10-Q 1 kbsriq3201210q.htm FORM 10Q REIT I - Q3 2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-52606
 
KBS REAL ESTATE INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Maryland
 
20-2985918
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
620 Newport Center Drive, Suite 1300
Newport Beach, California
 
92660
(Address of Principal Executive Offices)
 
(Zip Code)
(949) 417-6500
(Registrant’s Telephone Number, Including Area Code)
______________________________________________________________________ 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large Accelerated Filer
o
 
  
Accelerated Filer
¨
 
 
 
 
 
 
Non-Accelerated Filer
x
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
As of November 2, 2012, there were 191,220,496 outstanding shares of common stock of KBS Real Estate Investment Trust, Inc.



KBS REAL ESTATE INVESTMENT TRUST, INC.
FORM 10-Q
September 30, 2012
INDEX
 
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 

1

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


KBS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
September 30, 2012
 
December 31, 2011
 
(unaudited)
 
 
Assets
 
 
 
Real estate held for investment:
 
 
 
Land
$
434,400

 
$
437,653

Buildings and improvements
1,537,349

 
1,573,426

Tenant origination and absorption costs
185,748

 
197,752

Total real estate held for investment, at cost and net of impairment charges
2,157,497

 
2,208,831

Less accumulated depreciation and amortization
(216,638
)
 
(146,637
)
Total real estate held for investment, net
1,940,859

 
2,062,194

Real estate held for sale, net
540,589

 
902,039

Foreclosed real estate held for sale
26,254

 
28,848

Total real estate, net
2,507,702

 
2,993,081

Real estate loans receivable, net
28,527

 
45,024

Real estate securities

 
46,249

Total real estate and real estate-related investments, net
2,536,229

 
3,084,354

Cash and cash equivalents
89,230

 
53,991

Restricted cash
150,238

 
122,090

Pledged government securities
88,220

 
91,541

Rents and other receivables, net
46,956

 
43,302

Above-market leases, net
37,988

 
44,896

Assets related to real estate held for sale
3,847

 
21,795

Deferred financing costs, prepaid expenses and other assets
37,512

 
42,819

Total assets
$
2,990,220

 
$
3,504,788

Liabilities and equity
 
 
 
Notes payable and repurchase agreements:

 

Notes payable
$
1,547,072

 
$
1,568,230

Repurchase agreements

 
149,657

Notes payable related to real estate held for sale
355,442

 
581,321

Total notes payable and repurchase agreements
1,902,514

 
2,299,208

Accounts payable and accrued liabilities
63,153

 
57,355

Due to affiliates
9

 

Distributions payable

 
8,498

Below-market leases, net
99,720

 
114,343

Liabilities related to real estate held for sale
77,891

 
91,618

Other liabilities
60,693

 
73,509

Total liabilities
2,203,980

 
2,644,531

Commitments and contingencies (Note 15)


 


Redeemable common stock
3,279

 
45,376

Stockholders’ equity
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding

 

Common stock, $.01 par value; 1,000,000,000 shares authorized, 191,271,397 and 190,731,533 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively
1,913

 
1,907

Additional paid-in capital
1,685,531

 
1,639,228

Cumulative distributions and net losses
(904,190
)
 
(850,032
)
Accumulated other comprehensive (loss) income
(293
)
 
23,778

Total stockholders’ equity
782,961

 
814,881

Total liabilities and stockholders’ equity
$
2,990,220

 
$
3,504,788

See accompanying condensed notes to consolidated financial statements.

2

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Rental income
$
54,000

 
$
30,244

 
$
161,580

 
$
70,949

Tenant reimbursements
17,400

 
7,686

 
51,585

 
15,984

Interest income from real estate loans receivable
736

 
2,032

 
2,291

 
12,318

Interest income from real estate securities
10

 
702

 
689

 
2,163

Parking revenues and other operating income
1,104

 
617

 
3,037

 
1,484

Total revenues
73,250

 
41,281

 
219,182

 
102,898

Expenses:
 
 
 
 
 
 
 
Operating, maintenance, and management
23,956

 
12,411

 
69,080

 
25,124

Real estate taxes, property-related taxes, and insurance
9,332

 
4,861

 
29,103

 
12,957

Asset management fees to affiliate
2,854

 
3,440

 
8,788

 
10,290

General and administrative expenses
6,350

 
15,595

 
17,420

 
20,723

Depreciation and amortization
26,830

 
14,945

 
81,033

 
35,096

Interest expense
25,654

 
14,780

 
76,542

 
35,308

Impairment charge on real estate held for investment
13,082

 

 
18,183

 

Provision for loan losses

 
(26
)
 
142

 
(3,846
)
Total expenses
108,058

 
66,006

 
300,291

 
135,652

Other income
 
 
 
 
 
 
 
Gain on sales of foreclosed real estate held for sale

 
58

 
127

 
134

Gain on sales of real estate securities

 

 
25,456

 

Income from unconsolidated joint venture

 
795

 
750

 
5,029

Other interest income
9

 
9

 
20

 
97

Total other income
9

 
862

 
26,353

 
5,260

Loss from continuing operations
(34,799
)
 
(23,863
)
 
(54,756
)
 
(27,494
)
Discontinued operations:
 
 
 
 
 
 
 
Gain on sales of real estate, net
2,060

 
5,911

 
7,781

 
5,911

Income from discontinued operations
6,046

 
1,822

 
11,872

 
933

Impairment charges on discontinued operations
(999
)
 
(13,393
)
 
(13,808
)
 
(36,207
)
Gain from extinguishment of debt
10,980

 

 
10,980

 

Total gain (loss) from discontinued operations
18,087

 
(5,660
)
 
16,825

 
(29,363
)
Net loss
(16,712
)
 
(29,523
)
 
(37,931
)
 
(56,857
)
Net income attributable to noncontrolling interest in
discontinued operations

 
(100
)
 

 
(204
)
Net loss attributable to common stockholders
$
(16,712
)
 
$
(29,623
)
 
$
(37,931
)
 
$
(57,061
)
Basic and diluted loss per common share:
 
 
 
 
 
 
 
Continuing operations
(0.18
)
 
(0.13
)
 
(0.29
)
 
(0.14
)
Discontinued operations
0.09

 
(0.03
)
 
0.09

 
(0.16
)
Net loss per common share
$
(0.09
)
 
$
(0.16
)
 
$
(0.20
)
 
$
(0.30
)
Weighted-average number of common shares outstanding,
basic and diluted
191,571,844

 
188,821,869

 
191,657,587

 
187,461,243

Distributions declared per common share
$

 
$
0.132

 
$
0.085

 
$
0.393

See accompanying condensed notes to consolidated financial statements.

3

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2012
 
2011
 
2012
 
2011
Net loss
 
$
(16,712
)
 
$
(29,523
)
 
$
(37,931
)
 
$
(56,857
)
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Reclassification of realized gain on real estate securities
 

 

 
(25,240
)
 

Unrealized change in market value of real estate securities
 

 
(179
)
 

 
1,090

Unrealized gains on derivative instruments
 
197

 
915

 
1,169

 
3,334

Total other comprehensive income (loss)
 
197

 
736

 
(24,071
)
 
4,424

Total comprehensive loss
 
(16,515
)
 
(28,787
)
 
(62,002
)
 
(52,433
)
Total comprehensive loss attributable to noncontrolling interests
 

 
(128
)
 

 
(294
)
Total comprehensive loss attributable to common stockholders
 
$
(16,515
)
 
$
(28,915
)
 
$
(62,002
)
 
$
(52,727
)
See accompanying condensed notes to consolidated financial statements.



4

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2011 and the Nine Months Ended September 30, 2012 (unaudited)
(dollars in thousands)
 
Common Stock
 
Additional
Paid-in
Capital
 
Cumulative
Distributions
and
Net Income
(Loss)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
 
Shares
 
Amounts
 
 
 
 
 
 
Balance, December 31, 2010
185,320,095

 
$
1,853

 
$
1,600,848

 
$
(731,918
)
 
$
(8,945
)
 
$
861,838

 
$
(22,336
)
 
$
839,502

Net loss

 

 

 
(19,338
)
 

 
(19,338
)
 
23,895

 
4,557

Other comprehensive income

 

 

 

 
32,723

 
32,723

 
91

 
32,814

Distributions to noncontrolling interest

 

 

 

 

 

 
(1,650
)
 
(1,650
)
Issuance of common stock
6,351,438

 
63

 
46,429

 

 

 
46,492

 

 
46,492

Redemptions of common stock
(940,000
)
 
(9
)
 
(6,872
)
 

 

 
(6,881
)
 

 
(6,881
)
Transfers to redeemable common stock

 

 
6

 

 

 
6

 

 
6

Distributions declared

 

 

 
(98,776
)
 

 
(98,776
)
 

 
(98,776
)
Commissions on stock issuances to affiliate

 

 
(1,115
)
 

 

 
(1,115
)
 

 
(1,115
)
Other offering costs

 

 
(68
)
 

 

 
(68
)
 

 
(68
)
Balance, December 31, 2011
190,731,533

 
$
1,907

 
$
1,639,228

 
$
(850,032
)
 
$
23,778

 
$
814,881

 
$

 
$
814,881

Net loss

 

 

 
(37,931
)
 

 
(37,931
)
 

 
(37,931
)
Other comprehensive loss

 

 

 

 
(24,071
)
 
(24,071
)
 

 
(24,071
)
Issuance of common stock
1,714,015

 
17

 
11,114

 

 

 
11,131

 

 
11,131

Redemptions of common stock
(1,174,151
)
 
(11
)
 
(6,630
)
 

 

 
(6,641
)
 

 
(6,641
)
Transfers from redeemable common stock

 

 
42,097

 

 

 
42,097

 

 
42,097

Distributions declared

 

 

 
(16,227
)
 

 
(16,227
)
 

 
(16,227
)
Commissions on stock issuances to affiliate

 

 
(262
)
 

 

 
(262
)
 

 
(262
)
Other offering costs

 

 
(16
)
 

 

 
(16
)
 

 
(16
)
Balance, September 30, 2012
191,271,397

 
$
1,913

 
$
1,685,531

 
$
(904,190
)
 
$
(293
)
 
$
782,961

 
$

 
$
782,961

See accompanying condensed notes to consolidated financial statements.

