KBS Real Estate Investment Trust II (KBRS)
Filed: 27 Jan 11, 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): December 17, 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 December 17, 2010, the Company, through an indirect wholly owned subsidiary, acquired a 40-story office building containing 723,300 rentable square feet located in Louisville, Kentucky (“National City Tower”) for a purchase price of $113.6 million plus closing costs.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
| (a) | Financial Statements of Real Estate Acquired | |||||
| National City Tower | ||||||
| Report of Independent Registered Public Accounting Firm | F-1 | |||||
| Statements of Revenues Over Certain Operating Expenses for the Nine Months Ended September 30, 2010 (unaudited) and the Year Ended December 31, 2009 | F-2 | |||||
| Notes to Statements of Revenues Over Certain Operating Expenses for the Nine Months Ended September 30, 2010 (unaudited) and the Year Ended December 31, 2009 | F-3 | |||||
| (b) | Pro Forma Financial Information | |||||
| KBS Real Estate Investment Trust II, Inc. | ||||||
| Summary of Unaudited Pro Forma Financial Statements | F-6 | |||||
| Unaudited Pro Forma Balance Sheet as of September 30, 2010 | F-7 | |||||
| Unaudited Pro Forma Statement of Operations for the Nine Months Ended September 30, 2010 | F-9 | |||||
| Unaudited Pro Forma Statement of Operations for the Year Ended December 31, 2009 | F-11 | |||||
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: January 26, 2011 | 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 National City Tower for the year ended December 31, 2009. This statement is the responsibility of National City Tower’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 National City Tower’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 National City Tower’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 National City Tower’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 National City Tower for the year ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Irvine, California
January 26, 2011
F-1
STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES
(in thousands)
| Nine Months Ended September 30, 2010 | Year Ended December 31, 2009 | |||||||
| (unaudited) | ||||||||
Revenues: | ||||||||
Rental income | $ | 10,702 | $ | 14,122 | ||||
Tenant reimbursements | 1,036 | 1,375 | ||||||
Parking and other income | 782 | 1,162 | ||||||
Total revenues | 12,520 | 16,659 | ||||||
Expenses: | ||||||||
Utilities | 1,348 | 1,693 | ||||||
Repairs and maintenance | 1,045 | 1,445 | ||||||
Real estate taxes and insurance | 924 | 1,171 | ||||||
Cleaning | 708 | 909 | ||||||
General and administrative | 561 | 740 | ||||||
Property management fee | 309 | 426 | ||||||
Total expenses | 4,895 | 6,384 | ||||||
Revenues over certain operating expenses | $ | 7,625 | $ | 10,275 | ||||
See accompanying notes.
F-2
NOTES TO STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES
For the Nine Months Ended September 30, 2010 (unaudited)
and the Year Ended December 31, 2009
| 1. | DESCRIPTION OF REAL ESTATE PROPERTY |
On December 17, 2010, KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), through an indirect wholly owned subsidiary, acquired a 40-story office building containing 723,300 rentable square feet located on approximately 2.6 acres of land in Louisville, Kentucky (“National City Tower”). The sellers are not affiliated with the KBS REIT II or its advisor, KBS Capital Advisors LLC. The purchase price of National City Tower was approximately $113.6 million plus closing costs.
KBS REIT II is a Maryland corporation formed to invest in and manage a diverse portfolio of real estate properties located throughout the United States and real estate-related investments.
| 2. | BASIS OF PRESENTATION |
The accompanying statements of revenues over certain operating expenses have been prepared to comply with the rules and regulations of the Securities and Exchange Commission (“SEC”).
National City Tower is not a legal entity and the accompanying statements of revenues over certain operating expenses are not representative of the actual operations for the periods 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 National City Tower. Excluded items include interest, depreciation and amortization, and general and administrative costs not directly comparable to the future operations of National City Tower.
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) National City Tower was acquired from an unaffiliated party and (ii) based on due diligence of National City Tower by KBS REIT II, management is not aware of any material factors relating to National City Tower that would cause this financial information not to be indicative of future operating results.
