If you are an owner of KBS REIT 1, you may have or will likely receive a letter from CMG Partners. The purpose of this letter is to encourage investors to sell shares at a heavily discounted price in exchange for liquidity. While I concur that the commercial real estate market has had it’s difficulties and KBS has experienced some challenges associated with market conditions it is my recommendation to hold the shares and ignore the offer.
CMG Partners is in a class of funds whom I have not so affectionately termed “Vulture Funds.” It is a moniker I’ve given as a result of their propensity to prey on investors at inopportune times for excessive profits. In the case of the current KBS offer they make several statements as a pseudo justification for the ridiculous offer of $1 per share or, an 86% discount to the recently completed December 2010 value. I’ll respond to their statements here:
“KBS REIT is not listed on any exchange…”
Agreed, it is by design a non-traded REIT and is in fact one of the reasons I used it in portfolios. Investor behavior is a key variable in determining investment returns and many retail investors buy or sell as a reflection of their emotions about the market or a given investment. This has historically been a poor indicator of future performance and a chief obstacle to achieving the buy low, sell high goal of investing. Reasons for this dynamic are quite simple: buying low is generally done during a time of turmoil and therefore doesn’t “feel” good. Conversely, selling high typically comes at the opposite end of the emotional spectrum when doing so may give the appearance of missing out. Like many things in life, doing the right thing doesn’t always feel good in the moment.
“…our price is not reduced by any commission or fees…”
No reduction was necessary, the $1 per share offer leaves plenty of opportunity to profit after transaction expenses. Knights in shining armor they are not.
“Even though KBS was supposed to have listed their shares in 2012…”
KBS like many firms did not anticipate the near collapse of the financial markets in 2008 nor the subsequent recession we’ve endured. To expect any company to dogmatically hold to guidance made prior to such historic events is either foolish, uninformed, or both. Naturally, an initial public offering (IPO) or other liquidity event, if all had gone as planned, would be welcome. However, in light of present circumstances attempting to do so now would be ill advised and probably not accomplish what patience and little time may afford us.
“…it was the only non-traded REIT to purport to have an increase in share value from 2009 to 2010…” Two points here: Firstly, they didn’t purport anything, the share value assessment isn’t an arbitrary figure and report would have been a far more accurate term. Second, the increase is likely a result of the “house cleaning” they did in 2009. KBS management indicated that any questionable asset or investment would be written down for the initial share value assessment in an effort to provide a conservative valuation and avoid an annual repeat of charge offs. At the time they also indicated that some of these accounting maneuvers would likely be reversed resulting in subsequent improvements in share value. Combine this with leases made to companies such as Coca Cola and G & C foods as well as other operational improvements and a share value increase can easily be justified.
Lastly, they made a (hopefully) critical error in their offering price. By offering only one dollar they created a rational reason for investors not to sell. In making the risk to return ratio severely asymmetric (an 86% loss if sold) investors are likely to assume (and correctly so) that there isn’t much more to lose, but a whole lot to potentially gain.
Please contact me with any suggestions regarding this matter, otherwise shred the letter from CMG Partners and get ready for spring.