 


5

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Nine Months Ended September 30,
 
2012
 
2011
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(37,931
)
 
$
(56,857
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
 
 
 
Continuing operations
81,033

 
35,096

Discontinued operations
27,055

 
24,478

Income from unconsolidated joint venture

 
(5,029
)
Distribution of earnings from unconsolidated joint venture

 
5,029

Impairment charge on real estate - continuing operations
18,183

 

Impairment charges on real estate - discontinued operations
13,808

 
36,207

Noncash interest income on real estate-related investments
(276
)
 
(914
)
Change in provision for loan losses
84

 
(3,654
)
Deferred rent
(5,167
)
 
(4,703
)
Bad debt expense
(1
)
 
1,866

Amortization of deferred financing costs
6,024

 
5,963

Amortization of above- and below-market leases, net
(13,988
)
 
(4,835
)
Gain on sales of foreclosed real estate held for sale
(127
)
 
(134
)
Gain on sales of real estate, net
(7,781
)
 
(5,911
)
Gain on sales of real estate securities
(25,456
)
 

Gain on extinguishment of debt
(10,980
)
 

Amortization of discount and premium on notes payable, net
512

 

Changes in operating assets and liabilities:
 
 
 
Restricted cash for operational expenditures
(19,299
)
 
(2,988
)
Rents and other receivables
537

 
(588
)
Prepaid expenses and other assets
(958
)
 
(7,576
)
Accounts payable and accrued liabilities
7,212

 
18,104

Due to affiliates

 
4

Other liabilities
(10,069
)
 
9,272

Net cash provided by operating activities
22,415

 
42,830

Cash Flows from Investing Activities:
 
 
 
Improvements to real estate
(15,599
)
 
(19,727
)
Proceeds from sales of real estate, net
345,941

 
156,067

Proceeds from sales of foreclosed real estate held for sale
2,721

 
20,396

Proceeds from sale of real estate loans receivable
16,830

 

Investments in real estate loans receivable

 
(41,159
)
Principal repayments on real estate loans receivable
7

 
360

Extension fees related to real estate loans receivable
103

 
83

Proceeds from sale of real estate securities
46,214

 

Purchases of pledged securities
(1,833
)
 

Maturities of pledged securities
5,139

 

Cash received from the Transfer of the GKK Properties

 
32,050

Net change in restricted cash for capital expenditures
(2,856
)
 
2,900

Net cash provided by investing activities
396,667

 
150,970

Cash Flows from Financing Activities:
 
 
 
Proceeds from notes payable
159,197

 
82,339

Principal payments on notes payable
(363,246
)
 
(122,968
)
Principal payments on repurchase agreements
(149,657
)
 
(124,668
)
Net change in restricted cash for debt service obligations
(6,988
)
 

Payments of deferred financing costs
(2,636
)
 
(10,413
)
Payments to redeem common stock
(6,641
)
 
(5,144
)
Payments of commissions on stock issuances and other offering costs
(278
)
 
(864
)
Distributions paid to common stockholders
(13,594
)
 
(38,766
)
Distributions paid to noncontrolling interest

 
(1,168
)
Net cash used in financing activities
(383,843
)
 
(221,652
)
Net increase (decrease) in cash and cash equivalents
35,239

 
(27,852
)
Cash and cash equivalents, beginning of period
53,991

 
151,908

Cash and cash equivalents, end of period
$
89,230

 
$
124,056

See accompanying condensed notes to consolidated financial statements.

6

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)


1.
ORGANIZATION
KBS Real Estate Investment Trust, Inc. (the “Company”) was formed on June 13, 2005 as a Maryland corporation and has elected to be taxed as a real estate investment trust (“REIT”). Substantially all of the Company’s assets are held by, and the Company conducts substantially all of its operations through, KBS Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), and its subsidiaries. The Company is the sole general partner of and directly owns a 99% partnership interest in the Operating Partnership. The Company’s wholly owned subsidiary, KBS REIT Holdings LLC, a Delaware limited liability company (“KBS REIT Holdings”), owns the remaining 1% partnership interest in the Operating Partnership and is its sole limited partner.
The Company owns a diverse portfolio of real estate and real estate-related investments. As of September 30, 2012, the Company owned 810 real estate properties (of which 150 properties were held for non-sale disposition and 168 properties were held for sale), including the GKK Properties (defined below). In addition, as of September 30, 2012, the Company owned four real estate loans receivable, a participation interest with respect to a real estate joint venture and a 10-story condominium building with 62 units acquired through foreclosure, of which three condominium units, two retail spaces and parking spaces were owned by the Company and are held for sale. For information about certain properties held for non-sale disposition and the Goldman Mortgage Loan, see Note 9, “Notes Payable and Repurchase Agreements — Loan Maturities.”
On September 1, 2011, the Company, through indirect wholly owned subsidiaries (collectively, “KBS”), entered into a Collateral Transfer and Settlement Agreement (the “Settlement Agreement”) with, among other parties, GKK Stars Acquisition LLC (“GKK Stars”), the wholly owned subsidiary of Gramercy Capital Corp. (“Gramercy”) that indirectly owned the Gramercy real estate portfolio, to effect the orderly transfer of certain assets and liabilities of the Gramercy real estate portfolio to KBS in satisfaction of certain debt obligations under a mezzanine loan owed by wholly owned subsidiaries of Gramercy to KBS (the “GKK Mezzanine Loan”). The Settlement Agreement resulted in the transfer of the equity interests in certain subsidiaries of Gramercy (the “Equity Interests”) that indirectly owned or, with respect to a limited number of properties, held a leasehold interest in, 867 properties (the “GKK Properties”), including 576 bank branch properties and 291 office buildings, operations centers and other properties. As of December 15, 2011, GKK Stars had transferred all of the Equity Interests to the Company, giving the Company title to or, with respect to a limited number of GKK Properties, a leasehold interest in, 867 GKK Properties as of that date. For further discussion of the Settlement Agreement and the transfers of the GKK Properties, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”).
Subject to certain restrictions and limitations, the business of the Company is managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement with the Company (the “Advisory Agreement”) in effect through November 8, 2013. The Advisory Agreement may be renewed for an unlimited number of one-year periods upon the mutual consent of the Advisor and the Company. Either party may terminate the Advisory Agreement upon 60 days written notice. The Advisor owns 20,000 shares of the Company’s common stock.
Upon commencing its initial public offering (the “Offering”), the Company retained KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Advisor, to serve as the dealer manager of the Offering pursuant to a dealer manager agreement dated January 27, 2006 (the “Dealer Manager Agreement”). The Company ceased offering shares of common stock in its primary offering on May 30, 2008. The Company’s dividend reinvestment plan terminated effective April 10, 2012.
The Company sold 171,109,494 shares of common stock in its primary offering for gross offering proceeds of $1.7 billion. The Company sold 28,306,105 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $233.7 million. As of September 30, 2012, the Company had redeemed 8,164,202 of the shares sold in the Offering for $69.1 million.

7

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Asset Management Services Agreement Related to the GKK Properties
On March 30, 2012, the Company, through an indirect wholly owned subsidiary (“KBS Acquisition Sub”), entered into an Asset Management Services Agreement (the “Services Agreement”) with GKK Realty Advisors LLC (the “Property Manager”), an affiliate of Gramercy, with respect to the GKK Properties.  Pursuant to the Services Agreement, the Property Manager agreed to provide, among other services: standard asset management services, assistance related to dispositions, accounting services and budgeting and business plans for the GKK Properties (collectively, the “Services”). 
As compensation for the Services, the Company agreed to pay to the Property Manager: (i) an annual fee of $12.0 million plus all GKK Property-related expenses incurred by the Property Manager, the payment of a portion of which annual fee may be deferred by the Company until not later than June 30, 2013, and (ii) subject to certain terms and conditions contained in the Services Agreement, participation interests in the amounts by which the net sales value of all of the Company’s properties sold plus the value of the Company’s remaining net assets exceed certain threshold amounts, which participation will equal not less than $3.5 million and not more than $12.0 million, measured on a date as determined pursuant to the terms of the Services Agreement.
On August 17, 2012, the Company, through KBS Acquisition Sub, entered into an amendment to its Services Agreement (the “Amended Services Agreement”) with the Property Manager. Pursuant to the Amended Services Agreement, the annual fee to be paid for the Services will be reduced to (i) $9.0 million, should the Company sell the BBD1 Equity Interests (see Note 7, “Real Estate Held for Sale and Discontinued Operations - BBD1 Sale Agreement”) to the Property Manager or any affiliate of the Property Manager, including the BBD1 Buyer (see Note 7, “Real Estate Held for Sale and Discontinued Operations - BBD1 Sale Agreement”), or (ii) $10.0 million, should the BBD1 Buyer not acquire the BBD1 Equity Interests and the Company sells the BBD1 Equity Interests to a party other than the Property Manager or any affiliate of the Property Manager. If the Company does not sell the BBD1 Equity Interests, the annual fee will remain at $12.0 million. The Amended Services Agreement will terminate on December 31, 2015. The initial date on which either party can terminate the Amended Services Agreement also has been extended by six months as follows: on or after September 30, 2013, the Company may terminate the Amended Services Agreement with an effective termination date of March 31 (except for calendar year 2013) or September 30 of any calendar year (including September 30, 2013), on ninety days written notice to the Property Manager, with the payment of a termination fee of up to $5.0 million and subject to certain other terms contained in the agreement; and on or after June 30, 2013, the Property Manager may terminate the Amended Services Agreement on ninety days written notice to the Company, without the payment of a termination fee and subject to certain other terms contained in the agreement.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2011, except for the addition of the statements of other comprehensive income (loss) and the addition of accounting policies related to a change in a plan to sell and properties held for non-sale disposition.  In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU No. 2011-05”).  ASU No. 2011-05 requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The Company elected to present comprehensive income in two separate but consecutive statements as part of its consolidated financial statements, beginning with the first interim period beginning after December 15, 2011. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the SEC.

