KBS Strategic Opportunity REIT Board Recommends Rejection of MacKenzie Tender Offer
May 8, 2019 | James Sprow | Blue Vault
In a May 6, 2019, letter to stockholders, the board of directors of KBS Strategic Opportunity REIT, Inc., recommended against selling shares for $5.15 per share to MacKenzie Capital Management and/or its affiliates related to a tender offer for up to 120,000 shares of the company’s common stock.
The board stated, “We believe the Offer Price is substantially below the value of the Shares and recommend against selling your Shares at that price.”
The board gave the following reasons for their recommendation:
“On November 12, 2018, our board of directors approved an estimated value per share (the “EVPS”) of the REIT’s common stock of $9.91 based on the estimated value of the REIT’s assets less the estimated value of the REIT’s liabilities, or net asset value, divided by the number of shares outstanding as of September 30, 2018, with the exception of an adjustment to our net asset value to give effect to the November 12, 2018 authorization of a special dividend of $2.95 per share on our outstanding shares of common stock to the stockholders of record as of the close of business on November 12, 2018 which was reflected in the calculation of the November 12, 2018 estimated value per share.”
“The value of the REIT’s shares will fluctuate over time in response to developments related to individual assets in the REIT’s portfolio and the management of those assets and in response to the real estate and finance markets. As such, the most recent EVPS does not take into account developments in the REIT’s portfolio since November 12, 2018. Tendering stockholders whose shares are accepted for payment will lose the opportunity to participate in any potential future upside and future growth of the REIT with respect to such shares and will lose the right to receive any future distributions or dividends that we may declare and pay.”
“With respect to ordinary redemption requests received pursuant to our share redemption program (the “SRP”) for the fourth quarter of 2018 and first quarter of 2019, we had unfulfilled requests to redeem 2,199,077.193 and 3,294,069.589 Shares, respectively, or 92.888% and 94.216%, respectively, of the Shares submitted for redemption, due to SRP funding limitations. If future redemption requests exceed the amount of funding available under our share redemption program and any additional funding made available under one or more self-tender offers, the number of unfulfilled redemption or repurchase requests will increase over time. As of the date of this letter, we had an aggregate $7.3 million available under the SRP for additional redemptions in 2019 with $6.0 million available for ordinary redemption requests subject to the $2.0 million quarterly limitation in addition to $1.3 million available for the monthly redemption of shares requested in connection with a stockholder’s death, qualifying disability or determination of incompetence, all of which is specified in the current SRP. However, we continue to monitor the number of redemption requests and funding levels for the SRP. As we did in prior instances when our board of directors authorized additional funds for the redemption of shares, we will continue to consider the liquidity available to stockholders going forward, balanced with other long-term interests of the stockholders and the REIT. We are continuing to evaluate possible strategic alternatives to provide additional liquidity to stockholders, including but not limited to negotiating or procuring the sale of certain properties in the REIT’s portfolio, the potential conversion of the REIT to an “NAV REIT” with increased capacity to repurchase shares through its SRP, and other strategies.”
“We believe that the Bidder’s offer is meant to take advantage of the illiquidity of our Shares by buying your Shares at a price significantly below their fair value in order to make a significant profit.”
As of December 31, 2018, the REIT consolidated six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one retail property, two apartment properties (of which one apartment property was held for sale) and three investments in undeveloped land with approximately 1,000 developable acres and owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and three investments in real estate equity securities.
At December 31, 2018, the REIT had total assets of $1.005 billion and real estate assets of $726.0 million. It did not pay regular distributions in Q4 2018.
During the year ended December 31, 2018, the Company sold one office building, one office/flex/industrial portfolio consisting of 21 buildings and 124 developable acres of undeveloped land and classified one property as held for sale as of December 31, 2018. Additionally, during the year ended December 31, 2018, the Company sold 1,986,295 shares of common stock of Whitestone REIT.
For the year ended December 31, 2018, the Company paid aggregate distributions of $72.4 million, of which $1.4 million was reinvested through the dividend reinvestment plan. On November 12, 2018, the board of directors authorized a special dividend of $2.95 per share of common stock payable in either shares of common stock or cash to, and at the election of, the stockholders of record as of November 12, 2018. The special dividend was paid in December 2018 to stockholders of record as of the close of business on the record date. The 2018 special dividend was made primarily in connection with a deemed sale of land to a taxable REIT subsidiary, which triggered a significant amount of capital gain in 2018.
The Company’s net income attributable to common stockholders for the year ended December 31, 2018 was $33.546 million and the cash flows provided by operations were $2.143 million.
As a result of the special dividend paid in December 2018, the board of directors delayed the processing of redemptions that would otherwise occur on the last business day of November 2018 under the share redemption program until the last business day of December 2018. Any submission or withdrawal deadlines associated with such delayed redemptions were moved to their corresponding dates in December 2018.
Sources: SEC, Blue Vault
I have been in the financial services industry for 20 years and our firm provides an education platform that gets clients to “think differently” about their financial picture. For many years we have communicated to clients the need to diversify their portfolios using alternative asset classes and more specifically, private non-traded investments. Due diligence on these types of financial vehicles is essential and when I learned about Blue Vault in 2010, our firm immediately began using their material as a tool to build confidence in the minds of our advisors on which alternatives to recommend to clients. I am impressed with the way Blue Vault continues to add value to their subscribers and I view their publication as a tremendous resource in today’s complex world.