KBS Real Estate Investment Trust II (KBRS)
Filed: 25 Mar 10, 12:00am
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 5, 2010
KBS REAL ESTATE INVESTMENT TRUST II, INC.
(Exact name of registrant specified in its charter)
| Maryland | 000-53649 | 26-0658752 | ||
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (IRS Employer Identification No.) |
620 Newport Center Drive, Suite 1300
Newport Beach, California 92660
(Address of principal executive offices)
Registrant’s telephone number, including area code:(949) 417-6500
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant
under any of the following provisions:
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
ITEM 8.01 OTHER EVENTS
This Current Report on Form 8-K is being filed by KBS Real Estate Investment Trust II, Inc. (the “Company”) to present the financial statements for the acquired real property described below as well as the related pro forma financial statements for the Company. These financial statements are being filed on Form 8-K in order to be incorporated by reference into the Company’s registration statements.
On February 5, 2010, the Company, through an indirect wholly owned subsidiary, acquired a Class A office building containing 315,133 rentable square feet located in Portland, Oregon (“One Main Place”) for a purchase price (net of closing adjustments) of approximately $54.4 million plus closing costs.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
| (a) | Financial Statements of Real Estate Acquired | |||
One Main Place | ||||
| F-1 | ||||
Statement of Revenues Over Certain Operating Expenses for the Year Ended December 31, 2009 | F-2 | |||
Notes to Statement of Revenues Over Certain Operating Expenses for the Year Ended December 31, 2009 | F-3 | |||
| (b) | Pro Forma Financial Information | |||
KBS Real Estate Investment Trust II, Inc. | ||||
| F-5 | ||||
| F-6 | ||||
Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 2009 | F-8 | |||
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| KBS REAL ESTATE INVESTMENT TRUST II, INC. | ||||||
Dated: March 25, 2010 | BY: | /s/ Charles J. Schreiber, Jr. | ||||
| Charles J. Schreiber, Jr. | ||||||
| Chief Executive Officer | ||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
KBS Real Estate Investment Trust II, Inc.
We have audited the accompanying statement of revenues over certain operating expenses of One Main Place for the year ended December 31, 2009. This statement is the responsibility of One Main Place’s management. Our responsibility is to express an opinion on the statement based on our audit.
We conducted our audit in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenues over certain operating expenses is free of material misstatement. We were not engaged to perform an audit of One Main Place’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of One Main Place’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of revenues over certain operating expenses, assessing the accounting principles used and significant estimates made by management, and evaluating the overall presentation of the statement of revenues over certain operating expenses. We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenues over certain operating expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, as described in Note 2, and is not intended to be a complete presentation of One Main Place’s revenues and expenses.
In our opinion, the statement of revenues over certain operating expenses referred to above presents fairly, in all material respects, the revenues and certain operating expenses, as described in Note 2, of One Main Place for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
March 25, 2010
F-1
STATEMENT OF REVENUES OVER CERTAIN OPERATING EXPENSES
For the Year Ended December 31, 2009
(in thousands)
Revenues: | |||
Rental income | $ | 7,215 | |
Parking and other income | 733 | ||
Tenant reimbursements | 362 | ||
Total revenues | 8,310 | ||
Expenses: | |||
Repairs and maintenance | 1,171 | ||
Real estate taxes and insurance | 780 | ||
Utilities | 703 | ||
General and administrative expenses | 475 | ||
Total expenses | 3,129 | ||
Revenues over certain operating expenses | $ | 5,181 | |
See accompanying notes.
F-2
NOTES TO STATEMENT OF REVENUES OVER CERTAIN OPERATING EXPENSES
For the Year Ended December 31, 2009
| 1. | DESCRIPTION OF REAL ESTATE PROPERTY |
On February 5, 2010, KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”) acquired, through an indirect wholly owned subsidiary, an office building containing 315,133 rentable square feet in Portland, Oregon ( “One Main Place”) from One Main Place Portland–Oregon, Inc., (the “Seller”), an unaffiliated entity. One Main Place is located on approximately 0.9 acres of land. The purchase price (net of closing adjustments) of One Main Place was $54.4 million plus closing costs.
