x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Maryland | 26-0658752 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
800 Newport Center Drive, Suite 700 Newport Beach, California | 92660 | |
(Address of Principal Executive Offices) | (Zip Code) |
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ | ||||
Non-Accelerated Filer | x | (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Emerging growth company | ¨ |
PART I. | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
PART II. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 5. | |||
Item 6. | |||
September 30, 2017 | December 31, 2016 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Real estate: | ||||||||
Land | $ | 188,592 | $ | 188,592 | ||||
Buildings and improvements | 989,213 | 980,863 | ||||||
Tenant origination and absorption costs | 61,001 | 64,117 | ||||||
Total real estate held for investment, cost | 1,238,806 | 1,233,572 | ||||||
Less accumulated depreciation and amortization | (173,278 | ) | (141,830 | ) | ||||
Total real estate held for investment, net | 1,065,528 | 1,091,742 | ||||||
Real estate held for sale, net | — | 33,994 | ||||||
Total real estate, net | 1,065,528 | 1,125,736 | ||||||
Real estate loan receivable, net | 13,964 | 14,079 | ||||||
Total real estate and real estate-related investments, net | 1,079,492 | 1,139,815 | ||||||
Cash and cash equivalents | 75,951 | 48,009 | ||||||
Restricted cash | 3,750 | — | ||||||
Rents and other receivables, net | 61,387 | 59,152 | ||||||
Above-market leases, net | 2,701 | 4,466 | ||||||
Assets related to real estate held for sale | — | 3,565 | ||||||
Prepaid expenses and other assets | 31,045 | 31,773 | ||||||
Total assets | $ | 1,254,326 | $ | 1,286,780 | ||||
Liabilities and stockholders’ equity | ||||||||
Notes payable, net | 521,262 | 523,771 | ||||||
Accounts payable and accrued liabilities | 18,784 | 18,422 | ||||||
Due to affiliate | 51 | 41 | ||||||
Distributions payable | 4,241 | 4,493 | ||||||
Below-market leases, net | 1,665 | 2,876 | ||||||
Liabilities related to real estate held for sale | — | 17 | ||||||
Other liabilities | 10,666 | 10,253 | ||||||
Total liabilities | 556,669 | 559,873 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Redeemable common stock | 5,400 | 10,000 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding | — | — | ||||||
Common stock, $.01 par value; 1,000,000,000 shares authorized, 187,882,112 and 188,719,952 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | 1,879 | 1,887 | ||||||
Additional paid-in capital | 1,679,532 | 1,679,524 | ||||||
Cumulative distributions in excess of net income | (989,154 | ) | (964,504 | ) | ||||
Total stockholders’ equity | 692,257 | 716,907 | ||||||
Total liabilities and stockholders’ equity | $ | 1,254,326 | $ | 1,286,780 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 30,649 | $ | 33,214 | $ | 95,384 | $ | 101,674 | ||||||||
Tenant reimbursements | 3,401 | 3,389 | 10,842 | 11,114 | ||||||||||||
Interest income from real estate loans receivable | 267 | 270 | 795 | 806 | ||||||||||||
Other operating income | 1,827 | 1,729 | 5,441 | 5,191 | ||||||||||||
Total revenues | 36,144 | 38,602 | 112,462 | 118,785 | ||||||||||||
Expenses: | ||||||||||||||||
Operating, maintenance, and management | 8,315 | 9,002 | 25,600 | 25,785 | ||||||||||||
Real estate taxes and insurance | 5,014 | 5,099 | 15,092 | 15,223 | ||||||||||||
Asset management fees to affiliate | 2,899 | 2,955 | 8,746 | 8,850 | ||||||||||||
General and administrative expenses | 1,119 | 1,299 | 3,307 | 5,125 | ||||||||||||
Depreciation and amortization | 13,458 | 14,210 | 40,771 | 43,391 | ||||||||||||
Interest expense | 4,558 | 4,066 | 12,947 | 12,727 | ||||||||||||
Total expenses | 35,363 | 36,631 | 106,463 | 111,101 | ||||||||||||
Other income: | ||||||||||||||||
Other income | 118 | 474 | 167 | 516 | ||||||||||||
Gain on sale of real estate | — | — | 7,863 | 9,101 | ||||||||||||
Total other income | 118 | 474 | 8,030 | 9,617 | ||||||||||||
Net income | $ | 899 | $ | 2,445 | $ | 14,029 | $ | 17,301 | ||||||||
Net income per common share, basic and diluted | $ | — | $ | 0.01 | $ | 0.07 | $ | 0.09 | ||||||||
Weighted-average number of common shares outstanding, basic and diluted | 188,085,093 | 189,002,569 | 188,390,374 | 189,208,324 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 899 | $ | 2,445 | $ | 14,029 | $ | 17,301 | ||||||||
Other comprehensive income: | ||||||||||||||||
Reclassification of realized losses recognized on interest rate swaps (effective portion) | — | — | — | 60 | ||||||||||||
Total other comprehensive income | — | — | — | 60 | ||||||||||||
Total comprehensive income | $ | 899 | $ | 2,445 | $ | 14,029 | $ | 17,361 |
Additional Paid-in Capital | Cumulative Distributions and Net Income (Loss) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | ||||||||||||||||||||
Common Stock | |||||||||||||||||||||||
Shares | Amounts | ||||||||||||||||||||||
Balance, December 31, 2015 | 189,556,185 | $ | 1,895 | $ | 1,684,206 | $ | (928,111 | ) | $ | (60 | ) | $ | 757,930 | ||||||||||
Net income | — | — | — | 16,747 | — | 16,747 | |||||||||||||||||
Other comprehensive income | — | — | — | — | 60 | 60 | |||||||||||||||||
Redemptions of common stock | (836,233 | ) | (8 | ) | (4,682 | ) | — | — | (4,690 | ) | |||||||||||||
Distributions declared | — | — | — | (53,140 | ) | — | (53,140 | ) | |||||||||||||||
Balance, December 31, 2016 | 188,719,952 | $ | 1,887 | $ | 1,679,524 | $ | (964,504 | ) | $ | — | $ | 716,907 | |||||||||||
Net income | — | — | — | 14,029 | — | 14,029 | |||||||||||||||||
Redemptions of common stock | (837,840 | ) | (8 | ) | (4,592 | ) | — | — | (4,600 | ) | |||||||||||||
Transfers from redeemable common stock | — | — | 4,600 | — | — | 4,600 | |||||||||||||||||
Distributions declared | — | — | — | (38,679 | ) | — | (38,679 | ) | |||||||||||||||
Balance, September 30, 2017 | 187,882,112 | $ | 1,879 | $ | 1,679,532 | $ | (989,154 | ) | $ | — | $ | 692,257 |
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 14,029 | $ | 17,301 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 40,771 | 43,391 | ||||||
Noncash interest income on real estate-related investments | 3 | 3 | ||||||
Deferred rent | (1,549 | ) | (5,114 | ) | ||||
Bad debt expense | 264 | 247 | ||||||
Amortization of above- and below-market leases, net | 540 | (244 | ) | |||||
Amortization of deferred financing costs | 841 | 1,423 | ||||||
Unrealized gains on derivative instruments | (101 | ) | (321 | ) | ||||
Gain on sale of real estate, net | (7,863 | ) | (9,101 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Rents and other receivables | (1,163 | ) | (1,707 | ) | ||||
Prepaid expenses and other assets | (2,302 | ) | (4,606 | ) | ||||
Accounts payable and accrued liabilities | (1,097 | ) | 2,541 | |||||
Due to affiliates | 10 | 58 | ||||||
Other liabilities | 520 | 739 | ||||||
Net cash provided by operating activities | 42,903 | 44,610 | ||||||
Cash Flows from Investing Activities: | ||||||||
Proceeds from sale of real estate | 45,689 | 41,218 | ||||||
Improvements to real estate | (10,131 | ) | (32,125 | ) | ||||
Principal repayments on real estate loans receivable | 112 | 91 | ||||||
Net cash provided by investing activities | 35,670 | 9,184 | ||||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from note payable | — | 17,000 | ||||||
Principal payments on notes payable | (2,615 | ) | (39,800 | ) | ||||
Payments of deferred financing costs | (735 | ) | (878 | ) | ||||
Payments to redeem common stock | (4,600 | ) | (3,867 | ) | ||||
Distributions paid to common stockholders | (38,931 | ) | (40,177 | ) | ||||
Net cash used in financing activities | (46,881 | ) | (67,722 | ) | ||||
Net increase (decrease) in cash and cash equivalents and restricted cash | 31,692 | (13,928 | ) | |||||
Cash and cash equivalents and restricted cash, beginning of period | 48,009 | 72,687 | ||||||
Cash and cash equivalents and restricted cash, end of period | $ | 79,701 | $ | 58,759 | ||||
Supplemental Disclosure of Cash Flow Information: | ||||||||
Interest paid | $ | 12,076 | $ | 11,703 | ||||
Supplemental Disclosure of Noncash Transactions: | ||||||||
Increase in accrued improvements to real estate | $ | 1,421 | $ | — |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
1. | ORGANIZATION |
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
3. | REAL ESTATE HELD FOR INVESTMENT |
Property | Date Acquired | City | State | Property Type | Total Real Estate at Cost | Accumulated Depreciation and Amortization | Total Real Estate, Net | |||||||||||||
100 & 200 Campus Drive Buildings | 09/09/2008 | Florham Park | NJ | Office | $ | 143,687 | $ | (10,023 | ) | $ | 133,664 | |||||||||
300-600 Campus Drive Buildings | 10/10/2008 | Florham Park | NJ | Office | 162,131 | (14,899 | ) | 147,232 | ||||||||||||
Willow Oaks Corporate Center | 08/26/2009 | Fairfax | VA | Office | 103,753 | (18,137 | ) | 85,616 | ||||||||||||
Pierre Laclede Center | 02/04/2010 | Clayton | MO | Office | 80,531 | (9,491 | ) | 71,040 | ||||||||||||
Horizon Tech Center | 06/17/2010 | San Diego | CA | Office | 29,540 | (2,095 | ) | 27,445 | ||||||||||||
Union Bank Plaza | 09/15/2010 | Los Angeles | CA | Office | 186,119 | (20,151 | ) | 165,968 | ||||||||||||
Emerald View at Vista Center | 12/09/2010 | West Palm Beach | FL | Office | 31,029 | (6,582 | ) | 24,447 | ||||||||||||
Granite Tower | 12/16/2010 | Denver | CO | Office | 154,386 | (41,655 | ) | 112,731 | ||||||||||||
Fountainhead Plaza | 09/13/2011 | Tempe | AZ | Office | 119,383 | (16,414 | ) | 102,969 | ||||||||||||
Corporate Technology Centre | 03/28/2013 | San Jose | CA | Office | 228,247 | (33,831 | ) | 194,416 | ||||||||||||
$ | 1,238,806 | $ | (173,278 | ) | $ | 1,065,528 |
Property | Location | Rentable Square Feet | Total Real Estate, Net (in thousands) | Percentage of Total Assets | Annualized Base Rent (in thousands) (1) | Average Annualized Base Rent per Sq. Ft. | Occupancy | ||||||||||||||||
Corporate Technology Centre | San Jose, CA | 610,083 | $ | 194,416 | 15.5 | % | $ | 18,635 | $ | 30.54 | 100 | % | |||||||||||
Union Bank Plaza | Los Angeles, CA | 627,334 | 165,968 | 13.2 | % | 20,697 | 40.23 | 82 | % | ||||||||||||||
300-600 Campus Drive Buildings | Florham Park, NJ | 578,424 | 147,232 | 11.7 | % | 17,923 | 33.63 | 92 | % | ||||||||||||||
100 & 200 Campus Drive Buildings | Florham Park, NJ | 586,405 | 133,664 | 10.7 | % | 12,164 | 31.34 | 66 | % |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
October 1, 2017 through December 31, 2017 | $ | 31,057 | |
2018 | 120,037 | ||
2019 | 106,671 | ||
2020 | 100,749 | ||
2021 | 89,760 | ||
Thereafter | 275,199 | ||
$ | 723,473 |
Industry | Number of Tenants | Annualized Base Rent (1) (in thousands) | Percentage of Annualized Base Rent | ||||||
Finance | 33 | $ | 28,081 | 22.6 | % | ||||
Mining, Oil & Gas Extraction | 5 | 16,939 | 13.6 | % | |||||
Computer System Design & Programming | 5 | 15,638 | 12.6 | % | |||||
Legal Services | 33 | 15,146 | 12.2 | % | |||||
$ | 75,804 | 61.0 | % |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
Annualized Base Rent Statistics | |||||||||||||||||||||
Tenant | Property | Tenant Industry | Square Feet | % of Portfolio (Net Rentable Sq. Ft.) | Annualized Base Rent (in thousands) (1) | % of Portfolio Annualized Base Rent | Annualized Base Rent per Sq. Ft. | Lease Expiration (2) (3) | |||||||||||||
Union Bank | Union Bank Plaza | Finance | 342,712 | 8.5% | $ | 14,182 | 11.4% | $ | 41.38 | 01/31/2022 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
4. | TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES |
Tenant Origination and Absorption Costs | Above-Market Lease Assets | Below-Market Lease Liabilities | ||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | September 30, 2017 | December 31, 2016 | |||||||||||||||||||
Cost | $ | 61,001 | $ | 64,117 | $ | 13,650 | $ | 13,740 | $ | (10,170 | ) | $ | (11,249 | ) | ||||||||||
Accumulated amortization | (37,651 | ) | (33,577 | ) | (10,949 | ) | (9,274 | ) | 8,505 | 8,373 | ||||||||||||||
Net amount | $ | 23,350 | $ | 30,540 | $ | 2,701 | $ | 4,466 | $ | (1,665 | ) | $ | (2,876 | ) |
Tenant Origination and Absorption Costs | Above-Market Lease Assets | Below-Market Lease Liabilities | ||||||||||||||||||||||
For the Three Months Ended September 30, | For the Three Months Ended September 30, | For the Three Months Ended September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Amortization | $ | (2,281 | ) | $ | (2,811 | ) | $ | (593 | ) | $ | (606 | ) | $ | 383 | $ | 571 |
Tenant Origination and Absorption Costs | Above-Market Lease Assets | Below-Market Lease Liabilities | ||||||||||||||||||||||
For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Amortization | $ | (7,218 | ) | $ | (9,116 | ) | $ | (1,765 | ) | $ | (1,935 | ) | $ | 1,225 | $ | 2,179 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
5. | REAL ESTATE LOAN RECEIVABLE |
Loan Name Location of Related Property or Collateral | Date Acquired/ Originated | Property Type | Loan Type | Outstanding Principal Balance as of September 30, 2017 (1) | Book Value as of September 30, 2017 (2) | Book Value as of December 31, 2016 (2) | Contractual Interest Rate (3) | Annualized Effective Interest Rate (3) | Maturity Date | |||||||||||||||