8

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the FASB ASC and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.
The consolidated financial statements include the accounts of the Company, KBS REIT Holdings, the Operating Partnership, their direct and indirect wholly owned subsidiaries, and joint ventures the Company controls or for which it is the primary beneficiary, as well as the related amounts of noncontrolling interests. All significant intercompany balances and transactions are eliminated in consolidation.
The Company evaluates the need to consolidate joint ventures and consolidates joint ventures that it determines to be variable interest entities for which it is the primary beneficiary. The Company also consolidates joint ventures that are not determined to be variable interest entities, but for which it exercises control over major operating decisions through substantive participation rights, such as approval of budgets, selection of property managers, asset management, investment activity and changes in financing.
Risks and Uncertainties
The Company’s projected cash flows from operations will not be sufficient to cover capital expenditures, interest and amortization payment requirements on debt obligations and principal pay-down requirements for debt obligations at maturity or to allow the Company to meet the conditions for extension of certain of its loans payable, therefore requiring the Company to sell assets in order to meet capital requirements. If the Company’s cash flows from operations continue to deteriorate, the Company will be more dependent on asset sales to fund operations and for its liquidity needs. Moreover, the Company may be unable to meet certain financial and operating covenants in its debt obligations, and its lenders may take action against the Company. These factors could also have a material adverse effect on the Company and its stockholders’ return.
Use of Estimates
The preparation of the consolidated financial statements and condensed notes thereto in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Reclassifications
Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. As of December 31, 2011, the Company had classified 250 properties as held for sale, of which 247 properties were GKK Properties. During the nine months ended September 30, 2012, the Company disposed of 78 properties (including 70 GKK Properties), some of which were held for sale as of December 31, 2011. As of September 30, 2012, the Company had classified 168 GKK Properties as held for sale. Additionally, as of September 30, 2012, the Company reclassified 146 properties, including 145 GKK Properties related to the Goldman Mortgage Loan, that were previously held for sale to held for investment. The Company expects to dispose of the GKK Properties related to the Goldman Mortgage Loan by means other than by sale. As a result, certain reclassifications were made to the consolidated balance sheets, statements of operations and footnote disclosures for all periods presented to reflect all properties sold or held for sale during period ended September 30, 2012, as discontinued operations for all periods presented.

9

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Change in a Plan to Sell
The Company generally considers real estate to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. When real estate is initially considered “held for sale” it is measured at the lower of its depreciated book value, or fair value less costs to sell. Changes in the market may compel the Company to decide to reclassify a property that was designated as held for sale to held for investment.  A property that is reclassified from held for sale to held for investment or non-sale disposition is measured and recorded individually at the lower of (i) its carrying amount before the property was classified as held for sale, adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used, or (ii) its fair value at the date of the subsequent decision not to sell. Any adjustment to the carrying amount of the property as a result of the reclassification is included in income from continuing operations as an impairment charge on real estate held for investment. See Note 3, “Real Estate Held for Investment - Impairment of Real Estate,” for information regarding impairments related to properties reclassified from held for sale to held for investment. 
Real Estate Held for Non-Sale Disposition
The Company considers real estate assets that do not meet the criteria for held for sale but are expected to be disposed of other than by sale as real estate held for non-sale disposition.  The assets and liabilities related to real estate held for non-sale disposition are included in the Company’s consolidated balance sheets and the results of operations and are presented as part of continuing operations in the Company’s consolidated statements of operations for all periods presented.  The assets and liabilities of these properties will be removed from the Company’s consolidated balance sheets and the results of operations will be reclassified to discontinued operations on the Company’s consolidated statements of operations upon the ultimate disposition of the real estate.
Per Share Data
Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three and nine months ended September 30, 2012 and 2011, respectively.
Distributions declared per common share assumes each share was issued and outstanding each day from January 1, 2012 through February 28, 2012 and during the nine months ended September 30, 2011. For the period from January 1, 2012 through February 28, 2012 and for the nine months ended September 30, 2011, distributions were based on daily record dates and calculated at a rate of $0.00143836 per share per day. Each day during the periods from January 1, 2012 through February 28, 2012 and January 1, 2011 through September 30, 2011 was a record date for distributions.
Segments
The Company’s segments are based on the Company’s method of internal reporting, which classifies its operations by investment type: (i) real estate, (ii) real estate-related and (iii) commercial properties primarily leased to financial institutions received under the Settlement Agreement. For financial data by segment, see Note 14, “Segment Information.”
Recently Issued Accounting Standards Update
In December 2011, the FASB issued ASU No. 2011-10, Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate-a Scope Clarification (a consensus of the FASB Emerging Issues Task Force) (“ASU No. 2011-10”).  ASU No. 2011-10 clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of a default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20).  For public companies, the provisions of ASU No. 2011-10 are effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012.  The adoption of ASU No. 2011-10 did not have a material impact on the Company’s consolidated financial statements.

10

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). ASU No. 2011-11 requires entities to provide enhanced disclosures about financial instruments and derivative instruments that are either presented on a net basis on the balance sheet or subject to an enforceable master netting arrangement or similar agreement including (i) a description of the rights of offset associated with relevant agreements and (ii) both net and gross information, including amounts of financial collateral, for relevant assets and liabilities. The purpose of the update is to enhance comparability between those companies that prepare their financial statements on the basis of GAAP and those that prepare their financial statements in accordance with IFRS and to enable users of the financial statements to understand the effect or potential effect of the offsetting arrangements on the balance sheet. ASU No. 2011-11 is effective for fiscal years beginning on or after January 1, 2013, and for interim periods within those years. Disclosures are required retrospectively for all comparative periods presented in an entity’s financial statements. The Company does not expect the adoption of ASU No. 2011-11 will have a material impact to its consolidated financial statements.
3.
REAL ESTATE HELD FOR INVESTMENT
As of September 30, 2012, the Company’s portfolio of real estate held for investment, including the GKK Properties, was composed of approximately 16.6 million rentable square feet and was 85% occupied. These properties are located in 32 states and include office properties, industrial properties and bank branch properties. Included in the Company’s portfolio of real estate held for investment was 11.3 million rentable square feet related to the GKK Properties held for investment, which were 86% occupied as of September 30, 2012. In addition to the properties discussed in the preceding sentences, the Company owned 150 GKK Properties encompassing approximately 2.1 million rentable square feet that were held for non-sale disposition as of September 30, 2012, see “—Non-Sale Disposition of Real Estate” below.
The following table summarizes the Company’s investments in real estate as of September 30, 2012 and December 31, 2011 (in thousands), including real estate held for non-sale disposition:
 
 
Land
 
Buildings and
Improvements
 
Tenant 
Origination and
Absorption Costs
 
Total Real Estate
Held for 
Investment
As of September 30, 2012:
 
 
 
 
 
 
 
 
Office
 
$
97,367

 
$
599,144

 
$
26,728

 
$
723,239

Industrial
 
30,494

 
143,482

 
5,261

 
179,237

GKK Properties
 
306,539

 
794,723

 
153,759

 
1,255,021

Real estate held for investment, at cost and net of impairment charges (1)
 
$
434,400

 
$
1,537,349

 
$
185,748

 
$
2,157,497

Accumulated depreciation/amortization
 

 
(165,936
)
 
(50,702
)
 
(216,638
)
Real estate held for investment, net
 
$
434,400

 
$
1,371,413

 
$
135,046

 
$
1,940,859

As of December 31, 2011:
 
 
 
 
 
 
 
 
Office
 
$
97,651

 
$
599,371

 
$
30,148

 
$
727,170

Industrial
 
30,886

 
145,595

 
6,161

 
182,642

GKK Properties
 
309,116

 
828,460

 
161,443

 
1,299,019

Real estate held for investment, at cost and net of impairment charges
 
$
437,653

 
$
1,573,426

 
$
197,752

 
$
2,208,831

Accumulated depreciation/amortization
 

 
(113,839
)
 
(32,798
)
 
(146,637
)
Real estate held for investment, net
 
$
437,653

 
$
1,459,587

 
$
164,954

 
$
2,062,194

_____________________
(1) See “—Impairment of Real Estate.”

11

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Operating Leases
The Company’s real estate assets are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2012, the Company’s leases, excluding options to extend and leases on properties held for non-sale disposition, had remaining terms of up to 19.8 years with a weighted-average remaining term of 7.1 years. As of September 30, 2012, leases related to the GKK Properties, excluding options to extend and leases on properties held for non-sale disposition, had remaining terms of up to 19.8 years with a weighted-average remaining term of 8.1 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. Additionally, the Company assumed several leases related to the GKK Properties which contain shedding right provisions. As of September 30, 2012, these shedding rights totaled approximately 0.9 million square feet and can be exercised at various dates during 2012-2017. The Company has already been notified that 0.2 million square feet will be shed during the remainder of 2012, pursuant to these provisions. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as a security deposit vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $4.0 million and $4.3 million as of September 30, 2012 and December 31, 2011, respectively.
During the nine months ended September 30, 2012 and 2011, the Company recognized deferred rent from tenants of $4.0 million and $2.9 million, respectively. These excess amounts for the nine months ended September 30, 2012 and 2011 were net of $0.4 million and $0.4 million of lease incentive amortization, respectively. As of September 30, 2012 and December 31, 2011, the cumulative deferred rent balance was $25.3 million and $21.1 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $5.4 million and $5.2 million of unamortized lease incentives as of September 30, 2012 and December 31, 2011, respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.
The future minimum rental income from the Company’s properties under non-cancelable operating leases, including leases subject to shedding rights, and excluding options to extend and leases on properties held for non-sale disposition, as of September 30, 2012 for the years ending December 31 is as follows (in thousands):
October 1, 2012 through December 31, 2012
$
44,951