KBS REIT II is a Maryland corporation formed to invest in and manage a diverse portfolio of real estate and real estate-related investments.
| 2. | BASIS OF PRESENTATION |
The accompanying statement of revenues over certain operating expenses has been prepared to comply with the rules and regulations of the Securities and Exchange Commission (“SEC”).
One Main Place is not a legal entity and the accompanying statement of revenues over certain operating expenses is not representative of the actual operations for the period presented, as certain revenues and expenses have been excluded that may not be comparable to the revenues and expenses KBS REIT II expects to incur in the future operations of One Main Place. Excluded items include interest, depreciation and amortization, and general and administrative costs not directly comparable to the future operations of One Main Place.
An audited statement of revenues over certain operating expenses is being presented for the most recent fiscal year available instead of the three most recent years based on the following factors: (i) One Main Place was acquired from an unaffiliated party and (ii) based on due diligence of One Main Place by KBS REIT II, management is not aware of any material factors relating to One Main Place that would cause this financial information not to be indicative of future operating results.
Square footage, acreage, occupancy and other measures used to describe real estate included in these notes to the statement of revenues over certain operating expenses are presented on an unaudited basis.
| 3. | SIGNIFICANT ACCOUNTING POLICIES |
Rental Revenues
Minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, is recognized on a straight-line basis over the term of the related lease and amounts expected to be received in later years are recorded as deferred rent. The adjustment to record deferred rent increased rental revenue by $0.6 million for the year ended December 31, 2009.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.
| 4. | DESCRIPTION OF LEASING ARRANGEMENTS |
As of December 31, 2009, One Main Place was 95% leased by 39 tenants. For the year ended December 31, 2009, One Main Place earned 51% of its rental income from four tenants. These four tenants were in the following industries: non-profit, IT industry, legal services and federal government.
F-3
ONE MAIN PLACE
NOTES TO STATEMENT OF REVENUES OVER CERTAIN OPERATING EXPENSES (CONTINUED)
For the Year Ended December 31, 2009
The federally funded, non-profit organization provides applied research and technical assistance to educational institutes. Its lease expires on March 31, 2021 and the tenant has an option to extend the term by five years. This tenant also has a one-time option to terminate up to 33% of the rentable square feet leased if the tenant loses at least 80% of its funding from the United States government, subject to a termination fee. For the year ended December 31, 2009, One Main Place earned 16% of its rental income from this tenant.
The tenant in the IT industry provides enterprise-level configuration software to its clients. Its lease expires on April 30, 2014 and the tenant has an option to extend the lease term by five years (which option must be exercised between April 29, 2013 and August 3, 2013). The tenant also has an expansion option and if the tenant exercises its expansion option prior to May 1, 2011, the lease term for all of the tenant’s space will automatically be extended to April 30, 2015. For the year ended December 31, 2009, One Main Place earned 13% of its rental income from this tenant.
The legal services firm specializes in real estate and land use law, creditors’ rights law, and litigation. Its lease expires on December 31, 2013 and the tenant has two five-year extension options. For the year ended December 31, 2009, One Main Place earned 12% of its rental income from this tenant.
The tenant that is a division of the federal government provides defense services in federal criminal cases and certain other matters to individuals who are financially unable to obtain adequate representation. Its lease expires on November 4, 2014. For the year ended December 31, 2009, One Main Place earned 10% of its rental income from this tenant.
| 5. | FUTURE MINIMUM RENTAL COMMITMENTS |
As of December 31, 2009, expected future minimum rental receipts due under operating leases for the years ending December 31 were as follows (in thousands):
2010 | $ | 7,027 | |
2011 | 6,232 | ||
2012 | 6,384 | ||
2013 | 6,084 | ||
2014 | 3,844 | ||
Thereafter | 11,471 | ||
| $ | 41,042 | ||
| 6. | COMMITMENTS AND CONTINGENCIES |
Tenant Lease Termination Options
Certain tenants have lease termination options built into their leases, which are subject to termination fees. In the event that a tenant does exercise its option to terminate its lease early and the terminated space is not subsequently leased out, the amount of future minimum rent received will be reduced.
