KBS REIT warns shareholders it could cease as “a going concern”

Fund tied to Newport Beach firm says value of its properties has plunged by $350M

KBS REIT warns shareholders it could go out of business
KBS Realty Advisors' Charles J. Schreiber and 201 Spear Street, San Francisco (LinkedIn, KBS Realty Advisors)

A KBS Realty Advisors fund could crash and burn.

KBS Real Estate Investment Trust III, based in Newport Beach, is warning its business may soon fizzle out, the Dallas Morning News reported, citing a regulatory filing.

The KBS trust warned shareholders that “considering the current commercial real estate lending environment, this raises substantial doubt as to KBS REIT III’s ability to continue as a going concern.”

The KBS real estate trust owns more than $1.2 billion in office properties from Minnesota to Texas, including three large office buildings in Dallas.

KBS REIT III says the value of its properties has plunged since September of last year by nearly $350 million.

In a recent report to shareholders, the fund said its office towers in San Francisco have suffered the most from a pandemic shift to remote work. 

In August, the fund tied to the Newport Beach-based investment firm was poised to surrender an 18-story, 252,600-square-foot office building in San Francisco’s Downtown to its lender. The KBS fund bought the Class-A building in 2013 for $121 million.

This month, the KBS REIT took a $51 million write-down on the tower at 201 Spear Street in the South Financial District, according to a regulatory filing. Strada is reportedly buying the building for $60 million, or $200 per square foot. 

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KBS REIT III has $1.7 billion in loan maturities in the next 12 months. The fund said in the Dec. 15 report to shareholders that “the company may relinquish ownership of one or more secured properties to the mortgage lender.”

It added: “Continued disruptions in the financial markets and economic uncertainty could adversely affect the company’s ability to implement its business strategy and continue as a going concern.”

In Dallas, the KBS trust owns the three-tower Preston Commons and Sterling Plaza office buildings in North Dallas’ Preston district, which are more than 90 percent leased, according to the Morning News.

The company’s U.S. office portfolio was 86 percent leased in October.

The KBS trust is among a growing number of office owners hit hard by high vacancies, low leasing activity and tough finance markets. High mortgage rates and tougher lending standards have made it challenging for some investors to extend debt or refinance buildings.

More than 40 percent of U.S. office property loans are under water with more debt than current values and could face defaults, according to a recent report by the National Bureau of Economic Research.

“Assets in key markets, such as the San Francisco Bay area, continue to see substantial declines in both occupancy and leasing, precipitating a marked downturn in leasing activity,” the KBS REIT reported. “These challenges have, in turn, had a discernible impact on the REIT’s ongoing cash flow.”

— Dana Bartholomew

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