2013
173,338

2014
159,265

2015
147,912

2016
138,592

Thereafter
579,504

 
$
1,243,562


12

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

As of September 30, 2012, the Company’s highest tenant industry concentration, excluding properties held for non-sale disposition, (greater than 10% of annualized base rent) was as follows:
Industry
 
Number of
Tenants (1)
 
Annualized
Base Rent
(1) (2)
(in thousands)
 
Percentage of
Annualized Base Rent (1)
Finance
 
91
 
$
89,658

 
50.5
%
_____________________
(1) Excludes properties held for non-sale disposition.
(2) Annualized base rent represents annualized contractual base rental income as of September 30, 2012, adjusted for any contractual tenant concessions (including free rent).
As of September 30, 2012, no other tenant industries accounted for more than 10% of the Company’s annualized base rent. Excluding properties held for non-sale disposition, the Company currently has approximately 500 tenants over a diverse range of industries and geographical regions. As of September 30, 2012, the Company had a bad debt expense reserve of $4.4 million, which represents approximately 3% of its annualized base rent. The Company’s bad debt expense reserve included $3.5 million related to the GKK Properties. During the nine months ended September 30, 2012, the Company reduced its bad debt expense reserve and recorded a net recovery of bad debt expense related to its tenant receivables of $0.1 million. During the nine months ended September 30, 2011, the Company recorded bad debt expense related to its tenant receivables of $1.7 million.
As of September 30, 2012, the Company had a concentration of credit risk related to leases, excluding properties held for non-sale disposition, with the following tenants that represented more than 10% of the Company’s annualized base rent:
 
 
 
 
 
 
 
 
Annualized Base Rent Statistics
 
 
Tenant
 
Property
 
Tenant
Industry
 
Rentable Square Feet
 
% of
Portfolio Net Rentable Square Feet (1)
 
Annualized Base Rent (2)
(in thousands)
 
% of Portfolio Annualized Base Rent (1)
 
Annualized Base Rent per Square Foot
 
Lease Expiration
Bank of America, N.A.
 
Various
 
Finance
 
3,563,671
 
25.5
%
 
$
30,529

 
17.2
%
 
$
8.57

 
(3) 
Wells Fargo Bank, N.A.
 
Various
 
Finance
 
3,610,410
 
25.8
%
 
22,085

 
12.4
%
 
6.12

 
(4) 
_____________________
(1) Excludes properties held for non-sale disposition.
(2) Annualized base rent represents annualized contractual base rental income as of September 30, 2012, adjusted for any contractual tenant concessions (including free rent).
(3) As of September 30, 2012, lease expiration dates ranged from 2012 to 2026 with a weighted-average remaining term of 7.5 years. Additionally, as of September 30, 2012, some of Bank of America’s leases contained shedding rights provisions. These shedding rights totaled approximately 0.5 million square feet and can be exercised at various dates from 2012 to 2017.
(4) As of September 30, 2012, lease expiration dates ranged from 2012 to 2024 with a weighted-average remaining term of 11.1 years. Additionally, as of September 30, 2012, some of Wells Fargo Bank’s leases contained shedding rights provisions. These shedding rights totaled approximately 0.4 million square feet and can be exercised at various dates from 2012 to 2017. The Company has already been notified that 0.2 million square feet will be shed during the remainder of 2012, pursuant to these provisions.
Geographic Concentration Risk
As of September 30, 2012, the Company’s net investments in real estate in North Carolina, excluding properties held for non-sale disposition, represented 10.6% of the Company’s total assets.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in North Carolina’s real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results.

13

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Impairment of Real Estate
Due to changes in cash flow estimates and hold periods, the Company has recognized non-cash impairment charges to write-down the carrying value of certain of its real estate investments to their estimated fair values.  During the three and nine months ended September 30, 2012, the Company recorded impairment charges of $5.8 million and $5.8 million, respectively, with respect to seven properties, including five GKK Properties.  In addition, as of September 30, 2012, the Company reclassified the properties securing the Goldman Mortgage Loan and one other property that was previously held for sale to held for investment.  The Company recorded impairment charges of $7.3 million and $12.4 million related to these properties reclassified from held for sale to held for investment during the three and nine months ended September 30, 2012, respectively.  Included in the impairment related to properties reclassified from held for sale to held for investment during the three and nine months ended September 30, 2012 were (i) $5.9 million and $5.9 million of impairment charges, respectively, related to adjusting the carrying value of the properties for any depreciation and amortization expense that would have been recognized if the properties had always been classified as held for investment, which otherwise would have been recorded through depreciation and amortization expense and rental income (related to the amortization of above- market lease assets and below-market lease liabilities) and (ii) $1.4 million and $1.4 million of impairment charges, respectively, related to adjusting the carrying value of the properties to their fair value as of the date the properties were reclassified from held for sale to held for investment.  See Note 7, “Real Estate Held for Sale and Discontinued Operations,” for information regarding impairments of assets related to real estate held for sale. 
Real Estate Held for Non-Sale Disposition
As of September 30, 2012, the Company owned 150 GKK Properties that were held for non-sale disposition.  These properties were security for the Goldman Mortgage Loan and the BOA Windsor Mortgage Portfolio, which matured without repayment on August 31, 2012 and October 1, 2012, respectively.  For information with respect to the maturity defaults, rights of the lenders and subsequent developments, see Note 9, “Notes Payable and Repurchase Agreements”.  The following table summarizes the revenue and expenses related to properties held for non-sale disposition (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues related to real estate held for non-sale disposition
 
 
 
 
 
 
 
Total revenues
$
5,348

 
$
2,056

 
$
16,030

 
$
2,056

Expenses related to real estate held for non-sale disposition
 
 
 
 
 
 
 
Operating expenses
6,720

 
1,240

 
16,532

 
1,240

Impairment charge
9,501

 

 
13,774

 

Depreciation and amortization
1,206

 
1,003

 
1,962

 
1,003

Total expenses related to real estate held for non-sale disposition
17,427

 
2,243

 
32,268

 
2,243

Net loss related to real estate held for non-sale disposition
$
(12,079
)
 
$
(187
)
 
$
(16,238
)
 
$
(187
)

14

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

The following table summarizes the assets and liabilities related to properties held for non-sale disposition as of September 30, 2012 and December 31, 2011 (in thousands):
 
September 30, 2012
 
December 31, 2011
Assets related to real estate held for non-sale disposition
 
 
 
Total real estate, at cost and net of impairment charges
$
174,745

 
$
181,657

Accumulated depreciation and amortization
(12,955
)
 
(5,154
)
Real estate held for non-sale disposition, net
161,790

 
176,503

Restricted cash
9,783

 
1,249

Above-market leases, net
4,944

 
6,242

Other assets
1,513

 
12,586

Total assets
$
178,030

 
$
196,580

Liabilities related to real estate held for non-sale disposition
 
 
 
Notes payable (1)
161,083

 
157,790

Accounts payable and accrued liabilities
6,588

 
2,413

Below-market leases, net
4,990

 
5,825

Other liabilities
1,669

 
2,695

Total liabilities
$
174,330

 
$
168,723

_____________________
(1) Represents notes payable for the Goldman Mortgage Loan and the BOA Windsor Mortgage Portfolio. The principal balance of the Goldman Mortgage Loan excludes the Company’s $26.8 million and $34.2 million subordinated interest in the Goldman Mortgage Loan as of September 30, 2012 and December 31, 2011, respectively.
4.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES
As of September 30, 2012 and December 31, 2011, the Company’s tenant origination and absorption costs, above-market lease assets, and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
 
September 30, 2012
 
December 31, 2011
Cost, net of impairments
$
185,748

 
$
197,752

 
$
49,196

 
$
53,666

 
$
(124,837
)
 
$
(129,181
)
Accumulated Amortization
(50,702
)
 
(32,798
)
 
(11,208
)
 
(8,770
)
 
25,117

 
14,838

Net Amount
$
135,046

 
$
164,954

 
$
37,988

 
$
44,896

 
$
(99,720
)
 
$
(114,343
)

15

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2012 and 2011 were as follows (in thousands):
 
Tenant Origination  and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
For the Three Months Ended September 30,
 
For the Three Months Ended September 30,
 
For the Three Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Amortization
$
(6,596
)
 
$
(3,494
)
 
$
(1,723
)
 
$
(804
)
 
$
4,055

 
$
1,473

 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
For the Nine Months Ended September 30,
 
For the Nine Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Amortization
$
(20,909
)
 
$
(8,344
)
 
$
(6,464
)
 
$
(1,774
)
 
$
13,337

 
$
4,111

5.
REAL ESTATE LOANS RECEIVABLE
As of September 30, 2012 and December 31, 2011, the Company, through indirect wholly owned subsidiaries, had invested in or originated real estate loans receivable as follows (dollars in thousands):
Loan Name
Location of Related Property or Collateral
 
Date
Acquired/
Originated
 
Property
Type
 
Loan
Type
 
Outstanding
Principal
Balance as of
September 30, 
2012 (1)
 
