, in large part, provide liquidity to manage redemption requests.”

The REIT’s portfolio as of Nov. 22 included 17 office properties spanning approximately 7.3M SF across the U.S. Between properties in San Francisco, San Jose and Oakland, the company owns about 1.6M SF in the Bay Area. 

The company said it is working to determine when it can lift the stop on redemptions but offered no guidance as to when that might be. The decision affects what KBS terms “ordinary” redemptions, which roughly applies to all redemptions except those sought because a shareholder died or became disabled. 

Challenging market conditions that the company cited as a contributor to limiting withdrawals from one of its REITs have also been an enormous hurdle for another, which is attempting to sell off a large office building in Downtown Los Angeles. 

KBS REIT II’s attempt to sell off the Union Bank Plaza is — after many extensions to the would-be buyer, Waterbridge Capital — ongoing. The most recent extension offers a $15M buyer credit on the $155M sale price if the sale closes by Jan. 27 and a $13M credit if it closes prior to Jan. 31. Joel Schreiber’s Waterbridge Capital first entered an agreement to purchase the 40-story, 701K SF office building in Downtown Los Angeles in July 2022. 

“Net assets in liquidation decreased by approximately $34.7 million from $205.5 million on December 31, 2021 to $170.8 million on June 30, 2022,” primarily due to the liquidation value it anticipated for the sale of the Union Bank Plaza, a 2022 filing with the SEC indicated. 

The REIT voted to liquidate its assets in February 2020. The Union Bank Plaza is the last property it has left to sell.

"We continue to work with the buyer to close the transaction and hope to have it completed by January 31, 2023," Cordoves said.

Cordoves also said that the company does not expect the financial disruptions to spread to other holdings.

"Because the impact of the office sector’s downturn is market specific, and properties in the Growth & Income REIT are located in some of the hardest-hit regions, the impact of the market downturn in office properties has been more substantial in the Growth & Income REIT and is not reflective of what we are seeing across all of our other REITs and portfolios," he said.

UPDATE, JAN. 21, 1:35 P.M. ET: Comments from KBS Regional President for the Western U.S. Giovanni Cordoves have been added.