KBS Growth & Income REIT Inc., a publicly registered non-traded real estate investment trust, sent a letter to shareholders detailing the “significant decrease” in the company’s net asset value per share and its decision to delay its liquidation strategy until market conditions improve.
In December 2020, the REIT declared a net asset value per share of $4.90, a decline from the previous year’s valuation of $8.43 per share.
The 2020 NAV per share was based on the estimated value of the REIT’s assets, less the estimated value of its liabilities, divided by the number of shares outstanding, all as of September 30, 2020. Duff & Phelps, a third-party valuation firm, assisted with the process.
In the letter to shareholders, the REIT indicated that the “significant decrease was primarily due to the decrease in the appraised values of the real estate properties owned by the REIT which were significantly impacted by the civil unrest in certain markets where some of our properties are located and the ongoing COVID-19 pandemic.”
The Offices at Greenhouse in Houston, Texas was appraised at $48.5 million, a decrease of $8.5 million, or 14.9 percent, compared to prior year’s appraisal of $57 million.
The REIT claims that the value decline was due to a number of factors, including the property’s largest tenant deciding to market approximately 84,000 square feet of its total 136,000-square foot leased premises for sublease. This reportedly reduced the property value due to the projected costs and downtime attributable to backfilling the space in 2025 and beyond.
The REIT also pointed to COVID-19 negatively impacting the oil and gas markets, which reverberated through the office capital markets, resulting in increased vacancy and expanding cap rates across the office marketplace, particularly in Houston, the energy capital of the world.
Also, the “downward shock” to commodity pricing has put further stress on demand for office space among oil and gas companies which traditionally drive this market, the REIT said.
Another property in the KBS Growth and Income REIT portfolio, the Commonwealth Building in Portland, Oregon, had an appraised value of $65.3 million in December 2020. This represents a decrease of $19.3 million, or 22.8 percent, compared to prior year’s appraisal of $84.6 million.
In addition to the negative effects of COVID-19, Portland was impacted by months of social unrest, resulting in daily riots and physical damage to properties and businesses in the business districts, the REIT said. KBS explained that many downtown businesses listed their space for sublease in order to cut costs in the short term, while some relocated out of the area or had employees temporarily telecommute from home.
The Commonwealth Building is currently 87 percent leased but occupancy at the property could potentially decline to the 60 percent to 65 percent range by year-end 2021. In addition, market rents in Portland have declined significantly due to the increase in vacancy, the REIT noted.
Lastly, the REIT’s property, 213 West Institute in Chicago, was appraised at $35.9 million in December 2020, a decrease of $6 million, or 14.3 percent, compared to prior year’s appraisal of $41.9 million. Rental rates at the property declined from $33 to $31 per-square-foot on average. The REIT also claims that 2020 leasing has been slow in Chicago, due to COVID-19 lockdowns and restrictions, and five current tenants totaling more than 21,000 square feet have given notice they will be vacating at the end of their leases.
KBS Growth & Income REIT reiterated to its shareholders that it has been unable to raise “substantial” funds, which had been “impacted early on by regulatory changes, and the inability to significantly improve its size and scale in order to help offset the costs of operating a non-traded REIT.”
Thus, in August 2020, the board decided to pursue a liquidation strategy through asset sales and expected to present a plan of liquidation for a vote of stockholders within six months. However, the REIT has decided to halt its liquidation strategy until market conditions improve.
“As a result of the current adverse market conditions caused by the civil unrest and disruption in Portland and Chicago, where several of the company’s properties are located, and the ongoing uncertainty and business disruptions related to the COVID-19 pandemic, the board believes it is in the best interest of stockholders to delay any proposal to liquidate the company,” the REIT stated in the letter to shareholders.
For 2021, the company’s stated goals are to improve property cash flow through leasing renewals with existing tenants and new leases for current vacant space; continue value enhancing capital projects to maintain a high level of occupancy; and continue to evaluate the timing of the liquidation strategy.
KBS Growth & Income REIT’s initial private offering launched in June 2015 and raised $76.8 million before closing in April 2016. Its initial public offering raised $3.9 million from April 2016 until June 2017, and its second private offering launched in October 2017 and raised $5.4 million via KBSDirect.com, as of September 30, 2019. In December 2019, in connection with its consideration of strategic alternatives, the board decided to suspend the second private offering.
As of September 30, 2020, the company had invested in three office properties and had made an investment in an unconsolidated joint venture. Total assets for the third quarter of 2020 totaled $147 million.