Book Value
as of
September 30,
 2012 (2)
 
Book Value
as of
December 31,
2011 (2)
 
Contractual
Interest
Rate (3)
 
Annualized
Effective
Interest
Rate (3)
 
Maturity
Date (4)
Sandmar Mezzanine Loan
Southeast U.S. (5)
 
01/09/2007
 
Retail
 
Mezzanine
 
$
5,000

 
$
5,035

 
$
5,040

 
5.40%
 
6.83
%
 
01/01/2017
Lawrence Village Plaza Loan Origination
New Castle, Pennsylvania
 
08/06/2007
 
Retail
 
Mortgage
 
6,920

 
6,824

 
6,864

 
8.00%
 
9.41
%
 
09/01/2013
San Diego Office Portfolio B-Note
San Diego, California
 
10/26/2007
 
Office
 
B-Note
 
20,000

 
15,893

 
15,455

 
5.78%
 
11.18
%
 
10/11/2017
4929 Wilshire B-Note
Los Angeles, California
 
11/19/2007
 
Office
 
B-Note
 
3,993

 
3,028

 
3,005

 
6.05%
 
9.35
%
 
07/11/2017
11 South LaSalle Loan
Chicago, Illinois (6)
 
08/08/2007
 
Office
 
Mortgage
 

 

 
38,794

 
8.00%
 
(6 
) 
 
09/01/2010
Petra Subordinated Debt Tranche A (7)
 
10/26/2007
 
Unsecured
 
Subordinated
 

 

 
25,000

 
11.50%
 
(7 
) 
 
04/27/2009
Petra Subordinated Debt Tranche B (7)
 
10/26/2007
 
Unsecured
 
Subordinated
 

 

 
25,000

 
11.50%
 
(7 
) 
 
10/26/2009
 
 
 
 
 
 
 
 
$
35,913

 
$
30,780

 
$
119,158

 
 
 
 
 
 
Reserve for Loan Losses (8)
 
 
 
 
 
 
 

 
(2,253
)
 
(74,134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
35,913

 
$
28,527

 
$
45,024

 
 
 
 
 
 
_____________________
(1) Outstanding principal balance as of September 30, 2012 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns.
(2) Book value represents outstanding principal balance, adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs. Loan balances are presented gross of any asset-specific reserves.
(3) Contractual interest rates are the stated interest rates on the face of the loans. Annualized effective interest rates are calculated as the actual interest income recognized in 2012, using the interest method, divided by the average amortized cost basis of the investment during 2012. The annualized effective interest rates and contractual interest rates presented are for the nine months ended September 30, 2012.
(4) Maturity dates are as of September 30, 2012. Subject to certain conditions, the maturity date of certain loans receivable may be extended beyond the maturity date shown.
(5) The Company had recorded an asset-specific loan loss reserve against this investment as of September 30, 2012. See “—Reserve for Loan Losses.”
(6) See “—Recent Transactions – 11 South LaSalle Loan Sale.”
(7) As of December 31, 2011, the Company had recorded asset-specific loan loss reserves to reduce the carrying values of these investments to $0. The Company wrote-off its investment in the Petra Subordinated Debt Tranche A and Petra Subordinated Debt Tranche B during the nine months ended September 30, 2012.
(8) See “—Reserve for Loan Losses.”

16

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

As of September 30, 2012, the Company had outstanding funding commitments of $1.4 million on its loans receivable, subject to the satisfaction of certain conditions by the borrowers.
As of September 30, 2012 and December 31, 2011, interest receivable from real estate loans receivable was $0.3 million and $1.1 million, respectively, and is included in rents and other receivables.
The following summarizes the activity related to real estate loans receivable for the nine months ended September 30, 2012 (in thousands):
Real estate loans receivable, net - December 31, 2011
$
45,024

Principal repayments received on real estate loan receivable
(7
)
Extension fees received on real estate loan receivable
(103
)
Accretion of discounts on purchased real estate loans receivable
482

Amortization of origination fees and costs on purchased and originated real estate loans receivable
45

Change in loan loss reserve
71,881

Sale of the 11 South LaSalle Loan
(38,795
)
Write-off of Petra Subordinated Debt
(50,000
)
Real estate loans receivable, net - September 30, 2012
$
28,527

For the three and nine months ended September 30, 2012 and 2011, interest income from real estate loans receivable consisted of the following (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Contractual interest income
$
599

 
$
1,707

 
$
1,764

 
$
10,717

Accretion of purchase discounts
119

 
320

 
482

 
923

Amortization of origination fees and costs and acquisition costs, net
18

 
5

 
45

 
678

Interest income from real estate loans receivable
$
736

 
$
2,032

 
$
2,291

 
$
12,318

The Company generally recognizes income on impaired loans on either a cash basis, where interest income is only recorded when received in cash, or on a cost-recovery basis, where all cash receipts are applied against the carrying value of the loan. The Company will resume the accrual of interest if it determines the collection of interest according to the contractual terms of the loan is probable. The Company considers the collectibility of the loan’s principal balance in determining whether to recognize income on impaired loans on a cash basis or a cost-recovery basis. During the nine months ended September 30, 2012, the Company recognized $0.3 million of interest income related to an impaired loan with an asset-specific reserve. Additionally, as of September 30, 2012, the Company had interest income receivable of $0.2 million related to its impaired loan.
Recent Transactions
11 South LaSalle Loan Sale
On August 8, 2007, the Company, through an indirectly wholly owned subsidiary, originated a senior mortgage loan of up to $43.3 million on 11 South LaSalle (the “11 South LaSalle Loan”), a 35-story office building containing 329,271 square feet located in Chicago, Illinois. On February 24, 2012, the Company entered into a mortgage loan sale agreement, and on March 30, 2012, the Company sold the 11 South LaSalle Loan to an unaffiliated buyer for $17.0 million.

17

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Reserve for Loan Losses
Changes in the Company’s reserve for loan losses for the nine months ended September 30, 2012 were as follows (in thousands): 
Reserve for loan losses, December 31, 2011
$
74,134

Provision for loan losses
142

Charge-offs to reserve for loan losses
(72,023
)
Reserve for loan losses, September 30, 2012
$
2,253

As of September 30, 2012, the total reserve for loan losses consisted of $2.3 million of asset-specific reserves related to the Sandmar Mezzanine Loan, which had an amortized cost basis of $5.0 million.
The Company recorded provision for loan loss reserve of $0.1 million during the nine months ended September 30, 2012 and reduced its provision for loan loss reserves by $3.8 million during the nine months ended September 30, 2011. During the nine months ended September 30, 2012, the Company also charged-off $72.0 million of reserves for loan losses related to the write-off of Petra Subordinated Debt Tranche A and Petra Subordinated Debt Tranche B and the sale of the 11 South LaSalle Loan. For the nine months ended September 30, 2011, the change in loan loss reserves was comprised of an increase of $14.3 million to the asset-specific loan loss reserves, offset by a decrease of $18.1 million calculated on a portfolio-basis. During the nine months ended September 30, 2011, the Company also recovered $0.1 million of reserves for loan losses related to the foreclosure of the 200 Professional Drive Loan. As of September 30, 2012, the Company did not record a portfolio-based loan loss reserve, as each loan was evaluated for an asset-specific reserve.
6.
REAL ESTATE SECURITIES
Securities Held to Maturity
In connection with the Settlement Agreement, the Company received a portfolio of treasury securities that is pledged to provide a portion of the principal and interest payments for mortgage debt secured by certain GKK Properties. Since the Company does not intend to sell the securities, the securities are classified as held to maturity and are presented on an amortized cost basis and not at fair value. As of September 30, 2012, the Company’s investments in treasury securities had a carrying value and fair value of $88.2 million and $88.3 million, respectively, and have maturities that extend through November 2013. As of December 31, 2011, the carrying value and fair value of the Company’s treasury securities was $91.5 million and $91.5 million, respectively. The Company did not record any other-than-temporary impairments related to its held to maturity securities during the nine months ended September 30, 2012.
Securities Available for Sale
As of December 31, 2011, the Company held securities backed by CMBS that accrued interest at a coupon rate of 4.5% with a contractual maturity of December 2017 and an original purchase price of $44.2 million (the “Fixed Rate Securities”), which were classified as available-for-sale.  From acquisition through December 31, 2011, the Company had recognized through earnings other-than-temporary impairments of $22.2 million on the Fixed Rate Securities.  As of December 31, 2011, the carrying value of the Fixed Rate Securities was $46.2 million, consisting of cumulative unrealized gains of $25.2 million, which were recorded to accumulated other comprehensive income.  On March 27, 2012, the Company sold the Fixed Rate Securities to an unaffiliated buyer for a sales price of $46.7 million.  As a result, during the nine months ended September 30, 2012, the Company realized a gain on the sale of Fixed Rate Securities of $25.5 million

18

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

7.
REAL ESTATE HELD FOR SALE AND DISCONTINUED OPERATIONS
The operations of properties held for sale or to be disposed of and the aggregate net gains recognized upon their disposition are presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the year ended December 31, 2011, the Company disposed of three office properties and seven industrial properties, and through a consolidated joint venture, transferred a portfolio of 23 industrial properties and a master lease in full satisfaction of the debt outstanding to an affiliate of the lender. During the nine months ended September 30, 2012, the Company disposed of an additional six office properties, two industrial properties and 70 of the GKK Properties. As of September 30, 2012, the Company also classified 168 GKK Properties with an aggregate net book value of $540.6 million as held for sale. During the three and nine months ended September 30, 2012, the Company recorded an impairment charge of $1.0 million and $13.8 million, respectively, related to discontinued operations. The impairment charge was a result of a reduction in the estimated sales prices of certain properties held for sale.  The estimated sales prices were based on purchase and sale agreements the Company has entered into, offers received which the Company intends to accept or broker estimates of value. Additionally, during the nine months ended September 30, 2012, the Company reclassified 146 properties, including 145 GKK Properties related to the Goldman Mortgage Loan, that were previously held for sale to held for investment. The Company expects to dispose of the properties related to the Goldman Mortgage Loan by means other than by sale. The following table summarizes operating income from discontinued operations for the three and nine months ended September 30, 2012 and 2011 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Total revenues and other income
$
32,126