Environmental
One Main Place 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 One Main Place’s financial condition and results of operations as of December 31, 2009.
| 7. | SUBSEQUENT EVENTS |
KBS REIT II evaluates subsequent events up until the date the financial statements are issued. The accompanying financial statements were issued on March 25, 2010.
F-4
KBS REAL ESTATE INVESTMENT TRUST II, INC.
SUMMARY OF UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following pro forma information should be read in conjunction with the consolidated balance sheet of KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”) as of December 31, 2009, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2009 and the notes thereto. The consolidated financial statements of KBS REIT II as of and for the year ended December 31, 2009 have been included in KBS REIT II’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC. In addition, this pro forma information should be read in conjunction with the statements of revenues over certain operating expenses and the notes thereto of the Willow Oaks Corporate Center and the Pierre Laclede Center, which KBS REIT II has filed with the SEC, and the statement of revenues over certain operating expenses and the notes thereto of the One Main Place, which is included in this filing.
The following unaudited pro forma balance sheet as of December 31, 2009 has been prepared to give effect to the acquisition of the Pierre Laclede Center and One Main Place as if the acquisitions occurred on December 31, 2009.
The following unaudited pro forma statement of operations for the year ended December 31, 2009 has been prepared to give effect to the acquisitions of (i) the Willow Oaks Corporate Center; (ii) the Pierre Laclede Center; and (iii) One Main Place, as if the acquisitions occurred on January 1, 2009.
These unaudited pro forma financial statements are prepared for informational purposes only and are not necessarily indicative of future results or of actual results that would have been achieved had the acquisitions of the Willow Oaks Corporate Center, the Pierre Laclede Center and One Main Place been consummated as of the dates indicated. In addition, the pro forma balance sheet includes pro forma allocations of the purchase price based upon preliminary estimates of the fair value of the assets and liabilities acquired in connection with the acquisitions. These allocations may be adjusted in the future upon finalization of these preliminary estimates.
F-5
KBS REAL ESTATE INVESTMENT TRUST II, INC.
UNAUDITED PRO FORMA BALANCE SHEET
As of December 31, 2009
(in thousands, except share and per share amounts)
| Pro Forma Adjustments | ||||||||||||||||||||
| KBS Real Estate Investment Trust II Historical (a) | Pierre Laclede Center (b) | One Main Place (c) | Pro Forma Total | |||||||||||||||||
Assets | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Land | $ | 60,607 | $ | 15,200 | (d | ) | $ | 7,200 | (d | ) | $ | 83,007 | ||||||||
Buildings and improvements | 447,953 | 46,927 | (d | ) | 38,092 | (d | ) | 532,972 | ||||||||||||
Tenant origination and absorption costs | 66,867 | 15,523 | (d | ) | 9,552 | (d | ) | 91,942 | ||||||||||||
Total real estate, cost | 575,427 | 77,650 | 54,844 | 707,921 | ||||||||||||||||
Less accumulated depreciation and amortization | (34,059) | — | — | (34,059) | ||||||||||||||||
Total real estate, net | 541,368 | 77,650 | 54,844 | 673,862 | ||||||||||||||||
Real estate loans receivable, net | 130,801 | — | — | 130,801 | ||||||||||||||||
Total real estate and real estate-related investments, net | 672,169 | 77,650 | 54,844 | 804,663 | ||||||||||||||||
Cash and cash equivalents | 273,821 | (74,174) | (54,442) | 145,205 | ||||||||||||||||
Rents and other receivables, net | 3,893 | — | — | 3,893 | ||||||||||||||||
Above-market leases, net | 2,303 | 113 | (d | ) | 531 | (d | ) | 2,947 | ||||||||||||
