When Will KBS REIT II Pay a Real Dividend?

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REIT Wrecks
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When Will KBS REIT II Pay a Real Dividend?

Post by REIT Wrecks » Sun Jan 02, 2011 5:42 pm

KBS Realty, a Newport Beach, CA sponsor of real estate investments, has excelled in the business of raising money and amassing assets, which is really the real business of the non-traded REITs it sponsors. In fact, KBS REIT II, a non-traded REIT sponsored by KBS, has raised almost $1.5 billion in equity to date, and the REIT made one of the biggest office acquisitions in all of 2009 when it bought 300 N. Lasalle St., a recently constructed office building in Chicago. The acquisition price of $655 million set records. KBS followed up this deal with the $208 million acquisition of the Union Bank Tower on 445 South Figueroa St. in Los Angeles. Just like the purchase of 300 N LaSalle St., KBS' deal for the Union Bank Building was reported to be the most expensive Los Angeles office trade since 2008. The seller of both properties was an affiliate of Hines LP, which also sponsors non-traded REITs.

Unfortunately, KBS's success in raising money and buying property has not translated into a sustainable dividend for investors. Through the end of the third quarter, KBS had declared dividends of $56 million, but reported Funds From Operations of only $35 million. This means that KBS REIT II has strongly negative dividend coverage, and this is clearly not sustainable.

Furthermore, in its third quarter 10Q, KBS REIT reported an indicative portfolio capitalization rate of 4.8%, based on annualized third quarter NOI, excluding corporate-level cash of $66 million. This blended indicative 4.8% cap rate obviously does not support a 6.5% dividend, so it's not surprising that KBS has been borrowing to make up the difference between cash flow and distributions:
We made distributions to our stockholders during the nine months ended September 30, 2010 using a combination of cumulative cash flows from operations and debt financing...We have used and expect to continue to use proceeds from financings to fund a portion of our distributions until the proceeds from our ongoing initial public offering are fully invested.

Source: KBS REIT II 2010 Q3 10Q
Through the end of Q3, KBS REIT II had actually borrowed $18.3 million to make up the deficit between cash flow and distributions, but it's not clear that KBS has a plan to bridge the dividend deficit. KBS REIT II had only $66.7 million of cash left to invest at of the end of Q3, and the KBS REIT II offering was scheduled to terminate on December 31st. As KBS points out in its 10Q, "If we are unable to locate investments with attractive yields while we are investing the proceeds of our ongoing initial public offering, our distributions and the long-term returns of our investors may be lower than they otherwise would."

With ten year treasuries on the rise, that 4.8% cap rate looks even less appealing than it did before, and if KBS REIT II really wants to fully fund its distributions with cash flow, they'll need to do more than just pay up for assets. Like most other non-traded REITs, KBS has been on a mad dash to capitalize on retail investors' fear of stock market volatility and their desire for income. However, if KBS is unable to make more sensible acquisitions in 2011, it could be almost impossible to cover that 6.5% distribution rate with ordinary FFO.

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Re: When Will KBS REIT II Pay a Real Dividend?

Post by HonestFeeOnlyAdviser » Fri Jan 31, 2014 12:19 pm

Never. You may as well hand your money out to homeless people. They will at least appreciate more than the losers that push NPTR

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