Sheraton Charlotte Airport Hotel First Mortgage Charlotte, North Carolina | 07/11/2011 | Hotel | Mortgage | $ | 13,961 | $ | 13,964 | $ | 14,079 | 7.5% | 7.6% | 08/01/2018 |
Real estate loan receivable - December 31, 2016 | $ | 14,079 | |
Principal repayments received on the real estate loan receivable | (112 | ) | |
Amortization of closing costs and origination fees on the real estate loan receivable | (3 | ) | |
Real estate loan receivable - September 30, 2017 | $ | 13,964 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Contractual interest income | $ | 268 | $ | 271 | $ | 798 | $ | 809 | ||||||||
Amortization of closing costs and origination fees | (1 | ) | (1 | ) | (3 | ) | (3 | ) | ||||||||
Interest income from real estate loan receivable | $ | 267 | $ | 270 | $ | 795 | $ | 806 |
6. | REAL ESTATE HELD FOR SALE |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | ||||||||||||||||
Rental income | $ | — | $ | 1,337 | $ | 2,379 | $ | 5,148 | ||||||||
Tenant reimbursements | — | 17 | 33 | 389 | ||||||||||||
Total revenues | — | 1,354 | 2,412 | 5,537 | ||||||||||||
Expenses | ||||||||||||||||
Operating, maintenance, and management | — | 336 | 633 | 1,124 | ||||||||||||
Real estate taxes and insurance | — | 213 | 334 | 848 | ||||||||||||
Asset management fees to affiliate | — | 94 | 169 | 395 | ||||||||||||
General and administrative expenses | — | 9 | 15 | 64 | ||||||||||||
Depreciation and amortization | — | 488 | 157 | 1,931 | ||||||||||||
Interest expense | — | 108 | 88 | 835 | ||||||||||||
Total expenses | $ | — | $ | 1,248 | $ | 1,396 | $ | 5,197 |
September 30, 2017 | December 31, 2016 | ||||||
Assets related to real estate held for sale | |||||||
Total real estate, at cost | $ | — | $ | 42,276 | |||
Accumulated depreciation and amortization | — | (8,282 | ) | ||||
Real estate held for sale, net | — | 33,994 | |||||
Other assets | — | 3,565 | |||||
Total assets related to real estate held for sale | $ | — | $ | 37,559 | |||
Liabilities related to real estate held for sale | |||||||
Other liabilities | — | 17 | |||||
Total liabilities related to real estate held for sale | $ | — | $ | 17 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
7. | NOTES PAYABLE |
Book Value as of September 30, 2017 | Book Value as of December 31, 2016 | Contractual Interest Rate as of September 30, 2017 (1) | Effective Interest Rate as of September 30, 2017 (1) | Payment Type | Maturity Date (2) | |||||||||||
Amended and Restated Portfolio Revolving Loan Facility (3) | $ | 52,638 | $ | 52,638 | One-month LIBOR + 1.80% | 3.0% | Interest Only | 06/21/2018 | ||||||||
Union Bank Plaza Mortgage Loan (4) | 105,000 | 105,000 | One-month LIBOR + 1.65% | 2.9% | Interest Only | 01/12/2018 | ||||||||||
Portfolio Mortgage Loan #1 (5) | 77,651 | 78,033 | One-month LIBOR + 2.15% | 3.4% | Interest Only | 10/20/2017 | ||||||||||
Portfolio Mortgage Loan #3 (6) | 54,000 | 54,000 | One-month LIBOR + 1.75% - 1.85% | 3.0% | Interest Only | 03/01/2018 | ||||||||||
Corporate Technology Centre Mortgage Loan (7) | 138,892 | 140,000 | 3.50% | 3.5% | (7) | 04/01/2020 | ||||||||||
300-600 Campus Drive Revolving Loan (8) | 93,500 | 94,625 | One-month LIBOR + 2.05% | 3.3% | (8) | 02/01/2018 | ||||||||||
Total notes payable principal outstanding | $ | 521,681 | $ | 524,296 | ||||||||||||
Deferred financing costs, net | (419 | ) | (525 | ) | ||||||||||||
Total notes payable, net | $ | 521,262 | $ | 523,771 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
October 1, 2017 through December 31, 2017 | $ | 78,699 | ||
2018 | 307,513 | |||
2019 | 2,848 | |||
2020 | 132,621 | |||
$ | 521,681 |
8. | DERIVATIVE INSTRUMENTS |
Derivative Instruments | September 30, 2017 | December 31, 2016 | Reference Rate as of September 30, 2017 | Fix Pay Rate | Remaining Term in Years | |||||||||||
Number of Instruments | Notional Amount | Number of Instruments | Notional Amount | |||||||||||||
Interest Rate Swaps (1) | — | $ | — | 3 | $106,638 | (1) | (1) | (1) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
Derivative Instruments | Balance Sheet Location | September 30, 2017 | December 31, 2016 | |||||||||||
Number of Instruments (1) | Fair Value | Number of Instruments | Fair Value | |||||||||||
Interest Rate Swaps | Prepaid expenses and other assets, at fair value | — | $ | — | 2 | $ | 6 | |||||||
Interest Rate Swaps | Other liabilities, at fair value | — | $ | — | 1 | $ | (107 | ) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Derivatives designated as hedging instruments (1)(2) | ||||||||||||||||
Amount of loss recognized on interest rate swaps (effective portion) | $ | — | $ | — | $ | — | $ | 60 | ||||||||
— | — | — | 60 | |||||||||||||
Derivatives not designated as hedging instruments (2) | ||||||||||||||||
Realized loss recognized on interest rate swaps | — | 164 | 91 | 671 | ||||||||||||
Unrealized gains on interest rate swaps | — | (245 | ) | (101 | ) | (321 | ) | |||||||||
Losses related to swap terminations | — | — | — | 156 | ||||||||||||
— | (81 | ) | (10 | ) | 506 | |||||||||||
Increase (decrease) in interest expense as a result of derivatives | $ | — | $ | (81 | ) | $ | (10 | ) | $ | 566 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
9. | FAIR VALUE DISCLOSURES |
• | Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
• | Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and |
• | Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable. |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
September 30, 2017 | December 31, 2016 | |||||||||||||||||||||||
Face Value | Carrying Amount | Fair Value | Face Value | Carrying Amount | Fair Value | |||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||
Real estate loan receivable | $ | 13,961 | $ | 13,964 | $ | 13,945 | $ | 14,073 | $ | 14,079 | $ | 14,089 | ||||||||||||
Financial liabilities: | ||||||||||||||||||||||||
Notes payable | $ | 521,681 | $ | 521,262 | $ | 519,070 | $ | 524,296 | $ | 523,771 | $ | 522,296 |
10. | RELATED PARTY TRANSACTIONS |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
Incurred | Payable as of | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | December 31, | |||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Expensed | ||||||||||||||||||||||||
Asset management fees | $ | 2,899 | $ | 2,955 | $ | 8,746 | $ | 8,850 | $ | — | $ | — | ||||||||||||
Reimbursement of operating expenses (1) | 63 | 71 | 188 | 217 | 51 | 41 | ||||||||||||||||||
Disposition fees (2) | — | — | 470 | 423 | — | — | ||||||||||||||||||
$ | 2,962 | $ | 3,026 | $ | 9,404 | $ | 9,490 | $ | 51 | $ | 41 |
11. | COMMITMENTS AND CONTINGENCIES |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 1. | Financial Statements (continued) |
12. | SUBSEQUENT EVENTS |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, the entity that acted as our dealer manager and/or other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-sponsored programs and KBS-advised investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. |
• | We pay substantial fees to and expenses of our advisor and its affiliates. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase the risk of loss to our stockholders. |
• | We have used proceeds from financings, when necessary, to fund a portion of our distributions during our operational stage. We currently expect that our distributions will generally be paid from cash flow from operations and funds from operations from current or prior periods. We also expect to fund other distributions from the net proceeds from the sale of real estate and from the receipt of principal payments from, or the sale of, our real estate-related loan receivable. We can give no assurance regarding the timing, amount or source of future distributions. |
• | We depend on tenants for the revenue generated by our real estate investments and, accordingly, the revenue generated by our real estate investments is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our debt service obligations and limiting our ability to pay distributions to our stockholders. |
• | Our investments in real estate and our mortgage loan investment may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties and the property and other assets directly securing our loan investment could decrease. Such events would make it more difficult for the borrower under our loan investment to meet its payment obligations to us. It could also make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders. |
• | Disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to our stockholders. |
• | Certain of our debt obligations have variable interest rates and related payments that vary with the movement of LIBOR or other indexes. Increases in these indexes could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders. |
• | Our share redemption program provides only for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program document, and, together with redemptions sought in connection with a stockholder’s death, “Special Redemptions”). The dollar amounts available for such redemptions are determined by the board of directors and may be reviewed and adjusted from time to time. Additionally, redemptions are further subject to limitations described in our share redemption program. We currently do not expect to have funds available for ordinary redemptions in the future. |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
• | Since we have terminated our dividend reinvestment plan, we may have to use a greater proportion of our cash flow from operations to meet cash requirements for general corporate purposes, including, but not limited to, capital expenditures, tenant improvement costs and leasing costs related to our real estate properties; reserves required by financings of our real estate properties; the repayment of debt; and Special Redemptions under our share redemption program. This may reduce cash available for distributions. |
• | During the nine months ended September 30, 2017, we sold one office property. During the year ended December 31, 2016, we sold one office/flex property. As a result of our disposition activity, our general and administrative expenses, which are not directly related to the size of our portfolio, have increased as a percentage of our cash flow from operations and will continue to increase to the extent we sell additional assets. |
• | Although the Special Committee (defined below) engaged a financial advisor to assist with the exploration of strategic alternatives for us, we are not obligated to enter into any particular transaction or any transaction at all. Further, although we are exploring strategic alternatives and are marketing some of our assets for sale, there is no assurance that this process will result in stockholder liquidity, or provide a return to stockholders that equals or exceeds our estimated value per share. We do not expect to provide additional updates regarding our review of strategic alternatives until such time, if any, that we are prepared to announce a material transaction or to conclude the strategic review. |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
• | $45.7 million of proceeds from the sale of one office property; and |
• | $10.1 million used for improvements to real estate. |
• | $38.9 million of cash distributions; |
• | $4.6 million of cash used for redemptions of common stock; |
• | $2.6 million of principal payments on notes payable; and |
• | $0.8 million of payments of deferred financing costs. |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Payments Due During the Years Ending December 31, | ||||||||||||||||
Contractual Obligations | Total | Remainder of 2017 | 2018-2019 | 2020 | ||||||||||||
Outstanding debt obligations (1) | $ | 521,681 | $ | 78,699 | $ | 310,361 | $ | 132,621 | ||||||||
Interest payments on outstanding debt obligations (2) | 16,391 | 3,704 | 11,144 | 1,543 |
Three Months Ended September 30, | Increase (Decrease) | Percentage Change | $ Change Due to Dispositions (1) | $ Change Due to Properties or Loans Held Throughout Both Periods (2) | |||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||
Rental income | $ | 30,649 | $ | 33,214 | $ | (2,565 | ) | (8 | )% | $ | (1,337 | ) | $ | (1,228 | ) | ||||||||
Tenant reimbursements | 3,401 | 3,389 | 12 | — | % | (17 | ) | 29 | |||||||||||||||
Interest income from real estate loan receivable | 267 | 270 | (3 | ) | (1 | )% | — | (3 | ) | ||||||||||||||
Other operating income | 1,827 | 1,729 | 98 | 6 | % | — | 98 | ||||||||||||||||
Operating, maintenance and management costs | 8,315 | 9,002 | (687 | ) | (8 | )% | (336 | ) | (351 | ) | |||||||||||||
Real estate taxes and insurance | 5,014 | 5,099 | (85 | ) | (2 | )% | (213 | ) | 128 | ||||||||||||||
Asset management fees to affiliate | 2,899 | 2,955 | (56 | ) | (2 | )% | (94 | ) | 38 | ||||||||||||||
General and administrative expenses | 1,119 | 1,299 | (180 | ) | (14 | )% | n/a | n/a | |||||||||||||||