Deferred financing costs, prepaid expenses and other assets | 1,682 | — | — | 1,682 | ||||||||||||||||
Total assets | $ | 953,868 | $ | 3,589 | $ | 933 | $ | 958,390 | ||||||||||||
Liabilities and stockholders’ equity | ||||||||||||||||||||
Notes payable | $ | 126,660 | $ | — | $ | — | $ | 126,660 | ||||||||||||
Accounts payable and accrued liabilities | 2,664 | — | — | 2,664 | ||||||||||||||||
Due to affiliates | 206 | — | — | 206 | ||||||||||||||||
Distributions payable | 5,013 | — | — | 5,013 | ||||||||||||||||
Below-market leases, net | 19,664 | 3,589 | (d | ) | 933 | (d | ) | 24,186 | ||||||||||||
Other liabilities | 3,839 | — | — | 3,839 | ||||||||||||||||
Total liabilities | 158,046 | 3,589 | 933 | 162,568 | ||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||
Redeemable common stock | 21,260 | — | — | 21,260 | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||||||
Preferred stock, $.01 par value; 10,000,000 shares authorized, | — | — | — | — | ||||||||||||||||
Common stock, $.01 par value; | ||||||||||||||||||||
1,000,000,000 shares authorized, 93,167,161 shares issued | 932 | — | — | 932 | ||||||||||||||||
Additional paid-in capital | 810,006 | — | — | 810,006 | ||||||||||||||||
Cumulative distributions and net loss | (36,376) | — | — | (36,376) | ||||||||||||||||
Total stockholders’ equity | 774,562 | — | — | 774,562 | ||||||||||||||||
Total liabilities and stockholders' equity | $ | 953,868 | $ | 3,589 | $ | 933 | $ | 958,390 | ||||||||||||
F-6
KBS REAL ESTATE INVESTMENT TRUST II, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
As of December 31, 2009
| (a) | Historical financial information derived from KBS REIT II’s Annual Report on Form 10-K as of December 31, 2009. |
| (b) | Represents the acquisition of the Pierre Laclede Center. The purchase price of the Pierre Laclede Center (net of closing adjustments) was $74.2 million and was funded with proceeds from KBS REIT II’s ongoing initial public offering. |
| (c) | Represents the acquisition of One Main Place. The purchase price (net of closing adjustments) of One Main Place was $54.4 million and was funded with proceeds from KBS REIT II’s ongoing initial public offering. |
| (d) | KBS REIT II allocated the cost of tangible assets, identifiable intangibles and assumed liabilities (consisting of above and below-market leases and tenant origination and absorption costs) acquired in a business combination based on their estimated fair values. The purchase price allocation is preliminary and subject to change. |
F-7
KBS REAL ESTATE INVESTMENT TRUST II, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 2009
(in thousands, except share and per share amounts)
| Pro Forma Adjustments | |||||||||||||||||||||||||
| KBS Real Estate Investment Trust II Historical (a) | Willow Oaks Corporate Center | Pierre Laclede Center | One Main Place | Pro Forma Total | |||||||||||||||||||||
Revenues: | |||||||||||||||||||||||||
Rental income | $ | 49,548 | $ | 9,746 | (b) | $ | 13,797 | (b) | $ | 7,509 | (b) | $ | 80,600 | ||||||||||||
Tenant reimbursements | 8,762 | 559 | (c) | 539 | (c) | 362 | (c) | 10,222 | |||||||||||||||||
Interest income from real estate loans receivable | 16,885 | - | - | - | 16,885 | ||||||||||||||||||||
Interest income from real estate securities | 128 | - | - | - | 128 | ||||||||||||||||||||
Other operating income | 64 | 228 | (d) | 48 | (d) | 733 | (d) | 1,073 | |||||||||||||||||
Total revenues | 75,387 | 10,533 | 14,384 | 8,604 | 108,908 | ||||||||||||||||||||
Expenses: | |||||||||||||||||||||||||
Operating, maintenance and management | 12,265 | 2,654 | (e) | 4,271 | (e) | 2,349 | (e) | 21,539 | |||||||||||||||||
Real estate taxes and insurance | 4,515 | 954 | (f) | 1,991 | (f) | 780 | (f) | 8,240 | |||||||||||||||||
Asset management fees to affiliate | 4,482 | 554 | (g) | 562 | (g) | 412 | (g) | 6,010 | |||||||||||||||||
