More and more non-traded REITs continue to announce devastating losses for investors. KBS REIT I is a repeat offender. Investors in the KBS Real Estate Investment Trust I were told last week that their shares, which have already been re-priced twice before, are now worth about 50 percent of what they initially paid. In addition, investors have been officially stuck in this investment without the ability to redeem their shares since 2010, unless they are willing to sell on the secondary market at an even deeper discount.
KBS REIT I first re-priced the value of its shares on Nov. 23, 2009. At that time, the non-traded REIT informed investors that their shares had declined in value approximately 29 percent from $10 per share to $7.17. A little more than a year later on Dec. 10, 2010, KBS notified its investors that their shares had an improved value of $7.32 per share. Although a slight improvement, this enhancement in share price was misleading. Specifically, a careful review of the KBS 2010 annual report demonstrates that as of Dec. 31, 2010 − 20 days after KBS had re-priced its shares to $7.32− KBS had a net tangible book value per share of only $4.88. In other words, based on the actual properties owned by KBS REIT I as of December 2010, the shares were actually worth less than $5.
Now that KBS REIT I has announced that its shares are presently valued at $5.16, investors should question what the actual net tangible book value per share actually is. Conveniently, KBS has stopped providing an estimated tangible book value per share in its filings. However, based on previous calculations in KBS filings with the SEC, the tangible book value is most likely less than $5 a share.
Another serious concern for investors in the KBS REIT I is the amount of debt the REIT has acquired over the years. In its 2011 annual report filed March 26, 2012, KBS acknowledged surpassing the limit of debt stipulated in its offering documents. Below is an excerpt from the annual report:
“Our policies do not limit us from incurring debt until our total liabilities would exceed 75 percent of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets… Due to the amount of debt that we have assumed…we exceeded our charter limitation on total liabilities as of Sept. 30, 2011.”
KBS stopped being in violation of its own borrowing policy as of Dec. 31, 2011. Nevertheless, the fact remains that KBS REIT I has an overwhelming debt-to-asset ratio of more than 71 percent.
The trend described above is only exacerbated by the fact that for the past few years KBS has been disclosing in its filings that most of the distributions had actually been a return of capital − hence a return of investors’ own money. In 2010, KBS REIT I treated 96 percent of the amount distributed to investors as a return of capital. Unfortunately, investors in the KBS REIT I now don’t even have the opportunity to get that distribution. On March 20, 2012, KBS REIT I approved the suspension of monthly distribution payments “in order to manage [its] reduced cash flows from operations and to redirect available funds to reduce [its] debt.”
Many investors that purchased shares in the KBS REIT I were told that they would be able to invest in real estate while getting a constant source of income and without exposure to the volatility of the market. What they actually received is an illiquid investment that is worth less than half of what they paid for it, an investment that is not producing any income, and one that can’t be sold unless liquidated on the secondary market at an even deeper discount.
The Vernon Litigation Group law firm is currently representing multiple investors nationwide that have suffered substantial losses due to problems with their investment in non-traded REIT. For more information, contact Vernon Litigation Group by phone at (239) 319-4434 or by e-mail at info@vernonlitigation.com.