Depreciation and amortization | 13,458 | 14,210 | (752 | ) | (5 | )% | (488 | ) | (264 | ) | |||||||||||||
Interest expense | 4,558 | 4,066 | 492 | 12 | % | (108 | ) | 600 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
Nine Months Ended September 30, | Increase (Decrease) | Percentage Change | $ Change Due to Dispositions (1) | $ Change Due to Properties or Loans Held Throughout Both Periods (2) | |||||||||||||||||||
2017 | 2016 | ||||||||||||||||||||||
Rental income | $ | 95,384 | $ | 101,674 | $ | (6,290 | ) | (6 | )% | $ | (2,769 | ) | $ | (3,521 | ) | ||||||||
Tenant reimbursements | 10,842 | 11,114 | (272 | ) | (2 | )% | (356 | ) | 84 | ||||||||||||||
Interest income from real estate loan receivable | 795 | 806 | (11 | ) | (1 | )% | — | (11 | ) | ||||||||||||||
Other operating income | 5,441 | 5,191 | 250 | 5 | % | — | 250 | ||||||||||||||||
Operating, maintenance and management costs | 25,600 | 25,785 | (185 | ) | (1 | )% | (491 | ) | 306 | ||||||||||||||
Real estate taxes and insurance | 15,092 | 15,223 | (131 | ) | (1 | )% | (514 | ) | 383 | ||||||||||||||
Asset management fees to affiliate | 8,746 | 8,850 | (104 | ) | (1 | )% | (226 | ) | 122 | ||||||||||||||
General and administrative expenses | 3,307 | 5,125 | (1,818 | ) | (35 | )% | n/a | n/a | |||||||||||||||
Depreciation and amortization | 40,771 | 43,391 | (2,620 | ) | (6 | )% | (1,774 | ) | (846 | ) | |||||||||||||
Interest expense | 12,947 | 12,727 | 220 | 2 | % | (747 | ) | 967 | |||||||||||||||
Gain on sale of real estate, net | 7,863 | 9,101 | (1,238 | ) | (14 | )% | (1,238 | ) | — |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
• | Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period; |
• | Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate; |
• | Amortization of discounts and closing costs. Discounts and closing costs related to debt investments are amortized over the term of the loan as an adjustment to interest income. This application results in income recognition that is different than the underlying contractual terms of the debt investments. We have excluded the amortization of discounts and closing costs related to our debt investments in our calculation of MFFO to more appropriately reflect the economic impact of our debt investments, as discounts will not be economically recognized until the loan is repaid and closing costs are essentially the same as acquisition fees and expenses on real estate. We believe excluding these items provides investors with a useful supplemental metric that directly addresses core operating performance; |
• | Termination fees on derivative instruments. Termination fees on derivative instruments are included in interest expense. Although these amounts reduce net income, we exclude them from MFFO to more appropriately reflect the ongoing impact of our interest rate swap agreements; and |
• | Unrealized gains and losses on derivative instruments. These adjustments include unrealized gains and losses from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness. The change in fair value of interest rate swaps not designated as a hedge and the change in fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the economic impact of our interest rate swap agreements. |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income | $ | 899 | $ | 2,445 | $ | 14,029 | $ | 17,301 | ||||||||
Depreciation of real estate assets | 9,120 | 9,115 | 27,211 | 27,096 | ||||||||||||
Amortization of lease-related costs | 4,338 | 5,095 | 13,560 | 16,295 | ||||||||||||
Gain on sale of real estate, net | — | — | (7,863 | ) | (9,101 | ) | ||||||||||
FFO | 14,357 | 16,655 | 46,937 | 51,591 | ||||||||||||
Straight-line rent and amortization of above- and below-market leases | 368 | (1,866 | ) | (1,009 | ) | (5,358 | ) | |||||||||
Amortization of discounts and closing costs | 1 | 1 | 3 | 3 | ||||||||||||
Termination fees on derivative instruments | — | — | — | 156 | ||||||||||||
Unrealized gains on derivative instruments | — | (245 | ) | (101 | ) | (321 | ) | |||||||||
MFFO | $ | 14,726 | $ | 14,545 | $ | 45,830 | $ | 46,071 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
MFFO by component: | ||||||||||||||||
Assets held for investment | $ | 14,726 | $ | 13,845 | $ | 44,881 | $ | 43,578 | ||||||||
Real estate properties sold | — | 700 | 949 | 2,493 | ||||||||||||
MFFO | $ | 14,726 | $ | 14,545 | $ | 45,830 | $ | 46,071 |
Period | Distributions Declared (1) | Distributions Declared Per Share(1) | Distributions Paid (2) | Cash Flow From Operations | ||||||||||||
First Quarter 2017 | $ | 12,770 | $ | 0.068 | $ | 12,866 | $ | 12,404 | ||||||||
Second Quarter 2017 | 12,896 | 0.068 | 13,043 | 17,492 | ||||||||||||
Third Quarter 2017 | 13,013 | 0.069 | 13,022 | 13,007 | ||||||||||||
$ | 38,679 | $ | 0.205 | $ | 38,931 | $ | 42,903 |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) |
PART I. | FINANCIAL INFORMATION (CONTINUED) |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Item 4. | Controls and Procedures |
PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
a) | During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933. |
b) | Not applicable. |
c) | Our share redemption program provides only for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program document, and together with redemptions sought in connection with a stockholder’s death, “Special Redemptions”). Such redemptions are subject to the limitations described in the share redemption program document, including: |
• | During each calendar year, Special Redemptions are limited to an annual dollar amount determined by the board of directors, which may be reviewed during the year and increased or decreased upon ten business days’ notice to our stockholders. We may provide notice by including such information (a) in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the Securities and Exchange Commission or (b) in a separate mailing to the stockholders. On December 9, 2016, the board of directors approved the dollar amount limitation for Special Redemptions for calendar year 2017 of $10.0 million in the aggregate (subject to review and adjustment during the year by the board of directors), and further subject to the limitations described in the share redemption program. |
• | During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year. |
• | We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland General Corporation Law, as amended from time to time, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency. |
PART II. | OTHER INFORMATION (CONTINUED) |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds (continued) |
Month | Total Number of Shares Redeemed (1) | Average Price Paid Per Share (2) | Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program | ||||||
January 2017 | 54,480 | $ | 5.49 | (3) | |||||
February 2017 | 79,674 | $ | 5.49 | (3) | |||||
March 2017 | 55,953 | $ | 5.49 | (3) | |||||
April 2017 | 88,642 | $ | 5.49 | (3) | |||||
May 2017 | 82,827 | $ | 5.49 | (3) | |||||
June 2017 | 152,829 | $ | 5.49 | (3) | |||||
July 2017 | 125,633 | $ | 5.49 | (3) | |||||
August 2017 | 99,892 | $ | 5.49 | (3) | |||||
September 2017 | 97,910 | $ | 5.49 | (3) | |||||
Total | 837,840 |
Item 3. | Defaults upon Senior Securities |
Item 4. | Mine Safety Disclosures |
Item 5. | Other Information |
Ex. | Description | ||
3.1 | |||
3.2 | |||
4.1 | |||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
99.1 | |||
101.INS | XBRL Instance Document | ||
101.SCH | XBRL Taxonomy Extension Schema | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
KBS REAL ESTATE INVESTMENT TRUST II, INC. | |||
Date: | November 14, 2017 | By: | /S/ CHARLES J. SCHREIBER, JR. |
Charles J. Schreiber, Jr. | |||
Chairman of the Board, Chief Executive Officer and Director | |||
(principal executive officer) | |||
Date: | November 14, 2017 | By: | /S/ JEFFREY K. WALDVOGEL |
Jeffrey K. Waldvogel | |||
Chief Financial Officer | |||
(principal financial officer) |
1. | I have reviewed this quarterly report on Form 10-Q of KBS Real Estate Investment Trust II, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | November 14, 2017 | By: | /S/ CHARLES J. SCHREIBER, JR. |
Charles J. Schreiber, Jr. | |||
Chairman of the Board, Chief Executive Officer and Director | |||
(principal executive officer) |
1. | I have reviewed this quarterly report on Form 10-Q of KBS Real Estate Investment Trust II, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: | November 14, 2017 | By: | /S/ JEFFREY K. WALDVOGEL |
Jeffrey K. Waldvogel | |||
Chief Financial Officer | |||
(principal financial officer) |
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: | November 14, 2017 | By: | /S/ CHARLES J. SCHREIBER, JR. |
Charles J. Schreiber, Jr. | |||
Chairman of the Board, Chief Executive Officer and Director | |||
(principal executive officer) |
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
Date: | November 14, 2017 | By: | /S/ JEFFREY K. WALDVOGEL |
Jeffrey K. Waldvogel | |||
Chief Financial Officer | |||
(principal financial officer) |
Document and Entity Information - shares |
9 Months Ended | |
---|---|---|
Sep. 30, 2017 |
Nov. 09, 2017 |
|
Document and Entity Information [Abstract] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Sep. 30, 2017 | |
Document Fiscal Year Focus | 2017 | |
Document Fiscal Period Focus | Q3 | |
Entity Registrant Name | KBS Real Estate Investment Trust II, Inc. | |
Entity Central Index Key | 0001411059 | |
Entity Filer Category | Non-accelerated Filer | |
Current Fiscal Year end | --12-31 | |
Entity Common Stock, Shares Outstanding | 187,759,131 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Sep. 30, 2017 |
Dec. 31, 2016 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Preferred stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
Preferred stock, shares authorized (in shares) | 10,000,000 | 10,000,000 |
Preferred stock, shares issued (in shares) | 0 | 0 |
Preferred stock, shares outstanding (in shares) | 0 | 0 |
Common stock, par value (in dollars per share) | $ 0.01 | $ 0.01 |
Common stock, shares authorized (in shares) | 1,000,000,000 | 1,000,000,000 |
Common stock, shares issued (in shares) | 187,882,112 | 188,719,952 |
Common stock, shares outstanding (in shares) | 187,882,112 | 188,719,952 |
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Revenues: | ||||
Rental income | $ 30,649 | $ 33,214 | $ 95,384 | $ 101,674 |
Tenant reimbursements | 3,401 | 3,389 | 10,842 | 11,114 |
Interest income from real estate loans receivable | 267 | 270 | 795 | 806 |
Other operating income | 1,827 | 1,729 | 5,441 | 5,191 |
Total revenues | 36,144 | 38,602 | 112,462 | 118,785 |
Expenses: | ||||
Operating, maintenance, and management | 8,315 | 9,002 | 25,600 | 25,785 |
Real estate taxes and insurance | 5,014 | 5,099 | 15,092 | 15,223 |
Asset management fees to affiliate | 2,899 | 2,955 | 8,746 | 8,850 |
General and administrative expenses | 1,119 | 1,299 | 3,307 | 5,125 |
Depreciation and amortization | 13,458 | 14,210 | 40,771 | 43,391 |
Interest expense | 4,558 | 4,066 | 12,947 | 12,727 |
Total expenses | 35,363 | 36,631 | 106,463 | 111,101 |
Other income: | ||||
Other income | 118 | 474 | 167 | 516 |
Gain on sale of real estate | 0 | 0 | 7,863 | 9,101 |
Total other income | 118 | 474 | 8,030 | 9,617 |
Net income | $ 899 | $ 2,445 | $ 14,029 | $ 17,301 |
Net income per common share, basic and diluted (in dollars per share) | $ 0.00 | $ 0.01 | $ 0.07 | $ 0.09 |
Weighted-average number of common shares outstanding, basic and diluted (in shares) | 188,085,093 | 189,002,569 | 188,390,374 | 189,208,324 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Statement of Comprehensive Income [Abstract] | ||||
Net income | $ 899 | $ 2,445 | $ 14,029 | $ 17,301 |
Other comprehensive income: | ||||
Reclassification of realized losses recognized on interest rate swaps (effective portion) | 0 | 0 | 0 | 60 |
Total other comprehensive income | 0 | 0 | 0 | 60 |
Total comprehensive income | $ 899 | $ 2,445 | $ 14,029 | $ 17,361 |
ORGANIZATION |
9 Months Ended |
---|---|
Sep. 30, 2017 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