 
$
32,999

 
$
106,521

 
$
79,787

Total expenses
26,080

 
31,177

 
94,649

 
78,854

Income from discontinued operations before gain on sales of real estate, net and impairment charge
6,046

 
1,822

 
11,872

 
933

Gain on sales of real estate, net
2,060

 
5,911

 
7,781

 
5,911

Impairment charge
(999
)
 
(13,393
)
 
(13,808
)
 
(36,207
)
Gain from extinguishment of debt
10,980

 

 
10,980

 

Gain (loss) from discontinued operations
$
18,087

 
$
(5,660
)
 
$
16,825

 
$
(29,363
)
The following summary presents the major components of real estate held for sale and liabilities related to real estate held for sale as of September 30, 2012 and December 31, 2011 (in thousands):
 
September 30, 2012
 
December 31, 2011
Assets related to real estate held for sale
 
 
 
Total real estate, at cost and net of impairment charges
$
576,189

 
$
920,730

Accumulated depreciation and amortization
(35,600
)
 
(18,691
)
Real estate held for sale, net
540,589

 
902,039

Other assets
3,847

 
21,795

Total assets
$
544,436

 
$
923,834

Liabilities related to real estate held for sale
 
 
 
Notes payable
355,442

 
581,321

Other liabilities
77,891

 
91,618

Total liabilities
$
433,333

 
$
672,939


19

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

BBD1 Sale Agreement
On August 17, 2012, the Company, through an indirect wholly owned subsidiary (the “BBD1 Owner”) that indirectly owns 115 office properties and operations centers transferred to the Company pursuant to the Settlement Agreement (the “BBD1 Properties”), entered into an agreement (the “BBD1 Sale Agreement”) for the sale of membership interests (the “BBD1 Equity Interests”) to BBD1 Holdings LLC (the “BBD1 Buyer”), an unaffiliated entity and an affiliate of the Property Manager. Pursuant to the BBD1 Sale Agreement, the purchase price for the BBD1 Equity Interests will be approximately $485.0 million, as such price may be adjusted as described below (the “BBD1 Purchase Price”).
Pursuant to the BBD1 Sale Agreement, the BBD1 Owner will sell the BBD1 Equity Interests to the BBD1 Buyer on a date not later than November 14, 2012; however, upon the payment of certain funds and the satisfaction of certain terms and conditions of the BBD1 Sale Agreement, the BBD1 Buyer may extend such date up to an additional sixty days, plus an additional ten business days (the “BBD1 Closing Date”). The BBD1 Buyer exercised its option to extend the BBD1 Closing Date until December 14, 2012.
Pursuant to the BBD1 Sale Agreement, the BBD1 Buyer had until October 30, 2012 to determine whether it would defease the BBD1 Mortgage (the “Defeasance”), assume the BBD1 Mortgage (the “Assumption”) or, if it determined after commercially reasonable efforts that it could not obtain adequate financing for the acquisition of the BBD1 Equity Interests, terminate the BBD1 Sale Agreement, and provide the BBD1 Owner with notice of its decision. If the BBD1 Buyer elects either the Defeasance or the Assumption, it will use commercially reasonable efforts to provide for the release or indemnification of the Company’s subsidiaries which are guarantors under the BBD1 Mortgage. On October 30, 2012, the BBD1 Buyer notified the Company that it: (i) would not terminate the BBD1 Sale Agreement; (ii) selected the Defeasance; and (iii) would continue to pursue the Assumption in order to obtain financing for the acquisition of the BBD1 Equity Interests.
Pursuant to the terms of the BBD1 Sale Agreement, the BBD1 Purchase Price may be adjusted through the BBD1 Closing Date. These adjustments will depend on whether the BBD1 Buyer selects the Defeasance or the Assumption and on certain other prorations, prior payments and costs. Should the BBD1 Buyer choose the Assumption, the BBD1 Purchase Price will be reduced by $12.5 million. Should the BBD1 Buyer choose the Defeasance, the BBD1 Owner is obligated to cover the amount (not to exceed $15.0 million) by which the cost of acquiring certain securities needed to complete the Defeasance exceeds the balance of the mortgage loan. Additionally, the BBD1 Buyer will pay a portion of the BBD1 Purchase Price with six million shares of stock of Gramercy Capital Corp, at a share price of $2.50.
8.
FORECLOSED REAL ESTATE HELD FOR SALE
In 2006 and 2007, the Company originally made three debt investments (collectively, the “Tribeca Loans”) related to the conversion of an eight-story loft building into a 10-story condominium building with 62 units (the “Tribeca Building”) located at 415 Greenwich Street in New York, New York. On February 19, 2010, the borrowers under the Tribeca Loans defaulted and the Company foreclosed on the Tribeca Building by exercising its right to accept 100% of the ownership interest of the borrowers. The Company acquired the remaining unsold condominium units of the Tribeca Building and assumed the project liabilities. The Company recorded the Tribeca Building at fair value using a discounted cash flow valuation model based on the net realizable value (expected sales price less estimated costs to sell the unsold units) of the real estate.
As of September 30, 2012, the Company’s investment in the Tribeca Building consisted of three condominium units, two retail spaces and parking spaces with a carrying value of $26.3 million and is presented as foreclosed real estate held for sale on the consolidated balance sheet. During the nine months ended September 30, 2012, the Company sold one condominium unit of the Tribeca Building and recognized a gain on sale of $0.1 million and recorded expenses of $2.0 million related to foreclosed real estate held for sale. During the nine months ended September 30, 2011, the Company sold seven condominium units of the Tribeca Building and recognized a gain on sale of $0.1 million and recorded expenses of $1.8 million related to foreclosed real estate held for sale.

20

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

9.
NOTES PAYABLE AND REPURCHASE AGREEMENTS
As of September 30, 2012 and December 31, 2011, the Company’s notes payable and repurchase agreements consisted of the following (dollars in thousands):
Loan Type
 
Book Value as of
September 30, 2012
 
Book Value as of
December 31, 2011
 
Contractual
Interest Rates as of
September 30, 
2012 (1)
 
Weighted-Average
Interest Rates as of
September 30, 
2012 (1)
 
Weighted-Average
Remaining Term
in Years (2)
Fixed Rate
 
 
 
 
 
 
 
 
 
 
Mortgage loans
 
$
227,018

 
$
366,158

 
5.6% - 6.1%
 
5.9%
 
2.0
GKK Properties mortgage loans
 
962,164

 
1,025,421

 
3.0% - 10.3%
 
5.9%
 
5.3
Mezzanine loan
 
38,980

 

 
10.0%
 
10.0%
 
0.5
 
 
1,228,162

 
1,391,579

 
 
 
 
 
 
Variable Rate
 
 
 
 
 
 
 
 
 
 
Mortgage loans (3)
 
265,083

 
280,446

 
(4) 
 
2.8%
 
2.7
GKK Properties mortgage loans
 
417,741

 
486,510

 
(4) 
 
6.1%
 
0.5
Repurchase agreements (5)
 

 
149,657

 
(5) 
 
(5) 
 
(5) 
 
 
682,824

 
916,613

 
 
 
 
 
 
Total Notes Payable and Repurchase Agreements principal outstanding
 
1,910,986

 
2,308,192

 
 
 
 
 
 
Discount on notes payable, net (6)
 
(8,472
)
 
(8,984
)
 
 
 
 
 
 
Total Notes Payable and Repurchase Agreements, net  
 
$
1,902,514

 
$
2,299,208

 
 
 
 
 
 
_____________________
(1) Contractual interest rates as of September 30, 2012 represent the range of interest rates in effect under these loans as of September 30, 2012. Weighted-average interest rates as of September 30, 2012 are calculated as the actual interest rate in effect as of September 30, 2012 (consisting of the contractual interest rate and the effect of contractual floor rates and interest rate caps, floors and swaps), using interest rate indices as of September 30, 2012, where applicable.
(2) Weighted-average remaining term in years represents the initial maturity dates or the maturity dates as extended as of September 30, 2012; subject to certain conditions, the maturity dates of certain loans may be further extended.
(3) The Company has entered into separate interest rate swap agreements related to certain of these loans. See Note 10, “Derivative Instruments.”
(4) The contractual interest rates of these loans will vary based on one-month LIBOR plus a fixed spread. The spreads on the mortgage loans and GKK Properties mortgage loans range from 2.1% to 2.8% and 1.9% to 11.5%, respectively.
(5) On August 17, 2012, the Company paid off in full the outstanding principal balance under its repurchase agreements.
(6) Represents the unamortized discount and premium on notes payable due to the above- and below-market interest rates when the notes were assumed. The discount and premium are amortized over the remaining life of the respective loans.
As of September 30, 2012 and December 31, 2011, the Company’s deferred financing costs were $3.2 million and $6.3 million, respectively, net of amortization. During the three and nine months ended September 30, 2012, the Company incurred interest expense, net of discontinued operations, of $25.7 million and $76.5 million, respectively. During the three and nine months ended September 30, 2011, the Company incurred interest expense, net of discontinued operations, of $14.8 million and $35.3 million, respectively. Included in interest expense was the amortization of deferred financing costs of $1.9 million and $5.6 million for the three and nine months ended September 30, 2012, respectively, and interest expense incurred as a result of the Company’s interest rate swap agreements of $0.2 million and $1.1 million for the three and nine months ended September 30, 2012, respectively. Included in interest expense were the amortization of deferred financing costs of $2.2 million and $5.1 million for the three and nine months ended September 30, 2011, respectively, and interest expense incurred as a result of the Company’s interest rate swap agreements of $0.5 million and $2.2 million for the three and nine months ended September 30, 2011, respectively. Included in interest expense was the amortization of discount and premium on notes payable, which increased interest expense by $2.7 million and $8.9 million for the three and nine months ended September 30, 2012, respectively. As of September 30, 2012 and December 31, 2011, $13.0 million and $9.2 million of interest was payable, respectively.