Real estate acquisition fees and expenses | 1,524 | - | (h) | 718 | (h) | 555 | (h) | 2,797 | |||||||||||||||||
General and administrative expenses | 2,678 | - | - | - | 2,678 | ||||||||||||||||||||
Depreciation and amortization | 28,105 | 3,865 | (i) | 5,078 | (i) | 4,217 | (i) | 41,265 | |||||||||||||||||
Interest expense | 10,164 | - | - | - | 10,164 | ||||||||||||||||||||
Total expenses | 63,733 | 8,027 | 12,620 | 8,313 | 92,693 | ||||||||||||||||||||
Other income: | |||||||||||||||||||||||||
Other interest income | 646 | - | - | - | 646 | ||||||||||||||||||||
Gain on sale of real estate securities | 119 | - | - | - | 119 | ||||||||||||||||||||
Total other income | 765 | - | - | - | 765 | ||||||||||||||||||||
Net income | $ | 12,419 | $ | 2,506 | $ | 1,764 | $ | 291 | $ | 16,980 | |||||||||||||||
Net income per common share, basic and diluted | $ | 0.20 | $ | 0.20 | |||||||||||||||||||||
Weighted-average number | 63,494,969 | 85,993,572 | |||||||||||||||||||||||
F-8
KBS REAL ESTATE INVESTMENT TRUST II, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Year Ended December 31, 2009
| (a) | Historical financial information derived from KBS REIT II’s Annual Report on Form 10-K for the year ended December 31, 2009. |
| (b) | Represents base rental income (not reflected in the historical statement of operations of KBS REIT II), including amortization of above-market lease assets and below-market lease liabilities, for the year ended December 31, 2009. Base rent is recognized on a straight-line basis beginning on the pro forma acquisition date of January 1, 2009. Above-market lease assets and below-market lease liabilities are amortized over the remaining life of the respective lease. |
| (c) | Represents operating cost reimbursements from tenants (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009, based on historical operations of the previous owners. |
| (d) | Represents other operating income from tenants (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009, based on historical operations of the previous owners. |
| (e) | Represents operating expenses (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009, based on historical operations of the previous owners. |
| (f) | Represents real estate taxes and insurance expense incurred by the respective properties (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009 based on management’s estimates. |
| (g) | Represents asset management fees (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009 that would be due to affiliates of KBS REIT II had the assets been acquired on January 1, 2009. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the amount paid to acquire the investment, inclusive of acquisition fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. The asset management fee with respect to an investment in a loan (and investments other than real property) is calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid to acquire or fund the loan (or other investment), inclusive of acquisition or origination fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan (or other investment), plus the acquisition or origination fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. |
| (h) | Represents acquisition fees and expenses (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009. Acquisition fees and expenses are recognized in the period in which they are incurred. |
| (i) | Represents depreciation expense (not reflected in the historical statement of operations of KBS REIT II) for the year ended December 31, 2009. Depreciation expense on the purchase price of the building is recognized using the straight-line method and a 39-year life. Depreciation expense on the purchase price of the tenant improvements is recognized using the straight-line method over the life of the lease. Amortization expense on lease intangible costs is recognized using the straight-line method over the life of the lease. |
F-9