ORGANIZATION | ORGANIZATION KBS Real Estate Investment Trust II, Inc. (the “Company”) was formed on July 12, 2007 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2008. The Company conducts its business primarily through KBS Limited Partnership II, a Delaware limited partnership formed on August 23, 2007 (the “Operating Partnership”), and its subsidiaries. The Company is the sole general partner of and directly owns a 0.1% partnership interest in the Operating Partnership. The Company’s wholly-owned subsidiary, KBS REIT Holdings II LLC, a Delaware limited liability company formed on August 23, 2007 (“KBS REIT Holdings II”), owns the remaining 99.9% partnership interest in the Operating Partnership and is its sole limited partner. The Company invested in a diverse portfolio of real estate and real estate-related investments. As of September 30, 2017, the Company owned ten real estate properties (consisting of nine office properties and an office campus consisting of eight office buildings). In addition, as of September 30, 2017, the Company owned one real estate loan receivable. Subject to certain restrictions and limitations, the business of the Company is managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on May 21, 2017 (the “Advisory Agreement”). The Advisory Agreement may be renewed for an unlimited number of one-year periods upon the mutual consent of the Advisor and the Company. Either party may terminate the Advisory Agreement upon 60 days’ written notice. The Advisor owns 20,000 shares of the Company’s common stock. Upon commencing its initial public offering (the “Offering”), the Company retained KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Advisor, to serve as the dealer manager of the Offering. The Company ceased offering shares of common stock in its primary offering on December 31, 2010 and terminated its primary offering on March 22, 2011. The Company terminated its dividend reinvestment plan effective May 29, 2014. The Company sold 182,681,633 shares of common stock in its primary offering for gross offering proceeds of $1.8 billion. The Company sold 30,903,504 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $298.2 million. Also as of September 30, 2017, the Company had redeemed 25,723,025 shares sold in the Offering for $244.6 million. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
9 Months Ended |
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Sep. 30, 2017 | |
Accounting Policies [Abstract] | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”). Principles of Consolidation and Basis of Presentation The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The consolidated financial statements include the accounts of the Company, KBS REIT Holdings II, the Operating Partnership, and their direct and indirect wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Use of Estimates The preparation of the consolidated financial statements and condensed notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and condensed notes. Actual results could materially differ from those estimates. Per Share Data Basic net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the nine months ended September 30, 2017 and 2016, respectively. Distributions declared per common share were $0.069 and $0.205 in the aggregate for the three and nine months ended September 30, 2017, respectively, and $0.070 and $0.210 in the aggregate for the three and nine months ended September 30, 2016, respectively. Distributions declared per common share assumes each share was issued and outstanding each day that was a record date for distributions and were based on a monthly record date for each month during the periods commencing January 2017 through September 2017 and January 2016 through September 2016. Segments The Company invested in core real estate properties and real estate-related investments with the goal of acquiring a portfolio of income-producing investments. The Company’s real estate properties exhibit similar long-term financial performance and have similar economic characteristics to each other. Beginning with the reporting period commencing on January 1, 2016, the Company aggregated its investments into one reportable business segment. The Company considered both quantitative and qualitative thresholds and determined that its investment in a real estate loan receivable does not constitute a reportable segment. Prior to the reporting period commencing on January 1, 2016, the Company had identified two reportable business segments based on its investment types: real estate and real estate-related. However, based on the Company’s current investment portfolio, the Company does not believe that its investment in a real estate-related investment is a reportable segment. Reclassifications Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. During the nine months ended September 30, 2017, the Company sold an office property. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented. Additionally, during the year ended December 31, 2016, the Company elected to early adopt ASU No. 2016-18 (as defined below). As a result, the Company no longer presents the changes within restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows. Square Footage, Occupancy and Other Measures Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board. Recently Issued Accounting Standards Update In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 was to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU No. 2015-14”), which defers the effective date of ASU No. 2014-09 by one year. Early adoption is permitted but not before the original effective date. The primary source of revenue for the Company is generated through leasing arrangements, which are excluded from this standard. The Company’s revenues that may be impacted by this standard primarily include other operating income, sales of real estate and other ancillary income earned at its properties. In 2016, other operating income and other ancillary income were approximately 6% of consolidated revenue. The Company is in process of evaluating how this standard will impact sales of real estate. The Company continues to evaluate the impact that the standard will have on its consolidated financial statements. The Company expects to adopt the standard using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the adoption. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”). The amendments in ASU No. 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 primarily affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU No. 2016-01 also requires entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the balance sheet or in the accompanying notes to the financial statements. ASU No. 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application of certain provisions of the standard is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU No. 2016-01 to have a significant impact on its financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale securities. An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures. For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”). ASU No. 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on eight specific cash flow issues, including the following that are or may be relevant to the Company: (a) Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; (b) Cash payments relating to contingent consideration made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities; (c) Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement); and (d) In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the impact of adopting ASU No. 2016-15 on its financial statements, but does not expect the adoption of ASU No. 2016-15 to have a material impact on its financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company elected to early adopt ASU No. 2016-18 for the reporting period ended December 31, 2016 and it was applied retrospectively. As a result of the adoption of ASU No. 2016-18, the Company no longer presents the changes within restricted cash in the consolidated statements of cash flows. |
REAL ESTATE HELD FOR INVESTMENT |
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Real Estate [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
REAL ESTATE HELD FOR INVESTMENT | REAL ESTATE HELD FOR INVESTMENT As of September 30, 2017, the Company’s portfolio of real estate held for investment was composed of nine office properties and an office campus consisting of eight office buildings, encompassing in the aggregate approximately 4.9 million rentable square feet. As of September 30, 2017, the Company’s real estate portfolio was 83% occupied. The following table summarizes the Company’s real estate portfolio as of September 30, 2017 (in thousands):
As of September 30, 2017, the following properties represented more than 10% of the Company’s total assets:
_____________________ (1) Annualized base rent represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. Operating Leases The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2017, the leases had remaining terms, excluding options to extend, of up to 14.1 years with a weighted-average remaining term of 5.1 years. Some of the leases have provisions to extend the term of the leases, options for early termination for all or part of the leased premises after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $2.6 million and $2.5 million as of September 30, 2017 and December 31, 2016, respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized deferred rent from tenants, net of lease incentive amortization, of $1.5 million and $5.1 million, respectively. As of September 30, 2017 and December 31, 2016, the cumulative deferred rent balance was $60.1 million and $57.9 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $10.0 million and $10.9 million of unamortized lease incentives as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows (in thousands):
As of September 30, 2017, the Company had approximately 190 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:
(1) Annualized base rent represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. No other tenant industries accounted for more than 10% of annualized base rent. The Company had not identified any material tenant credit issues as of September 30, 2017. During the nine months ended September 30, 2017 and 2016, the Company recorded bad debt expense of $0.3 million and $0.2 million, respectively. As of September 30, 2017, the Company had a bad debt expense reserve of approximately $0.6 million, which represented less than 1% of its annualized base rent. As of September 30, 2017, the Company had a concentration of credit risk related to the following tenant lease that represented more than 10% of the Company’s annualized base rent:
_____________________ (1) Annualized base rent represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. (2) Represents the expiration date of the lease as of September 30, 2017 and does not take into account any tenant renewal or termination options. (3) Union Bank has two options to extend the term of this lease for three, four, five, six or seven years per option term, provided that the combined renewal option terms do not exceed 10 years. If Union Bank elects to exercise its extension options, it must extend the lease on (i) the entire office premises or (ii) no less than 200,000 rentable square feet consisting of full floors only plus either all or none of both the retail and vault space. No other tenant accounted for more than 10% of annualized base rent. Geographic Concentration Risk As of September 30, 2017, the Company’s net investments in real estate in California and New Jersey represented 30.9% and 22.4% of the Company’s total assets, respectively. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California and New Jersey real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders. |
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES |
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Tenant Origination and Absorption Costs, Above-Market Lease Assets and Below-Market Lease Liabilities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES | TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES As of September 30, 2017 and December 31, 2016, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):
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REAL ESTATE LOAN RECEIVABLE |
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Receivables [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
REAL ESTATE LOAN RECEIVABLE | REAL ESTATE LOAN RECEIVABLE As of September 30, 2017 and December 31, 2016, the Company, through an indirect wholly owned subsidiary, had originated the following real estate loan receivable (dollars in thousands):
(1) Outstanding principal balance as of September 30, 2017 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns. (2) Book value represents outstanding principal balance, adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs. (3) Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2017, using the interest method, annualized and divided by the average amortized cost basis of the investment during 2017. The contractual interest rate and annualized effective interest rate presented are as of September 30, 2017. The following summarizes the activity related to the real estate loan receivable for the nine months ended September 30, 2017 (in thousands):
For the nine months ended September 30, 2017 and 2016, interest income from the real estate loan receivable consisted of the following (in thousands):
As of September 30, 2017 and December 31, 2016, the borrower under the Company’s real estate loan receivable was current on its debt obligations. |
REAL ESTATE HELD FOR SALE |
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Discontinued Operations and Disposal Groups [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
