A real estate investment trust run by Newport Beach-based KBS Realty Advisors, fresh off a $250 million bond offering in Israel, has made plans to spend nearly $300 million on an office property in downtown San Francisco and a portfolio of business parks in the Seattle suburbs.
KBS Strategic Opportunity REIT Inc., an investment fund that buys offices, apartments and developable land, said in regulatory filings this month that it had entered into an agreement to buy 353 Sacramento St., a 23-story office tower in San Francisco’s Financial District.
The building—across the street from the Embarcadero Center office complex and a few blocks from the city’s waterfront—has about 285,000 square feet of leasable space.
KBS said in regulatory filings that it will pay $169.5 million for the building—nearly $600 per square foot, plus closing costs. A time frame for the deal being concluded hasn’t been disclosed.
The per-square-foot price exceeds what’s been seen in Orange County recently—sales for high-end airport-area buildings now approach $400 per square foot. KBS nonetheless appears to be getting something of a deal.
The average sale price for buildings in San Francisco’s Financial District was close to $650 per square foot at the end last year, which is about $30 per square foot below that area’s peak pricing, which came in 2008, according to local brokerage data.
Abundant foreign capital chasing the area’s office deals, in addition to leasing activity that places the city’s market among the best-performing regions in the country the past few years, has been pushing up pricing lately, according to local brokerage reports.
The 353 Sacramento building was 87% leased to 25 tenants earlier this month, according to KBS.
The seller, San Francisco-based Pacific Eagle Holdings Corp., paid a reported $71 million for the office in 1999.
The deal would be the first in downtown San Francisco for KBS Strategic Opportunity REIT, although different KBS investment funds account for several investments in the Bay Area, including another tower in the Financial District.
Redmond Portfolio
The plans for the San Francisco acquisition were disclosed days after the same KBS fund announced it had closed on a trio of office and industrial parks in Redmond, Wash., about 2 miles from the headquarters of Microsoft Corp.
The 21 buildings that make up the three Westpark portfolio properties total nearly 780,000 square feet.
KBS Strategic Opportunity REIT paid $128 million, or roughly $164 per square foot, for the properties, which were 82% leased at the time of the sale.
The seller was Calwest Industrial Properties, a venture between California Public Employees Retirement System and institutional investor RREEF. The portfolio last sold in 2005 for about $111 million, according to local reports.
The purchase is the only property in Redmond that KBS and its affiliates own, although it has a number of other investments in the Puget Sound area, including office towers and midrise buildings in nearby Bellevue.
Recent Bond Sale
The $297.5 million of buying activity in San Francisco and Redmond comes a month after KBS Strategic Opportunity REIT made international headlines by going public through an offering of bonds registered in Israel.
The company raised $250 million after listing the bonds on the Tel Aviv Stock Exchange, which unlike its U.S. counterparts allows companies to make debt-based public offerings.
The deal is the first-ever bond issuance by a U.S.-based REIT in Israel and one of the largest bond offerings any U.S. company has ever made there, Peter McMillan, president of KBS Strategic Opportunity REIT, told the Business Journal last month.
The 4.25% bonds have a seven-year term, with 20% of the principal payable each year from 2019 to 2023, according to regulatory filings.
The company became aware of the opportunity after seeing other U.S. real estate companies, particularly those based in New York, access debt markets in Israel, McMillan said.
KBS Strategic Opportunity REIT kicked off in 2009 and had raised more than $600 million when it stopped selling shares in the U.S. through its initial offering a few years ago. That money was used to buy properties beginning in 2010 that were valued at more than $900 million.
The portfolio had a fair-market value at nearly $1.3 billion at the end of last year, according to the fund’s latest annual report.
The fund hadn’t bought properties in nearly two years prior to the bond offering.
McMillan foreshadowed the two recent deals last month when he said that the $250 million raised would be used for additional purchases.
“We’ve already identified a few opportunities” for potential acquisitions, he said then.
KBS Realty Advisors is run by Charles Schreiber, a former Koll Development Co. executive, and Peter Bren, the brother of Irvine Company Chairman Donald Bren.
KBS and its affiliates have bought and sold more than $30 billion worth of offices, industrial buildings, apartments and other real estate assets over the past 13 years on behalf of pension funds and other institutional investors, as well as private investors who buy shares in its numerous nontraded REITS.
The company’s KBS Capital Advisors affiliate, a real estate operating company that serves as the adviser to the KBS nontraded REITs, is headed by Bren, Schreiber, McMillan and Keith Hall.
KBS Strategic Opportunity REIT could see some additional changes to its operations down the road, according to regulatory filings.
KBS said in a late-April filing with the Securities and Exchange Commission that it had hired NGKF Capital Markets “for the purpose of identifying, negotiating or procuring the sale of all or a portion of the equity interest in certain of the properties in the company’s portfolio.”
KBS Strategic Opportunity REIT “continues to evaluate possible strategic alternatives that may provide additional liquidity to the company’s stockholders,” it said in the regulatory filing.