The accompanying unaudited statement of revenues over certain operating expenses for the nine months ended September 30, 2010 has been prepared to include all adjustments which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such period. Operating results for the nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
Square footage, acreage, occupancy and other measures used to describe real estate included in these notes to the statements 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 $0.5 million and $0.3 million for the year ended December 31, 2009 and nine months ended September 30, 2010 (unaudited), respectively.
Use of Estimates
The preparation of financial statements, as described in Note 2 and 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.
F-3
NATIONAL CITY TOWER
NOTES TO STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES (CONTINUED)
For the Nine Months Ended September 30, 2010 (unaudited)
and the Year Ended December 31, 2009
| 4. | DESCRIPTION OF LEASING ARRANGEMENTS |
As of December 31, 2009, National City Tower was 92% leased to 20 tenants. For the year ended December 31, 2009, National City Tower earned 77% of its rental income from three tenants in the following industries: financial services, health insurance and legal services.
The tenant in the financial services industry occupies 225,173 square feet, or approximately 31% of the total rentable square feet. This tenant has several leases with 13,725 square feet expiring on November 30, 2012 and the remaining 211,448 square feet expiring on November 30, 2022. This tenant has two ten-year extension options and a one-time option to terminate up to three full floors of the leased premises, with the third returned floor subject to a termination fee. For the year ended December 31, 2009, National City Tower earned 30% of its rental income from this tenant.
The tenant in the health insurance industry occupies 190,407 square feet, or approximately 26% of the total rentable square feet. This tenant has one lease with 4,069 square feet expiring on May 31, 2014, 67,982 square feet expiring on October 31, 2017 and 118,356 square feet expiring on May 31, 2019. This tenant has an option to extend any combination of the leased space by five years. This tenant also has a one-time option to terminate the leased space that expires on May 31, 2014, subject to a termination fee. For the year ended December 31, 2009, National City Tower earned 27% of its rental income from this tenant.
The tenant in the legal services industry occupies 95,515 square feet, or approximately 13% of the total rentable square feet. This tenant has several leases with 9,659 square feet expiring on February 28, 2011 and 85,856 square feet expiring on December 31, 2016. This tenant has two five-year extension options. For the year ended December 31, 2009, National City Tower earned 20% 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 | $ | 13,837 | ||
2011 | 14,231 | |||
2012 | 14,010 | |||
2013 | 12,172 | |||
2014 | 12,183 | |||
Thereafter | 59,289 | |||
| $ | 125,722 | |||
F-4
NATIONAL CITY TOWER
NOTES TO STATEMENTS OF REVENUES OVER CERTAIN OPERATING EXPENSES (CONTINUED)
For the Nine Months Ended September 30, 2010 (unaudited)
and the Year Ended December 31, 2009
| 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 total amount of future minimum rent received by National City Tower will be reduced.
Environmental
National City Tower 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 National City Tower’s financial condition or results of operations as of December 31, 2009.
| 7. | SUBSEQUENT EVENTS |
KBS REIT II evaluates subsequent events up until the date the statements of revenues over certain operating expenses are issued. The accompanying statements of revenues over certain operating expenses were issued on January 26, 2011.
F-5
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 sheets of KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”) as of December 31, 2009 and September 30, 2010, the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2009 and for the three and nine months ended September 30, 2010, and the notes thereto. The consolidated financial statements of KBS REIT II as of and for the year ended December 31, 2009 and the consolidated financial statements as of and for the three and nine months ended September 30, 2010 have been included in KBS REIT II’s prior filings 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, the 300 N. LaSalle Building, the Union Bank Plaza and Granite Tower, which have been filed with the SEC, and the statements of revenues over certain operating expenses and the notes thereto of National City Tower, which are included herein.
The following unaudited pro forma balance sheet as of September 30, 2010 has been prepared to give effect to the acquisitions of National City Tower and Granite Tower as if the acquisitions occurred on September 30, 2010.