REAL ESTATE SALE | REAL ESTATE HELD FOR SALE In accordance with ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”), results of operations from properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. Results of operations from properties that were classified as held for sale in financial statements issued prior to January 1, 2014 will remain in discontinued operations on the Company’s consolidated statements of operations. Prior to the adoption of ASU No. 2014-08, the results of operations of properties held for sale or to be disposed of and the aggregate net gains recognized upon their disposition were presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the nine months ended September 30, 2017, the Company disposed of one office property. During the year ended December 31, 2016, the Company disposed of one office/flex property. The results of operations for the properties sold during the nine months ended September 30, 2017 and the year ended December 31, 2016 are included in continuing operations on the Company’s consolidated statements of operations. As of September 30, 2017, the Company did not have any real estate properties held for sale. The following table summarizes certain revenue and expenses related to the Company’s real estate properties that were sold during the year ended December 31, 2016 and the three and nine months ended September 30, 2017, which were included in continuing operations (in thousands):
The following summary presents the major components of assets and liabilities related to real estate held for sale as of September 30, 2017 and December 31, 2016 (in thousands). No real estate properties were held for sale as of September 30, 2017.
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NOTES PAYABLE |
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Notes Payable [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTES PAYABLE | NOTES PAYABLE As of September 30, 2017 and December 31, 2016, the Company’s notes payable consisted of the following (dollars in thousands):
(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2017. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2017, using interest rate indices as of September 30, 2017, where applicable. For further information regarding the Company’s derivative instruments, see Note 8, “Derivative Instruments.” (2) Represents the initial maturity date or the maturity date as extended as of September 30, 2017; subject to certain conditions, the maturity dates of certain loans may be extended beyond the maturity date shown. (3) On June 23, 2017, the Company exercised its first extension option with the lender to extend the maturity date of the Amended and Restated Portfolio Revolving Loan Facility to June 21, 2018. As of September 30, 2017, the Amended and Restated Portfolio Revolving Loan Facility was secured by Pierre Laclede Center. (4) On September 15, 2017, the Company extended the maturity date of the Union Bank Plaza Mortgage Loan to January 12, 2018. As of September 30, 2017, $105.0 million of the Union Bank Plaza Mortgage Loan had been disbursed to the Company with the remaining loan balance of $14.3 million available for future disbursements, subject to certain conditions set forth in the loan agreement. (5) On June 28, 2017, the Company entered into a loan modification agreement with the lender and extended the maturity date of Portfolio Mortgage Loan #1 to October 20, 2017. As of September 30, 2017, Portfolio Mortgage Loan #1 was secured by Horizon Tech Center and Granite Tower. On October 19, 2017, the Company exercised its extension option with the lender to extend the maturity date of Portfolio Mortgage Loan #1 to April 20, 2018. (6) On March 1, 2017, the Company exercised its second extension option with the lender to extend the maturity date of Portfolio Mortgage Loan #3 to March 1, 2018 and reduced the loan commitment amount to $54.0 million. As of September 30, 2017, the principal balance under Portfolio Mortgage Loan #3 consisted of the $32.4 million non-revolving portion and $21.6 million revolving portion. As of September 30, 2017, Portfolio Mortgage Loan #3 was secured by the 100 & 200 Campus Drive Buildings and Willow Oaks Corporate Center. (7) Monthly payments were initially interest-only. On May 1, 2017, monthly payments for the Corporate Technology Centre Mortgage Loan began to include principal and interest with principal payments calculated using an amortization schedule of 30 years for the balance of the loan term, with the remaining principal balance, all accrued and unpaid interest and any other amounts due at maturity. (8) As of September 30, 2017, the principal balance of the 300-600 Campus Drive Revolving Loan consisted of the $93.5 million non-revolving portion. The revolving portion of $25.0 million remained available for future disbursements, subject to certain terms and conditions contained in the loan documents. On the first day of each calendar quarter, commencing on October 1, 2016, and each succeeding January 1, April 1, July 1 and October 1 thereafter, the Company repays principal outstanding under the 300-600 Campus Drive Revolving Loan in equal installments of $375,000. During the three and nine months ended September 30, 2017, the Company incurred $4.6 million and $12.9 million of interest expense, respectively. During the three and nine months ended September 30, 2016, the Company incurred $4.1 million and $12.7 million of interest expense, respectively. As of September 30, 2017 and December 31, 2016, $1.4 million and $1.3 million, respectively, of interest expense were payable. Included in interest expense for the three and nine months ended September 30, 2017 was $0.2 million and $0.8 million of amortization of deferred financing costs, respectively. Included in interest expense for the three and nine months ended September 30, 2016 were $0.6 million and $1.4 million of amortization of deferred financing costs, respectively. During the nine months ended September 30, 2017, the Company recorded a reduction to interest expense of $10,000 as a result of the Company’s interest rate swap agreements. Interest expense incurred as a result of the Company’s interest rate swap agreements for the nine months ended September 30, 2016 was $0.6 million. The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of September 30, 2017 (in thousands):
The Company plans to exercise its extension options available under its loan agreements, if applicable, or pay off or refinance the related notes payable prior to their maturity dates. Certain of the Company’s notes payable contain financial debt covenants. As of September 30, 2017, the Company was in compliance with these debt covenants. |
DERIVATIVE INSTRUMENTS |
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Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DERIVATIVE INSTRUMENTS | DERIVATIVE INSTRUMENTS The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes. The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of September 30, 2017 and December 31, 2016. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
(1) As of June 1, 2017, all of the Company’s remaining interest rate swaps had expired. As of December 31, 2016, none of the Company’s interest rate swaps were designated as cash flow hedges. The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of September 30, 2017 and December 31, 2016 (dollars in thousands):
_____________________ (1) As of June 1, 2017, all of the Company’s remaining interest rate swaps had expired. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) in the accompanying consolidated statements of comprehensive income (loss) and as other comprehensive income in the accompanying consolidated statements of stockholders’ equity. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The change in fair value of the ineffective portion is recognized directly in earnings. With respect to swap agreements that were terminated for which it remains probable that the original hedged forecasted transactions (i.e., LIBOR-based debt service payments) will occur, the loss related to the termination of these swap agreements is included in accumulated other comprehensive income (loss) and is reclassified into earnings over the period of the original forecasted hedged transaction. The change in fair value of a derivative instrument that is not designated as a cash flow hedge is recorded as interest expense in the accompanying consolidated statements of operations. The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations (in thousands):
_____________________ (1) All of the Company’s interest rate swap agreements were initially designated as cash flow hedges. During 2014, the Company dedesignated all of its interest rate swap instruments due to the anticipated early repayment of debt in connection with asset sales, and therefore, certain hedged forecasted transactions were no longer probable beyond the projected asset sale date. (2) As of June 1, 2017, all of the Company’s remaining interest rate swaps had expired. |
FAIR VALUE DISCLOSURES |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
FAIR VALUE DISCLOSURES | FAIR VALUE DISCLOSURES Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of assets and liabilities for which it is practicable to estimate the fair value: Cash and cash equivalents, rent and other receivables, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items. Real estate loan receivable: The Company’s real estate loan receivable is presented in the accompanying consolidated balance sheets at its amortized cost net of recorded loan loss reserves (if applicable) and not at fair value. The fair value of the real estate loan receivable was estimated using an internal valuation model that considered the expected cash flows for the loan, underlying collateral value (for collateral-dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs. Notes payable: The fair value of the Company’s notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs. The following were the face values, carrying amounts and fair values of the Company’s real estate loan receivable and notes payable as of September 30, 2017 and December 31, 2016, which carrying amounts do not generally approximate the fair values (in thousands):
Disclosure of the fair values of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Low levels of transaction volume for certain financial instruments have made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different. |
RELATED PARTY TRANSACTIONS |
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Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
RELATED PARTY TRANSACTIONS | RELATED PARTY TRANSACTIONS The Company has entered into the Advisory Agreement with the Advisor. This agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the management of the Company’s investments, among other services, and the disposition of investments, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. The Company has also entered into a fee reimbursement agreement with the Dealer Manager pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc. and KBS Growth & Income REIT, Inc. On January 6, 2014, the Company, together with KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc., the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT, Inc. was added to the insurance program at terms similar to those described above. In June 2017, the Company renewed its participation in the program, and the program is effective through June 30, 2018. As KBS REIT I is implementing its plan of of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage. During the nine months ended September 30, 2017 and 2016, no other business transactions occurred between the Company and KBS REIT I, KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc. and KBS Growth & Income REIT, Inc. Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 2017 and 2016, respectively, and any related amounts payable as of September 30, 2017 and December 31, 2016 (in thousands):
(1) Reimbursable operating expenses primarily consists of internal audit personnel costs, accounting software and cybersecurity related expenses incurred by the Advisor under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $63,000 and $64,000 for the three months ended September 30, 2017 and 2016, respectively, and $167,000 and $162,000 for the nine months ended September 30, 2017 and 2016, respectively, and were the only type of employee costs reimbursed under the Advisory Agreement for the nine months ended September 30, 2017 and 2016. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company’s direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company. (2) Disposition fees with respect to real estate sold are included in the gain on sale of real estate, net, in the accompanying consolidated statements of operations. Disposition fees with respect to real estate loans receivable sold are included in the gain on payoff or sale of real estate loans receivable in the accompanying consolidated statements of operations. During the nine months ended September 30, 2017, the Advisor paid the Company a $0.1 million property insurance rebate. |
COMMITMENTS AND CONTINGENCIES |
