Valuation drops, distributions stop at top REIT

KBS property trust REIT down to $5.16 from launch price of $10; dividends to investors halted.
JUL 24, 2012
Another major nontraded real estate investment trust has seen a sharp drop in its value — but is also stopping paying distributions to investors. KBS Real Estate Investment Trust Inc., or KBS REIT I, told investors Monday it was cutting the value of the REIT to $5.16 per share, from $7.32, a drop of 29%. The REIT's offering price was $10 per share. A number of REITs have seen valuations decline this year as the commercial real estate market continues to struggle and debt weighs on REITs' balance sheets. “The new pricing of KBS REIT I reflects the current status of the portfolio, and the discontinuation of distributions was made with the goal of managing the REIT's debt obligations and cash flows, and attempting to maximize the total return to investors over time,” said Keith Hall, executive vice president of KBS REIT I. The REIT is substantial, having raised $1.7 billion in equity in its initial offering, according to an investor presentation the company filed with the Securities and Exchange Commission on Monday. It has $3.4 billion in property assets, and holds loans and other debt of $2.3 billion. Distributions to investors will be cut to zero, it announced. The REIT “will discontinue paying monthly distributions to shareholders in an effort to maximize the total amount of capital returned to shareholders over time,” according to the filing. Since July 2009, annual distributions had been 53 cents per share, according to the filing. The company said cash flow will be used to meet four objectives: paying down debt, strategically reinvesting capital, attempting to improve the overall return of the company and managing the REIT's reduced cash flow. When asked to clarify what the last objective meant, Mr. Hall noted that it was simply one of the stated company objectives. The KBS REIT has been hit by the broad decline in the commercial real estate market since 2008. Occupancy of the REIT's real estate holdings declined last year to 85%, from 92% in 2010, according to the filing. Added to that, rents are in decline. “REIT I's existing rents are rolling downward into this moderately improving rental market that still remains well below peak levels,” according to the filing. Eighty-one percent of the REIT's portfolio is in office space, with 10% in bank branches and 9% in industrial real estate. KBS REIT I “has not been immune” to the broad real estate market's difficulties,” Mr. Hall said. “While some markets have recently made slight recoveries, many markets are still challenged with decreasing occupancy and/or new lease rates at substantially lower levels from the 2007-08 peaks.”

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