The following unaudited pro forma statements of operations for the nine months ended September 30, 2010 and for the year ended December 31, 2009 have been prepared to give effect to the acquisitions of (i) the Willow Oaks Corporate Center acquired on August 26, 2009; (ii) the 300 N. LaSalle Building acquired on July 29, 2010, (iii) the Union Bank Plaza acquired on September 15, 2010, (iv) Granite Tower acquired on December 16, 2010, and (v) National City Tower acquired on December 17, 2010, 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 300 N. LaSalle Building, the Union Bank Plaza, Granite Tower and National City Tower been consummated as of January 1, 2009. The audited statement of revenues over certain operating expenses of Willow Oaks Corporate Center has been previously filed on Form 8-K/A with the SEC on October 16, 2009, the audited statement of revenues over certain operating expenses of the 300 N. LaSalle Building has been previously filed on Form 8-K/A with the SEC on September 27, 2010, the audited statement of revenues over certain operating expenses of the Union Bank Plaza has been previously filed on Form 8-K/A with the SEC on November 23, 2010, and the audited statement of revenues over certain operating expenses of Granite Tower was filed on Form 8-K with the SEC on January 26, 2011. In addition, the pro forma balance sheet includes pro forma preliminary estimates of the fair value of the assets and liabilities acquired in connection with the acquisitions. These preliminary estimates may be adjusted in the future upon finalization of the purchase accounting.
F-6
KBS REAL ESTATE INVESTMENT TRUST II, INC.
UNAUDITED PRO FORMA BALANCE SHEET
As of September 30, 2010
(in thousands, except share and per share amounts)
| Pro Forma Adjustments | ||||||||||||||||
| KBS Real Estate Investment Trust II Historical (a) | Granite Tower (b) | National City Tower (c) | Pro Forma Total | |||||||||||||
Assets | ||||||||||||||||
Real estate: | ||||||||||||||||
Land | $ | 169,657 | $ | 8,850 | (d) | $ | 6,700 | (d) | $ | 185,207 | ||||||
Buildings and improvements | 1,279,922 | 125,167 | (d) | 76,680 | (d) | 1,481,769 | ||||||||||
Tenant origination and absorption costs | 199,214 | 16,271 | (d) | 32,183 | (d) | 247,668 | ||||||||||
Total real estate, cost | 1,648,793 | 150,288 | 115,563 | 1,914,644 | ||||||||||||
Less accumulated depreciation and amortization | (60,566 | ) | - | - | (60,566 | ) | ||||||||||
Total real estate, net | 1,588,227 | 150,288 | 115,563 | 1,854,078 | ||||||||||||
Real estate loans receivable, net | 246,607 | - | - | 246,607 | ||||||||||||
Total real estate and real estate-related investments, net | 1,834,834 | 150,288 | 115,563 | 2,100,685 | ||||||||||||
Cash and cash equivalents | 80,889 | - | - | 80,889 | ||||||||||||
Restricted cash | 796 | - | - | 796 | ||||||||||||
Rents and other receivables, net | 16,763 | - | - | 16,763 | ||||||||||||
Above-market leases, net | 41,635 | 1,942 | (d) | 3,845 | (d) | 47,422 | ||||||||||
Deferred financing costs, prepaid expenses and other assets | 14,411 | - | 616 | (e) | 15,027 | |||||||||||
Total assets | $ | 1,989,328 | $ | 152,230 | $ | 120,024 | $ | 2,261,582 | ||||||||
Liabilities and stockholders’ equity | ||||||||||||||||
Notes payable | $ | 720,434 | $ | - | $ | 69,000 | (c) | $ | 789,434 | |||||||
Accounts payable and accrued liabilities | 23,584 | - | - | 23,584 | ||||||||||||
Due to affiliates | - | - | - | - | ||||||||||||
Distributions payable | 7,564 | - | - | 7,564 | ||||||||||||
Below-market leases, net | 28,035 | 3,265 | (d) | 5,844 | (d) | 37,144 | ||||||||||
Other liabilities | 9,974 | - | - | 9,974 | ||||||||||||
Total liabilities | 789,591 | 3,265 | 74,844 | 867,700 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Redeemable common stock | 33,905 | - | - | 33,905 | ||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $.01 par value; 10,000,000 shares authorized, | - | - | - | - | ||||||||||||
Common stock, $.01 par value; | ||||||||||||||||
1,000,000,000 shares authorized, 144,819,252 shares issued | 1,448 | 166 | (b) | 50 | (c) | 1,664 | ||||||||||
Additional paid-in capital | 1,260,395 | 148,799 | (b) | 45,130 | (c) | 1,454,324 | ||||||||||
Cumulative distributions in excess of net income | (90,994 | ) | - | - | (90,994 | ) | ||||||||||
Accumulated other comprehensive loss | (5,017 | ) | - | - | (5,017 | ) | ||||||||||
Total stockholders’ equity | 1,165,832 | 148,965 | 45,180 | 1,359,977 | ||||||||||||
Total liabilities and stockholders’ equity | $ | 1,989,328 | $ | 152,230 | $ | 120,024 | $ | 2,261,582 | ||||||||
F-7
KBS REAL ESTATE INVESTMENT TRUST II, INC.