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Sep. 30, 2017 | |
Commitments and Contingencies Disclosure [Abstract] | |
COMMITMENTS AND CONTINGENCIES | COMMITMENTS AND CONTINGENCIES Economic Dependency The Company is dependent on the Advisor for certain services that are essential to the Company, including the disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. In the event the Advisor is unable to provide any of these services, the Company will be required to obtain such services from other sources. Environmental As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of September 30, 2017. Legal Matters From time to time, the Company is party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote. |
SUBSEQUENT EVENTS |
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Sep. 30, 2017 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | SUBSEQUENT EVENTS The Company evaluates subsequent events up until the date the consolidated financial statements are issued. Distributions Paid On October 2, 2017, the Company paid distributions of $4.2 million, which related to distributions declared for September 2017 in the amount of $0.02256164 per share of common stock to stockholders of record as of the close of business on September 20, 2017. On November 1, 2017, the Company paid distributions of $4.4 million, which related to distributions declared for October 2017 in the amount of $0.02331370 per share of common stock to stockholders of record as of the close of business on October 20, 2017. Distributions Declared On November 14, 2017, the Company’s board of directors declared a November 2017 distribution in the amount of $0.02256164 per share of common stock to stockholders of record as of the close of business on November 20, 2017, which the Company expects to pay in December 2017, and a December 2017 distribution in the amount of $0.02331370 per share of common stock to stockholders of record as of the close of business on December 20, 2017, which the Company expects to pay in January 2018. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Sep. 30, 2017 | |
Accounting Policies [Abstract] | |
Basis of Presentation | The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. |
Principles of Consolidation | The consolidated financial statements include the accounts of the Company, KBS REIT Holdings II, the Operating Partnership, and their direct and indirect wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. |
Use of Estimates | The preparation of the consolidated financial statements and condensed notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and condensed notes. Actual results could materially differ from those estimates. |
Per Share Data | Basic net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the nine months ended September 30, 2017 and 2016, respectively. Distributions declared per common share were $0.069 and $0.205 in the aggregate for the three and nine months ended September 30, 2017, respectively, and $0.070 and $0.210 in the aggregate for the three and nine months ended September 30, 2016, respectively. Distributions declared per common share assumes each share was issued and outstanding each day that was a record date for distributions and were based on a monthly record date for each month during the periods commencing January 2017 through September 2017 and January 2016 through September 2016. |
Segments | The Company invested in core real estate properties and real estate-related investments with the goal of acquiring a portfolio of income-producing investments. The Company’s real estate properties exhibit similar long-term financial performance and have similar economic characteristics to each other. Beginning with the reporting period commencing on January 1, 2016, the Company aggregated its investments into one reportable business segment. The Company considered both quantitative and qualitative thresholds and determined that its investment in a real estate loan receivable does not constitute a reportable segment. Prior to the reporting period commencing on January 1, 2016, the Company had identified two reportable business segments based on its investment types: real estate and real estate-related. However, based on the Company’s current investment portfolio, the Company does not believe that its investment in a real estate-related investment is a reportable segment. |
Reclassifications | Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. During the nine months ended September 30, 2017, the Company sold an office property. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented. Additionally, during the year ended December 31, 2016, the Company elected to early adopt ASU No. 2016-18 (as defined below). As a result, the Company no longer presents the changes within restricted cash in the consolidated statements of cash flows. Instead, restricted cash is included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the consolidated statements of cash flows. |
Square Footage, Occupancy and Other Measures | Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board. |
Recently Issued Accounting Standards Update | In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 was to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU No. 2015-14”), which defers the effective date of ASU No. 2014-09 by one year. Early adoption is permitted but not before the original effective date. The primary source of revenue for the Company is generated through leasing arrangements, which are excluded from this standard. The Company’s revenues that may be impacted by this standard primarily include other operating income, sales of real estate and other ancillary income earned at its properties. In 2016, other operating income and other ancillary income were approximately 6% of consolidated revenue. The Company is in process of evaluating how this standard will impact sales of real estate. The Company continues to evaluate the impact that the standard will have on its consolidated financial statements. The Company expects to adopt the standard using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the adoption. In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”). The amendments in ASU No. 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 primarily affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU No. 2016-01 also requires entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the balance sheet or in the accompanying notes to the financial statements. ASU No. 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application of certain provisions of the standard is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU No. 2016-01 to have a significant impact on its financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale securities. An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures. For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements. In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”). ASU No. 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on eight specific cash flow issues, including the following that are or may be relevant to the Company: (a) Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; (b) Cash payments relating to contingent consideration made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities; (c) Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement); and (d) In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the impact of adopting ASU No. 2016-15 on its financial statements, but does not expect the adoption of ASU No. 2016-15 to have a material impact on its financial statements. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company elected to early adopt ASU No. 2016-18 for the reporting period ended December 31, 2016 and it was applied retrospectively. As a result of the adoption of ASU No. 2016-18, the Company no longer presents the changes within restricted cash in the consolidated statements of cash flows. |
REAL ESTATE HELD FOR INVESTMENT (Tables) |
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Real Estate [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Real Estate Investments | The following table summarizes the Company’s real estate portfolio as of September 30, 2017 (in thousands):
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Schedules of Concentration of Risk, by Risk Factor | As of September 30, 2017, the Company had a concentration of credit risk related to the following tenant lease that represented more than 10% of the Company’s annualized base rent:
_____________________ (1) Annualized base rent represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. (2) Represents the expiration date of the lease as of September 30, 2017 and does not take into account any tenant renewal or termination options. (3) Union Bank has two options to extend the term of this lease for three, four, five, six or seven years per option term, provided that the combined renewal option terms do not exceed 10 years. If Union Bank elects to exercise its extension options, it must extend the lease on (i) the entire office premises or (ii) no less than 200,000 rentable square feet consisting of full floors only plus either all or none of both the retail and vault space. As of September 30, 2017, the Company had approximately 190 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:
(1) Annualized base rent represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. As of September 30, 2017, the following properties represented more than 10% of the Company’s total assets:
_____________________ (1) Annualized base rent represents annualized contractual base rental income as of September 30, 2017, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term. |
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Schedule of Future Minimum Rental Income for Company's Properties | As of September 30, 2017, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows (in thousands):
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TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES (Tables) |
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Tenant Origination and Absorption Costs, Above-Market Lease Assets and Below-Market Lease Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tenant Origination and Absorption Costs, Above-Market Lease Assets and Below-Market Lease Liabilities | As of September 30, 2017 and December 31, 2016, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
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Amortization of Tenant Origination and Absorption Costs, Above-Market Leases and Below-Market Lease Liabilities | Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):
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REAL ESTATE LOAN RECEIVABLE (Tables) |
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Receivables [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Real Estate Loans Receivable | As of September 30, 2017 and December 31, 2016, the Company, through an indirect wholly owned subsidiary, had originated the following real estate loan receivable (dollars in thousands):
(1) Outstanding principal balance as of September 30, 2017 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns. (2) Book value represents outstanding principal balance, adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs. (3) Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2017, using the interest method, annualized and divided by the average amortized cost basis of the investment during 2017. The contractual interest rate and annualized effective interest rate presented are as of September 30, 2017. |
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Schedule of Activity Related to Real Estate Loans Receivable | The following summarizes the activity related to the real estate loan receivable for the nine months ended September 30, 2017 (in thousands):
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Schedule of Interest Income from Real Estate Loans Receivable | For the nine months ended September 30, 2017 and 2016, interest income from the real estate loan receivable consisted of the following (in thousands):
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REAL ESTATE HELD FOR SALE (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discontinued Operations and Disposal Groups [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Revenue and Expenses of Real Estate Disposed of by Sale | The following table summarizes certain revenue and expenses related to the Company’s real estate properties that were sold during the year ended December 31, 2016 and the three and nine months ended September 30, 2017, which were included in continuing operations (in thousands):
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Schedule of Assets and Liabilities of Real Estate Held-for-Sale | The following summary presents the major components of assets and liabilities related to real estate held for sale as of September 30, 2017 and December 31, 2016 (in thousands). No real estate properties were held for sale as of September 30, 2017.