21

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of September 30, 2012 (in thousands):
October 1, 2012 through December 31, 2012
$
187,761

(1) 
2013
774,468

 
2014
90,227

 
2015
296,809

 
2016
137,620

 
Thereafter
424,101

 
 
$
1,910,986

 
_____________________
(1) Amount includes the Goldman Mortgage Loan, with an outstanding principal balance of $154.9 million, which matured on August 31, 2012 without repayment. See “—Loan Maturities” below.
The following summarizes the activity related to notes payable and repurchase agreements for the nine months ended September 30, 2012 (in thousands):
 
Notes Payable
 
Repurchase Agreements
 
Total
Total Notes Payable and Repurchase Agreements, net  - December 31, 2011
$
2,149,551

 
$
149,657

 
$
2,299,208

Proceeds from notes payable
159,197

 

 
159,197

Principal repayments
(363,246
)
 
(149,657
)
 
(512,903
)
Extinguishment of debt
(43,500
)
 

 
(43,500
)
Amortization of discount on notes payable, net
512

 

 
512

Total Notes Payable and Repurchase Agreements, net  - September 30, 2012
$
1,902,514

 
$

 
$
1,902,514

Loan Maturities
During the nine months ended September 30, 2012, two of the loans the Company assumed pursuant to the Settlement Agreement matured without repayment.  The loans had outstanding principal balances of $43.5 million (the “One Citizens Loan”) and $154.9 million (the “Goldman Mortgage Loan”).  The One Citizens Loan matured on January 11, 2012.  On July 31, 2012, the Company entered into an agreement in lieu of foreclosure to transfer title of the property securing the One Citizens Loan to the lender in full satisfaction of the debt outstanding under, and other obligations related to, the One Citizens Loan.  As a result, the Company recorded a gain on extinguishment of debt of $11.0 million, which represents the difference between the carrying amount of the outstanding debt and other liabilities of approximately $45.9 million and the carrying value of the real estate properties and other assets of approximately $34.9 million, upon transfer of the property. Included in this gain on extinguishment of debt is a gain on the settlement of debt of $7.6 million, which represents the difference between the carrying value of the liabilities and the fair value of the assets transferred to the One Citizens Loan lender, and a gain on the transfer of real estate assets of $3.4 million, which represents the difference between the fair value and the carrying value of the real estate assets as of the date of transfer. The impact of this gain on extinguishment of debt was $0.06 per share for the three and nine months ended September 30, 2012.

22

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

The Goldman Mortgage Loan matured on August 31, 2012.  The outstanding principal balance of $154.9 million as of September 30, 2012, excludes the Company’s $26.8 million subordinated interest in the Goldman Mortgage Loan.  On August 31, 2012, the indirect wholly owned subsidiaries of the Company that are mortgage borrowers under the Goldman Mortgage Loan (collectively, the “Borrower”) received a notice of maturity default from the lender, CF Branch, LLC (the “Lender”), stating that the entire indebtedness under the Goldman Mortgage Loan is due and payable. The Company’s subsidiary that guaranteed the repayment of the Goldman Mortgage Loan (the “Guarantor”) (which guaranty is limited, however, to the equity value of the mortgaged real estate assets), and whose assets consist primarily of the equity interests in the entities that directly or indirectly own the real estate assets encumbered by the Goldman Mortgage Loan, also received notice from the Lender demanding payment of all sums due under the Goldman Mortgage Loan. From and after the maturity date, interest on the Goldman Mortgage Loan will accrue at the default rate, which is the greater of (i) 4% per annum in excess of the interest rate otherwise applicable under the loan and (ii) 1% per annum in excess of the Prime Rate from time to time.
The Company is currently negotiating with the Lender (i) a collateral transfer agreement to transfer to the Lender or its nominee the equity interests in the entities that directly or indirectly own the real estate assets encumbered by the Goldman Mortgage Loan; (ii) a loan sale agreement to transfer to the Lender the Company’s subordinated interest in the Goldman Mortgage Loan; and (iii) mutual releases of the Company, the Borrower, the Guarantor and the Lender of their obligations, as applicable, under the Goldman Mortgage Loan, the limited guaranty and the other loan documents. However, these negotiations are ongoing, and there is no assurance that the Company will reach an agreement with the Lender. In the event the Company is unable to reach such an agreement, the Lender may attempt to collect a late fee of approximately $6.4 million that the Lender has previously indicated was due in addition to the outstanding loan balance, unpaid interest (including any default interest) and legal fees; however, based on the terms of the loan agreement the Company does not believe that any late fee is due and payable and has not recorded any liability as of September 30, 2012 for this fee. Moreover, if the Company is unable to reach such an agreement with the Lender, the Lender may take immediate action to attempt to exercise certain of its rights under the loan and security documents, including without limitation, initiating foreclosure proceedings of the properties securing the Goldman Mortgage Loan. The Lender may also attempt a public sale of the collateral pledged under the limited guaranty. The carrying value of the properties securing the Goldman Mortgage Loan was $156.2 million as of September 30, 2012.  Additionally, the Company held $9.3 million in various reserve accounts related to the Goldman Mortgage Loan.  
Subsequent to September 30, 2012, one of the loans the Company assumed pursuant to the Settlement Agreement with an outstanding principal balance of $6.1 million (the “BOA Windsor Mortgage Portfolio”) matured without repayment.  The BOA Windsor Mortgage Portfolio matured on October 1, 2012 and as a result of the maturity, the lender may choose to attempt to exercise certain of its rights under the loan and security documents, including without limitation, requiring the repayment of principal outstanding or foreclosing on the properties securing the loan.  The carrying value of the properties securing the BOA Windsor Mortgage Portfolio was $5.2 million as of September 30, 2012.
Debt Covenants
The documents evidencing the Company’s debt obligations typically require that specified loan-to-value and debt service coverage ratios be maintained with respect to the financed properties. A breach of the financial covenants in these documents may result in the lender imposing additional restrictions on the Company’s operations, such as restrictions on the Company’s ability to incur additional debt, or may allow the lender to impose “cash traps” with respect to cash flow from the property securing the loan. In addition, such a breach may constitute an event of default and the lender could require the Company to repay the debt immediately. If the Company fails to make such repayment in a timely manner, the lender may be entitled to take possession of any property securing the loan.

23

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

As of September 30, 2012, the borrowers under two mortgage loans that the Company assumed pursuant to the Settlement Agreement were out of debt service coverage compliance. The loans had outstanding principal balances of $203.0 million (the “BBD2 Loan”) and $13.4 million (the “Jenkins Loan”), respectively, as of September 30, 2012. Such non-compliance does not constitute an event of default under the applicable loan and security documents of either loan. However, as a result of such non-compliance, under the BBD2 Loan, the lender has imposed a “cash trap” to restrict distributions to the Company to the budgeted property operating expenses and requires lender consent regarding the release of properties securing the loan, and under the Jenkins Loan, the lender has also imposed a “cash trap” and has the right to replace the property manager of the property. With respect to the BBD2 Loan, the Company is currently reviewing the mechanics of the debt service coverage requirements with the lender to confirm if the Company is actually out of compliance with the debt service coverage requirements as defined in the applicable loan documents. 
Recent Financing Transactions
Gramercy and Garrison Mezzanine Loan
On August 17, 2012 (the “Mezzanine Loan Effective Date”), the Company, through certain indirect wholly owned subsidiaries (collectively, the “Mezzanine Loan Borrower”), entered into a mezzanine loan for a principal amount of $39.0 million (the “Mezzanine Loan”) with Gramercy Investment Trust and Garrison Commercial Funding XI LLC (collectively, the “Mezzanine Loan Lender”), each an unaffiliated lender. As required by the loan agreement, the Company used the proceeds of the Mezzanine Loan to pay off in full all of the outstanding amounts under the Company’s repurchase agreements related to its former investment in the GKK Mezzanine Loan (the “Amended Repurchase Agreements”). The Mezzanine Loan is initially secured by a pledge of 100% of the equity interests in certain of the Company’s indirect wholly owned subsidiaries (the “Mezzanine Loan Security”) that directly or indirectly own 25 of the Company’s properties, encompassing an aggregate of 2.3 million square feet (the “Mezz-Related Properties”).
The Mezzanine Loan matures on the earlier of (i) April 1, 2013, or (ii) the date of (a) the sale of all or a portion of the BBD1 Properties, or (b) the refinancing of the BBD1 Properties where the cumulative net proceeds from such refinancing are sufficient to repay the Mezzanine Loan in full. Notwithstanding the above and subject to the satisfaction of certain terms and conditions contained in the Mezzanine Loan agreement, should the BBD1 Buyer elect not to acquire the BBD1 Equity Interests, the maturity date of the Mezzanine Loan will be the earlier of (i) August 1, 2013, or (ii) the date of (a) the sale of all or a portion of the BBD1 Properties, or (b) the refinancing of the BBD1 Properties where the cumulative net proceeds from such refinancing are sufficient to repay the Mezzanine Loan in full. The loan bears interest at a fixed rate of 10% per annum with monthly interest payments and the Mezzanine Loan Borrower is required to make certain mandatory prepayments or amortization payments in the following amounts:
(i)
an amount equal to all net proceeds of the Mezz-Related Properties (or the BBD1 Properties, as the case may be) until the Mezzanine Loan is paid in full;
(ii)
an amount equal to all net proceeds over $75.0 million available to the Company or its affiliates, from the sale or refinancing of any of the Company’s properties other than the Mezz-Related Properties (or the BBD1 Properties, as the case may be), until the Mezzanine Loan is paid in full, provided that none of the net proceeds referred to in this section (ii) may be used for (a) the payment by the Company to any of its affiliates of dividends, distributions, fees, principal, interest or lease payments; provided that, should the Company meet certain financial covenants in the Mezzanine Loan agreement, it will be able to pay asset management and certain other fees to certain of its affiliates, including the Advisor, or (b) the optional repayment or prepayment of any third-party indebtedness of the Company or any of its affiliates, except that such funds may be used to pay the Mezzanine Loan Lender and the lender under the Goldman Mortgage Loan; and
(iii)
beginning on October 1, 2012, monthly amortization payments in the amount of $1.5 million during the term of the loan, which amortization payments increase to $2.0 million if the Sale Agreement terminates (unless the termination is caused by a default by the BBD1 Buyer thereunder).