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
As of September 30, 2010
| (a) | Historical financial information derived from KBS REIT II’s Quarterly Report on Form 10-Q as of September 30, 2010. |
| (b) | Represents the acquisition of Granite Tower. The purchase price Granite Tower was $149.0 million and was funded with proceeds, net of offering costs, received from KBS REIT II’s initial public offering through the acquisition date. The pro forma adjustments assume the proceeds were raised as of September 30, 2010 and KBS REIT II receives a gross offering price of $10 per share. |
| (c) | Represents the acquisition of National City Tower. The purchase price National City Tower was $113.6 million and was funded with proceeds from a $69.0 million five-year mortgage loan and proceeds, net of offering costs, received from KBS REIT II’s initial public offering through the acquisition date. The pro forma adjustments assume the proceeds were raised as of September 30, 2010 and KBS REIT II receives a gross offering price of $10 per share. |
| (d) | KBS REIT II determined 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 the business combination based on their estimated fair values. The purchase accounting for these acquisitions is preliminary and subject to change. |
| (e) | Represents loan fees incurred in conjunction with the financing of National City Tower. |
F-8
KBS REAL ESTATE INVESTMENT TRUST II, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2010
(in thousands, except share and per share amounts)
| Pro Forma Adjustments | ||||||||||||||||||||||||||||
| KBS Real Estate Investment Trust II Historical (a) | Willow Oaks Corporate Center | 300 N. LaSalle Building | Union Bank Plaza | Granite Tower | National City Tower | Pro Forma Total | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Rental income | $ | 69,673 | $ | (46) | (b) | $ | 21,677 | (b) | $ | 15,307 | (b) | $ | 11,096 | (b) | $ | 10,997 | (b) | $ | 128,704 | |||||||||
Tenant reimbursements | 10,845 | — | 7,133 | (c) | 1,555 | (c) | 543 | (c) | 1,036 | (c) | 21,112 | |||||||||||||||||
Interest income from real estate loans receivable | 20,088 | — | — | — | — | — | 20,088 | |||||||||||||||||||||
Other operating income | 1,466 | — | 578 | (d) | 3,130 | (d) | 1,012 | (d) | 782 | (d) | 6,968 | |||||||||||||||||
Total revenues | 102,072 | (46) | 29,388 | 19,992 | 12,651 | 12,815 | 176,872 | |||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Operating, maintenance and management | 17,835 | — | 10,706 | (e) | 5,325 | (e) | 2,940 | (e) | 3,971 | (e) | 40,777 | |||||||||||||||||
Real estate taxes and insurance | 7,643 | — | 479 | (f) | 1,842 | (f) | 1,657 | (f) | 924 | (f) | 12,545 | |||||||||||||||||
Asset management fees to affiliate | 6,184 | — | 2,861 | (g) | 1,111 | (g) | 846 | (g) | 652 | (g) | 11,654 | |||||||||||||||||
Real estate acquisition fees and expenses | 15,157 | — | (10,202 | ) (h) | (1,802 | ) (h) | — | — | 3,153 | |||||||||||||||||||
General and administrative expenses | 3,122 | — | (125 | ) (i) | — | — | — | 2,997 | ||||||||||||||||||||
Depreciation and amortization | 40,465 | (180) | (j) | 9,628 | (j) | 5,735 | (j) | 4,953 | (j) | 5,662 | (j) | 66,263 | ||||||||||||||||
Interest expense | 10,310 | — | 8,610 | (k) | 2,715 | (l) | — | 2,206 | (m) | 23,841 | ||||||||||||||||||
Total expenses | 100,716 | (180) | 21,957 | 14,926 | 10,396 | 13,415 | 161,230 | |||||||||||||||||||||
Other income: | ||||||||||||||||||||||||||||
Other interest income | 239 | — | — | — | — | — | 239 | |||||||||||||||||||||
Net income (loss) | $ | 1,595 | $ | 134 | $ | 7,431 | $ | 5,066 | $ | 2,255 | $ | (600) | $ | 15,881 | ||||||||||||||