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NOTES PAYABLE (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Notes Payable [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Long-term Debt Instruments | As of September 30, 2017 and December 31, 2016, the Company’s notes payable consisted of the following (dollars in thousands):
(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2017. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2017, using interest rate indices as of September 30, 2017, where applicable. For further information regarding the Company’s derivative instruments, see Note 8, “Derivative Instruments.” (2) Represents the initial maturity date or the maturity date as extended as of September 30, 2017; subject to certain conditions, the maturity dates of certain loans may be extended beyond the maturity date shown. (3) On June 23, 2017, the Company exercised its first extension option with the lender to extend the maturity date of the Amended and Restated Portfolio Revolving Loan Facility to June 21, 2018. As of September 30, 2017, the Amended and Restated Portfolio Revolving Loan Facility was secured by Pierre Laclede Center. (4) On September 15, 2017, the Company extended the maturity date of the Union Bank Plaza Mortgage Loan to January 12, 2018. As of September 30, 2017, $105.0 million of the Union Bank Plaza Mortgage Loan had been disbursed to the Company with the remaining loan balance of $14.3 million available for future disbursements, subject to certain conditions set forth in the loan agreement. (5) On June 28, 2017, the Company entered into a loan modification agreement with the lender and extended the maturity date of Portfolio Mortgage Loan #1 to October 20, 2017. As of September 30, 2017, Portfolio Mortgage Loan #1 was secured by Horizon Tech Center and Granite Tower. On October 19, 2017, the Company exercised its extension option with the lender to extend the maturity date of Portfolio Mortgage Loan #1 to April 20, 2018. (6) On March 1, 2017, the Company exercised its second extension option with the lender to extend the maturity date of Portfolio Mortgage Loan #3 to March 1, 2018 and reduced the loan commitment amount to $54.0 million. As of September 30, 2017, the principal balance under Portfolio Mortgage Loan #3 consisted of the $32.4 million non-revolving portion and $21.6 million revolving portion. As of September 30, 2017, Portfolio Mortgage Loan #3 was secured by the 100 & 200 Campus Drive Buildings and Willow Oaks Corporate Center. (7) Monthly payments were initially interest-only. On May 1, 2017, monthly payments for the Corporate Technology Centre Mortgage Loan began to include principal and interest with principal payments calculated using an amortization schedule of 30 years for the balance of the loan term, with the remaining principal balance, all accrued and unpaid interest and any other amounts due at maturity. (8) As of September 30, 2017, the principal balance of the 300-600 Campus Drive Revolving Loan consisted of the $93.5 million non-revolving portion. The revolving portion of $25.0 million remained available for future disbursements, subject to certain terms and conditions contained in the loan documents. On the first day of each calendar quarter, commencing on October 1, 2016, and each succeeding January 1, April 1, July 1 and October 1 thereafter, the Company repays principal outstanding under the 300-600 Campus Drive Revolving Loan in equal installments of $375,000. |
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Schedule of Maturities of Long-term Debt | The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of September 30, 2017 (in thousands):
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DERIVATIVE INSTRUMENTS (Tables) |
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Sep. 30, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Notional and Fair Value of Interest Rate Swaps Designated as Cash Flow Hedges | The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of September 30, 2017 and December 31, 2016. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
(1) As of June 1, 2017, all of the Company’s remaining interest rate swaps had expired. As of December 31, 2016, none of the Company’s interest rate swaps were designated as cash flow hedges. |
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Schedule of Derivative Instruments in Statement of Financial Position | The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of September 30, 2017 and December 31, 2016 (dollars in thousands):
_____________________ (1) As of June 1, 2017, all of the Company’s remaining interest rate swaps had expired. |
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Schedule of Derivative Instruments in Statement of Operations | The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations (in thousands):
_____________________ (1) All of the Company’s interest rate swap agreements were initially designated as cash flow hedges. During 2014, the Company dedesignated all of its interest rate swap instruments due to the anticipated early repayment of debt in connection with asset sales, and therefore, certain hedged forecasted transactions were no longer probable beyond the projected asset sale date. (2) As of June 1, 2017, all of the Company’s remaining interest rate swaps had expired. |
FAIR VALUE DISCLOSURES (Tables) |
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Fair Value Disclosures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Face Value, Carrying Amounts and Fair Value | The following were the face values, carrying amounts and fair values of the Company’s real estate loan receivable and notes payable as of September 30, 2017 and December 31, 2016, which carrying amounts do not generally approximate the fair values (in thousands):
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RELATED PARTY TRANSACTIONS (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Related Party Transactions [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Related Party Costs | Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 2017 and 2016, respectively, and any related amounts payable as of September 30, 2017 and December 31, 2016 (in thousands):
(1) Reimbursable operating expenses primarily consists of internal audit personnel costs, accounting software and cybersecurity related expenses incurred by the Advisor under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $63,000 and $64,000 for the three months ended September 30, 2017 and 2016, respectively, and $167,000 and $162,000 for the nine months ended September 30, 2017 and 2016, respectively, and were the only type of employee costs reimbursed under the Advisory Agreement for the nine months ended September 30, 2017 and 2016. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company’s direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company. (2) Disposition fees with respect to real estate sold are included in the gain on sale of real estate, net, in the accompanying consolidated statements of operations. Disposition fees with respect to real estate loans receivable sold are included in the gain on payoff or sale of real estate loans receivable in the accompanying consolidated statements of operations. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) |
3 Months Ended | 9 Months Ended | 12 Months Ended | |||
---|---|---|---|---|---|---|
Sep. 30, 2017
$ / shares
|
Sep. 30, 2016
$ / shares
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Sep. 30, 2017
$ / shares
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Sep. 30, 2016
$ / shares
|
Dec. 31, 2016
segment
|
Dec. 31, 2015
segment
|
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Accounting Policies [Abstract] | ||||||
Distributions declared per common share (in dollars per share) | $ / shares | $ 0.069 | $ 0.070 | $ 0.205 | $ 0.210 | ||
Number of reportable segments | segment | 1 | 2 | ||||
Accounting Standards Update 2014-09 | ||||||
New Accounting Pronouncements or Change in Accounting Principle [Line Items] | ||||||
Other operating income and other ancillary income as percent of consolidated revenue | 6.00% |
REAL ESTATE HELD FOR INVESTMENT (Operating Leases) (Narrative) (Details) $ in Thousands |
9 Months Ended | ||
---|---|---|---|
Sep. 30, 2017
USD ($)
tenant
|
Sep. 30, 2016
USD ($)
|
Dec. 31, 2016
USD ($)
|
|
Operating Leased Assets [Line Items] | |||
Deferred rent recognized | $ 1,549 | $ 5,114 | |
Deferred rent receivables | 60,100 | $ 57,900 | |
Unamortized lease incentives | $ 10,000 | 10,900 | |
Number of tenants | tenant | 190 | ||
Recorded bad debt expense related to tenant | $ 264 | $ 247 | |
Bad debt reserve | 600 | ||
Other liabilities, at fair value | |||
Operating Leased Assets [Line Items] | |||
Security deposit liability | $ 2,600 | $ 2,500 | |
Maximum | |||
Operating Leased Assets [Line Items] | |||
Operating lease, term | 14 years 1 month 6 days | ||
Bad debt reserve of annualized base rent | 1.00% | ||
Weighted Average | |||
Operating Leased Assets [Line Items] | |||
Operating lease, term | 5 years 1 month 6 days |
REAL ESTATE HELD FOR INVESTMENT (Future Minimum Rental Income) (Details) $ in Thousands |
Sep. 30, 2017
USD ($)
|
---|---|
Real Estate [Abstract] | |
October 1, 2017 through December 31, 2017 | $ 31,057 |
2018 | 120,037 |
2019 | 106,671 |
2020 | 100,749 |
2021 | 89,760 |
Thereafter | 275,199 |
Future minimum rental income | $ 723,473 |
REAL ESTATE HELD FOR INVESTMENT (Highest Tenant Industry Concentrations- Grater than 10% of Annual Base Rent) (Details) $ in Thousands |
9 Months Ended |
---|---|
Sep. 30, 2017
USD ($)
tenant
| |
Concentration Risk [Line Items] | |
Number of Tenants | tenant | 190 |
Annualized Base Rent | $ | $ 75,804 |
Percentage of Annualized Base Rent | 61.00% |
Finance | |
Concentration Risk [Line Items] | |
Number of Tenants | tenant | 33 |
Annualized Base Rent | $ | $ 28,081 |
Percentage of Annualized Base Rent | 22.60% |
Mining, Oil & Gas Extraction | |
Concentration Risk [Line Items] | |
Number of Tenants | tenant | 5 |
Annualized Base Rent | $ | $ 16,939 |
Percentage of Annualized Base Rent | 13.60% |