Net income per common share, basic and diluted | $ | 0.01 | $ | 0.10 | ||||||||||||||||||||||||
Weighted-average number of common shares | 115,611,704 | 166,338,395 | ||||||||||||||||||||||||||
F-9
KBS REAL ESTATE INVESTMENT TRUST II, INC.
NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 2010
| (a) | Historical financial information derived from KBS REIT II’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2010. |
| (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 nine months ended September 30, 2010. 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 non-cancelable terms of the respective lease, including any below-market renewal periods. |
| (c) | Represents operating cost reimbursements from tenants (not reflected in the historical statement of operations of KBS REIT II) for the nine months ended September 30, 2010, 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 nine months ended September 30, 2010, 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 nine months ended September 30, 2010, 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 nine months ended September 30, 2010 based on management’s estimates. |
| (g) | Represents asset management fees (not reflected in the historical statement of operations of KBS REIT II) for the nine months ended September 30, 2010 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. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition fees and expenses related thereto. |
| (h) | Represents adjustments to eliminate real estate acquisition fees and expenses incurred during the nine months ended September 30, 2010 for properties presented on a pro forma basis. Acquisition fees and expenses are recorded in the unaudited pro forma statement of operations for the year ended December 31, 2009, based on the pro forma acquisition date of January 1, 2009. |
| (i) | Represents the amortization of an acquisition contingency related to a lease with the seller for the nine months ended September 30, 2010. |
| (j) | Represents depreciation expense (not reflected in the historical statement of operations of KBS REIT II) for the nine months ended September 30, 2010. Depreciation expense on the purchase price of buildings 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. |
| (k) | Represents loan fee amortization and interest expense incurred on a mortgage loan secured by the 300 N. LaSalle Building, which bears interest at a fixed rate of 4.25% per annum, maturing August 1, 2015. Amortization of loan fees is recognized using the interest method over the life of the loan. |
| (l) | Represents loan fee amortization and interest expense incurred on a mortgage loan secured by the Union Bank Plaza, which bears interest at a swapped fixed rate of 3.445% per annum, maturing September 15, 2015. Amortization of loan fees is recognized using the interest method over the life of the loan. |
| (m) | Represents loan fee amortization and interest expense incurred on a mortgage loan secured by National City Tower, which bears interest at a swapped fixed rate of 4.085% per annum, maturing December 16, 2015. Amortization of loan fees is recognized using the interest method over the life of the loan. |
F-10
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 | 300 N. LaSalle Building | Union Bank Plaza | Granite Tower | National City Tower | Pro Forma Total | ||||||||||||||||||||||
Revenues: | ||||||||||||||||||||||||||||
Rental income | $ | 49,548 | $ | 10,101 | (b) | $ | 25,588 | (b) | $ | 21,183 | (b) | $ | 14,350 | (b) | $ | 14,277 | (b) | $ | 135,047 | |||||||||