Computer System Design & Programming | |
Concentration Risk [Line Items] | |
Number of Tenants | tenant | 5 |
Annualized Base Rent | $ | $ 15,638 |
Percentage of Annualized Base Rent | 12.60% |
Legal Services | |
Concentration Risk [Line Items] | |
Number of Tenants | tenant | 33 |
Annualized Base Rent | $ | $ 15,146 |
Percentage of Annualized Base Rent | 12.20% |
REAL ESTATE HELD FOR INVESTMENT (Concentration of Credit Risk for Tenant Leases) (Details) $ in Thousands |
9 Months Ended |
---|---|
Sep. 30, 2017
USD ($)
ft²
extension
$ / ft²
| |
Real Estate Properties [Line Items] | |
Annualized Base Rent | $ | $ 75,804 |
Tenant Lease - Union Bank Plaza | |
Real Estate Properties [Line Items] | |
Square Feet | ft² | 342,712 |
% of Portfolio (Net Rentable Sq. Ft.) | 8.50% |
Annualized Base Rent | $ | $ 14,182 |
% of Portfolio Annualized Base Rent | 11.40% |
Annualized Base Rent per Sq. Ft. | $ / ft² | 41.38 |
Extension option | extension | 2 |
Tenant Lease - Union Bank Plaza | Maximum | |
Real Estate Properties [Line Items] | |
Extension period | 10 years |
Tenant Lease - Union Bank Plaza | Minimum | |
Real Estate Properties [Line Items] | |
Rentable area required for extension option (less than) | ft² | 200,000 |
REAL ESTATE HELD FOR INVESTMENT (Geographic Concentration Risk) (Details) |
9 Months Ended |
---|---|
Sep. 30, 2017 | |
Concentration Risk [Line Items] | |
Concentration risk, percentage | 61.00% |
Assets, Total | California | |
Concentration Risk [Line Items] | |
Concentration risk, percentage | 30.90% |
Assets, Total | New Jersey | |
Concentration Risk [Line Items] | |
Concentration risk, percentage | 22.40% |
REAL ESTATE LOAN RECEIVABLE (Schedule of Real Estate Loans Receivable) (Details) - USD ($) $ in Thousands |
9 Months Ended | |
---|---|---|
Sep. 30, 2017 |
Dec. 31, 2016 |
|
Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
Book Value | $ 13,964 | $ 14,079 |
Mortgage | Sheraton Charlotte Airport Hotel First Mortgage Charlotte, North Carolina | ||
Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
Date Acquired | Jul. 11, 2011 | |
Outstanding Principal Balance | $ 13,961 | |
Book Value | $ 13,964 | $ 14,079 |
Contractual Interest Rate | 7.50% | |
Annualized Effective Interest Rate | 7.60% | |
Maturity Date | Aug. 01, 2018 |
REAL ESTATE LOAN RECEIVABLE (Schedule of Activity Related to Real Estate Loans Receivable) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Real Estate Loans Receivable [Roll Forward] | ||||
Real estate loan receivable - December 31, 2016 | $ 14,079 | |||
Principal repayments received on the real estate loan receivable | (112) | $ (91) | ||
Amortization of closing costs and origination fees on the real estate loan receivable | $ (1) | $ (1) | (3) | $ (3) |
Real estate loan receivable - September 30, 2017 | $ 13,964 | $ 13,964 |
REAL ESTATE LOAN RECEIVABLE (Schedule of Interest Income from Real Estate Loans Receivable) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Receivables [Abstract] | ||||
Contractual interest income | $ 268 | $ 271 | $ 798 | $ 809 |
Amortization of closing costs and origination fees | (1) | (1) | (3) | (3) |
Interest income from real estate loan receivable | $ 267 | $ 270 | $ 795 | $ 806 |
REAL ESTATE HELD FOR SALE (Narrative) (Details) - Disposed of by Sale - property |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2017 |
Dec. 31, 2016 |
|
Office Properties | ||
Real Estate Properties [Line Items] | ||
Number of real estate properties sold | 1 | |
Office-Flex Properties [Member] | ||
Real Estate Properties [Line Items] | ||
Number of real estate properties sold | 1 |
REAL ESTATE HELD FOR SALE (Revenue and Expenses of Real Estate Held-for-Sale) (Details) - Disposed of by Sale - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Revenues | ||||
Rental income | $ 0 | $ 1,337 | $ 2,379 | $ 5,148 |
Tenant reimbursements | 0 | 17 | 33 | 389 |
Total revenues | 0 | 1,354 | 2,412 | 5,537 |
Expenses | ||||
Operating, maintenance, and management | 0 | 336 | 633 | 1,124 |
Real estate taxes and insurance | 0 | 213 | 334 | 848 |
Asset management fees to affiliate | 0 | 94 | 169 | 395 |
General and administrative expenses | 0 | 9 | 15 | 64 |
Depreciation and amortization | 0 | 488 | 157 | 1,931 |
Interest expense | 0 | 108 | 88 | 835 |
Total expenses | $ 0 | $ 1,248 | $ 1,396 | $ 5,197 |
REAL ESTATE HELD FOR SALE (Schedule of Assets and Liabilities Related to Real Estate Held for Sale) (Details) - Held-for-sale - USD ($) $ in Thousands |
Sep. 30, 2017 |
Dec. 31, 2016 |
---|---|---|
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items] | ||
Total real estate, at cost | $ 0 | $ 42,276 |
Accumulated depreciation and amortization | 0 | (8,282) |
Real estate held for sale, net | 0 | 33,994 |
Other assets | 0 | 3,565 |
Total assets related to real estate held for sale | 0 | 37,559 |
Other liabilities | 0 | 17 |
Total liabilities related to real estate held for sale | $ 0 | $ 17 |
NOTES PAYABLE (Narrative) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
Dec. 31, 2016 |
|
Derivative [Line Items] | |||||
Interest expense | $ 4,558 | $ 4,066 | $ 12,947 | $ 12,727 | |
Interest payable, current | 1,400 | 1,400 | $ 1,300 | ||
Amortization of deferred financing costs | $ 200 | $ 600 | 841 | 1,423 | |
Interest Rate Swaps | |||||
Derivative [Line Items] | |||||
Interest expense | $ 600 | ||||
Increase in interest expense | $ (10) |
NOTES PAYABLE (Schedule of Maturities of Long-Term Debt) (Details) - USD ($) $ in Thousands |
Sep. 30, 2017 |
Dec. 31, 2016 |
---|---|---|
Notes Payable [Abstract] | ||
October 1, 2017 through December 31, 2017 | $ 78,699 | |
2018 | 307,513 | |
2019 | 2,848 | |
2020 | 132,621 | |
Total notes payable, net | $ 521,681 | $ 524,296 |
DERIVATIVE INSTRUMENTS (Notional Amount and Fair Value) (Details) - Interest Rate Swaps $ in Thousands |
Sep. 30, 2017
USD ($)
investment
|
Dec. 31, 2016
USD ($)
investment
|
---|---|---|
Derivative [Line Items] | ||
Number of Instruments | investment | 0 | 3 |
Notional Amount | $ | $ 0 | $ 106,638 |
Prepaid expenses and other assets, at fair value | ||
Derivative [Line Items] | ||
Number of Instruments | investment | 0 | 2 |
Notional Amount | $ | $ 0 | $ 6 |
Other liabilities, at fair value | ||
Derivative [Line Items] | ||
Number of Instruments | investment | 0 | 1 |
Notional Amount | $ | $ 0 | $ 107 |
DERIVATIVE INSTRUMENTS (Statement of Operations) (Details) - Interest Rate Swaps - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Derivative [Line Items] | ||||
Increase (decrease) in interest expense as a result of derivatives | $ 0 | $ (81) | $ (10) | $ 566 |
Derivatives designated as hedging instruments | ||||
Derivative [Line Items] | ||||
Amount of loss recognized on interest rate swaps (effective portion) | 0 | 0 | 0 | 60 |
Increase (decrease) in interest expense as a result of derivatives | 0 | 0 | 0 | 60 |
Derivatives not designated as hedging instruments (2) | ||||
Derivative [Line Items] | ||||
Realized loss recognized on interest rate swaps | 0 | 164 | 91 | 671 |
Unrealized gains on interest rate swaps | 0 | (245) | (101) | (321) |
Losses related to swap terminations | 0 | 0 | 0 | 156 |
Increase (decrease) in interest expense as a result of derivatives | $ 0 | $ (81) | $ (10) | $ 506 |
FAIR VALUE DISCLOSURES (Schedule of Face Value, Carrying Amounts and Fair Value) (Details) - USD ($) |
Sep. 30, 2017 |
Dec. 31, 2016 |
---|---|---|
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
Real estate loan receivable, Face Value | $ 13,961,000 | $ 14,073,000 |
Notes payable, Face Value | 521,681,000 | 524,296,000 |
Carrying Amount | ||
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
Real estate loans receivable, Value | 13,964,000 | 14,079,000 |
Notes payable, Value | 521,262,000 | 523,771,000 |
Fair Value | ||
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items] | ||
Real estate loans receivable, Value | 13,945,000 | 14,089,000 |
Notes payable, Value | $ 519,070,000 | $ 522,296,000 |
RELATED PARTY TRANSACTIONS (Related Party Cost) (Details) - USD ($) $ in Thousands |
3 Months Ended | 9 Months Ended | |||
---|---|---|---|---|---|
Sep. 30, 2017 |
Sep. 30, 2016 |
Sep. 30, 2017 |
Sep. 30, 2016 |
Dec. 31, 2016 |
|
Related Party Transaction [Line Items] | |||||
Payable as of | $ 51 | $ 51 | $ 41 | ||
Administrative fees | 63 | $ 64 | 167 | $ 162 | |
Advisor and Dealer Manager | |||||
Related Party Transaction [Line Items] | |||||
Expenses | 2,962 | 3,026 | 9,404 | 9,490 | |
Payable as of | 51 | 51 | 41 | ||
Advisor and Dealer Manager | Asset management fees | |||||
Related Party Transaction [Line Items] | |||||
Expenses | 2,899 | 2,955 | 8,746 | 8,850 | |
Payable as of | 0 | 0 | 0 | ||
Advisor and Dealer Manager | Reimbursement of operating expenses | |||||
Related Party Transaction [Line Items] | |||||
Expenses | 63 | 71 | 188 | 217 | |
Payable as of | 51 | 51 | 41 | ||
Advisor and Dealer Manager | Disposition fees | |||||
Related Party Transaction [Line Items] | |||||
Expenses | 0 | $ 0 | 470 | $ 423 | |
Payable as of | $ 0 | $ 0 | $ 0 |
RELATED PARTY TRANSACTIONS (Narrative) (Details) $ in Millions |
9 Months Ended |
---|---|
Sep. 30, 2017
USD ($)
| |
KBS Capital Advisors LLC | Property Insurance Rebate | |
Related Party Transaction [Line Items] | |
Paid from related parties | $ 0.1 |
SUBSEQUENT EVENTS (Details) - USD ($) $ / shares in Units, $ in Millions |
1 Months Ended | |||||
---|---|---|---|---|---|---|
Nov. 14, 2017 |
Nov. 01, 2017 |
Oct. 02, 2017 |
Dec. 31, 2017 |
Oct. 31, 2017 |
Sep. 30, 2017 |
|
Dividend Paid | ||||||
Subsequent Event [Line Items] | ||||||
Distribution rate per share per day, declared | $ 0.02256164 | |||||
Dividend Declared | Scenario, Forecast | ||||||
Subsequent Event [Line Items] | ||||||
Distribution rate per share per day, declared | $ 0.02331370 | |||||
Subsequent Event | ||||||
Subsequent Event [Line Items] | ||||||
Distribution rate per share per day, declared | $ 0.02256164 | |||||
Subsequent Event | Dividend Paid | ||||||
Subsequent Event [Line Items] | ||||||
Paid distributions | $ 4.4 | $ 4.2 | ||||
Distribution rate per share per day, declared | $ 0.02331370 |
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