Tenant reimbursements | 8,762 | 559 | (c) | 1,756 | (c) | 2,493 | (c) | 1,228 | (c) | 1,375 | (c) | 16,173 | ||||||||||||||||
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) | 721 | (d) | 3,840 | (d) | 1,383 | (d) | 1,162 | (d) | 7,398 | ||||||||||||||||
Total revenues | 75,387 | 10,888 | 28,065 | 27,516 | 16,961 | 16,814 | 175,631 | |||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||
Operating, maintenance and management | 12,265 | 2,654 | (e) | 7,251 | (e) | 7,045 | (e) | 3,883 | (e) | 5,213 | (e) | 38,311 | ||||||||||||||||
Real estate taxes and insurance | 4,515 | 954 | (f) | 3,146 | (f) | 2,717 | (f) | 2,275 | (f) | 1,171 | (f) | 14,778 | ||||||||||||||||
Asset management fees to affiliate | 4,482 | 554 | (g) | 4,967 | (g) | 1,573 | (g) | 1,127 | (g) | 869 | (g) | 13,572 | ||||||||||||||||
Real estate acquisition fees and expenses | 1,524 | - | 10,202 | (h) | 1,802 | (h) | 1,314 | (h) | 1,213 | (h) | 16,055 | |||||||||||||||||
General and administrative expenses | 2,678 | - | (536 | ) (i) | - | - | - | 2,142 | ||||||||||||||||||||
Depreciation and amortization | 28,105 | 3,865 | (j) | 15,962 | (j) | 7,886 | (j) | 6,431 | (j) | 5,902 | (j) | 68,151 | ||||||||||||||||
Interest expense | 10,164 | - | 14,982 | (k) | 3,848 | (l) | - | 2,942 | (m) | 31,936 | ||||||||||||||||||
Total expenses | 63,733 | 8,027 | 55,974 | 24,871 | 15,030 | 17,310 | 184,945 | |||||||||||||||||||||
Other income: | ||||||||||||||||||||||||||||
Other interest income | 646 | - | - | - | - | - | 646 | |||||||||||||||||||||
Gain on sale of real estate securities | 119 | - | - | - | - | - | 119 | |||||||||||||||||||||
Total other income | 765 | - | - | - | - | - | 765 | |||||||||||||||||||||
Net income (loss) | $ | 12,419 | $ | 2,861 | $ | (27,909 | ) | $ | 2,645 | $ | 1,931 | $ | (496 | ) | $ | (8,549 | ) | |||||||||||
Net income (loss) per common share, basic and diluted | $ | 0.20 | $ | (0.06 | ) | |||||||||||||||||||||||
Weighted-average number of common shares outstanding, basic and diluted | 63,494,969 | 137,719,033 | ||||||||||||||||||||||||||
F-11
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 non-cancelable terms of the respective lease, including any below-market renewal periods. |
| (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. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition fees and expenses related thereto. |
| (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, based on the pro forma acquisition date of January 1, 2009. |
| (i) | Represents the amortization of an acquisition contingency related to a lease with the seller for the year ended December 31, 2009. |
| (j) | 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 buildings 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. |
| (k) | Represents loan fee amortization and interest expense incurred on a mortgage loan secured by the 300 N. LaSalle Building, which bears interest at a fixed rate of 4.25% per annum, maturing August 1, 2015. Amortization of loan fees is recognized using the interest method over the life of the loan. |
| (l) | Represents loan fee amortization and interest expense incurred on a mortgage loan secured by the Union Bank Plaza, which bears interest at a swapped fixed rate of 3.445% per annum, maturing September 15, 2015. Amortization of loan fees is recognized using the interest method over the life of the loan. |
| (m) | Represents loan fee amortization and interest expense incurred on a mortgage loan secured by National City Tower, which bears interest at a swapped fixed rate of 4.085% per annum, maturing December 16, 2015. Amortization of loan fees is recognized using the interest method over the life of the loan. |
F-12