24

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Commencing on the Mezzanine Loan Effective Date, the Company and the Mezzanine Loan Borrower must use commercially reasonable efforts to replace the Mezzanine Loan Security with a pledge of 100% of the equity interests (the “BBD1 Equity Interests”) in the direct or indirect subsidiaries of the entity that owns (i) the BBD1 Properties and (ii) certain treasury securities that were pledged as part of a prior, partial defeasance of the BBD1 Mortgage. Such efforts include, among other actions, negotiating with the lender of the mortgage loan encumbering the BBD1 Properties (the “BBD1 Mortgage”) for the lender’s consent to such replacement. If such replacement occurs, the collateral in place on the Mezzanine Loan Effective Date (other than the $6.0 million deposit account referenced below) will be released, the Mezzanine Loan Borrower will have no further liability under the Mezzanine Loan documents and the BBD1 Owner will assume all of the Mezzanine Loan Borrower’s obligations under the Mezzanine Loan. Subject to certain conditions in the Mezzanine Loan agreement and among other events of default therein, any non-monetary event of default under the BBD1 Mortgage or the mortgage loan secured by certain of the properties owned by subsidiaries of the Mezzanine Loan Borrower (the “US Bank Loan”) that causes the lender to accelerate the maturity of such outstanding indebtedness, or any other event of default under the BBD1 Mortgage or the US Bank Loan, will constitute an event of default under the Mezzanine Loan. Additionally, a Company affiliate granted the Mezzanine Loan Lender a security interest in a bank account into which the Company deposited $6.0 million on the Mezzanine Loan Effective Date. Subsequent to September 30, 2012 and pursuant to the occurrence of certain conditions in the BBD1 Sale Agreement, the Company paid the Mezzanine Loan principal balance down by $6.0 million with this deposit.
The Mezzanine Loan documents require the Company and its subsidiaries to meet certain financial and other covenants, which include limitations on new recourse liabilities, limitations on the creation of additional liens or indebtedness, and limitations on the payment of certain fees to affiliates. Mandatory redemptions of shares under the Company’s share redemption program are permitted in connection with the death, qualifying disability or determination of incompetence of a stockholder, provided that no change of control of the Company occurs.
The remaining principal balance and all outstanding interest and fees under the Mezzanine Loan are due on the maturity date. The Mezzanine Loan Borrower has the right to prepay the loan at any time upon no less than five days written notice to the Mezzanine Loan Lender. The Company is providing a guaranty of the payment of the principal balance of, and any interest, fees and other sums outstanding under or relating to, and obligations of the Mezzanine Loan Borrower under, the Mezzanine Loan.
Extension, Modification and Paydown of the Portfolio Secured Mortgage Loan Facility
On July 9, 2008, certain of the Company’s wholly owned subsidiaries (the “Portfolio Secured Mortgage Loan Facility Borrowers”), entered into a secured four-year mortgage loan agreement with an unaffiliated lender for the maximum principal amount of $158.7 million (the “Portfolio Secured Mortgage Loan Facility”), subject to certain borrowing limitations. The Portfolio Secured Mortgage Loan Facility was secured by various real estate properties owned by the Portfolio Secured Mortgage Loan Facility Borrowers. The maturity date of the loan was July 9, 2012, with two one-year extension options, subject to certain conditions contained in the loan documents. On October 27, 2011, the Sabal VI Building was added to the Portfolio Secured Mortgage Loan Facility. On July 10, 2012, the Portfolio Secured Mortgage Loan Facility Borrowers entered into a loan modification agreement to release the following properties from the loan: Plainfield Business Center, Riverview Business Center I & II, Royal Parkway Center I & II, Rivertech I & II, Great Oaks Center, Rickenbacker IV and the Sabal VI Building. In connection with the loan modification agreement and the release of certain properties from the loan, the Company also paid down the outstanding principal balance by $77.5 million with proceeds from various debt financings discussed below and extended the maturity date of the Portfolio Secured Mortgage Loan Facility to September 9, 2012. As of July 11, 2012, the aggregate principal amount outstanding under the loan was $15.0 million. All amounts outstanding under the Portfolio Secured Mortgage Loan Facility were repaid prior to maturity.

25

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

Office Portfolio Mortgage Loan
On July 11, 2012, the Company, through indirect wholly owned subsidiaries, entered into a three-year mortgage loan agreement with an unaffiliated lender secured by the Crescent Green Buildings, the Sabal VI Building and Great Oaks Center (the “Office Portfolio Mortgage Loan”). The proceeds from the Office Portfolio Mortgage Loan were primarily used to pay down the Portfolio Secured Mortgage Loan Facility. The maximum principal amount of the Office Portfolio Mortgage Loan is $55.5 million. At closing, $52.4 million was disbursed to the Company and $3.1 million was available for future disbursements, subject to certain conditions set forth in the loan agreement. The maturity date of the loan is July 31, 2015, with two one-year extension options, subject to certain conditions contained in the loan documents. The Office Portfolio Mortgage Loan bears interest at a floating rate equal to 225 basis points over one-month LIBOR. Monthly payments on the Office Portfolio Mortgage Loan include principal and interest with principal payments calculated using an amortization schedule of 30 years and an annual interest rate of 6.5%. KBS REIT Properties, LLC (“KBS REIT Properties”), an affiliate of the Company, is providing a guaranty of 25% of the outstanding principal amount of the loan.
Industrial Portfolio Mortgage Loan
On July 11, 2012, the Company, through indirect wholly owned subsidiaries, entered into a three-year mortgage loan agreement with an unaffiliated lender secured by Royal Parkway Center I & II, Riverview Business Center I & II and Plainfield Business Center (the “Industrial Portfolio Mortgage Loan”). The proceeds from the Industrial Portfolio Mortgage Loan were primarily used to pay down the Portfolio Secured Mortgage Loan Facility. The maximum principal amount of the Industrial Portfolio Mortgage Loan is $25.8 million. At closing, $22.7 million was disbursed to the Company and $3.1 million was available for future disbursements, subject to certain conditions set forth in the loan agreement. The maturity date of the loan is July 31, 2015, with two one-year extension options, subject to certain conditions contained in the loan documents. The Industrial Portfolio Mortgage Loan bears interest at a floating rate equal to 250 basis points over one-month LIBOR. Monthly payments are interest only during the initial term of the loan. KBS REIT Properties is providing a guaranty of 25% of the outstanding principal amount of the loan.
Rivertech Mortgage Loan            
On July 11, 2012, the Company, through an indirect wholly owned subsidiary, entered into a three-year mortgage loan agreement with an unaffiliated lender secured by the Rivertech I & II Buildings (the “Rivertech Mortgage Loan”). The proceeds from the Rivertech Mortgage Loan were primarily used to pay down the Portfolio Secured Mortgage Loan Facility. The maximum principal amount of the Rivertech Mortgage Loan is $25.2 million. At closing, $21.9 million was disbursed to the Company and $3.3 million was available for future disbursements. On August 17, 2012, the remaining $3.3 million available was disbursed to the Company. The maturity date of the loan is July 31, 2015, with two one-year extension options, subject to certain conditions contained in the loan documents, and bears interest at a floating rate equal to 275 basis points over one-month LIBOR. Monthly payments were initially interest only. Commencing September 1, 2012, monthly payments include principal and interest with principal payments calculated using an amortization schedule of 30 years and an annual interest rate of 6.5%. KBS REIT Properties is providing a guaranty of 25% of the outstanding principal amount of the loan.
Rickenbacker Mortgage Loan
On July 11, 2012, the Company, through an indirect wholly owned subsidiary, entered into a three-year mortgage loan agreement with an unaffiliated lender secured by the Rickenbacker IV Building (the “Rickenbacker Mortgage Loan”). The proceeds from the Rickenbacker Mortgage Loan were primarily used to pay down the Portfolio Secured Mortgage Loan Facility. The maximum principal amount of the Rickenbacker Mortgage Loan is $7.5 million. At closing, $6.0 million was disbursed to the Company and $1.5 million was available for future disbursements, subject to certain conditions set forth in the loan agreement. The maturity date of the loan is July 31, 2015, with two one-year extension options, subject to certain conditions contained in the loan documents. The Rickenbacker Mortgage Loan bears interest at a floating rate equal to 250 basis points over one-month LIBOR. Monthly payments are interest only during the initial term of the loan. KBS REIT Properties is providing a guaranty of 25% of the outstanding principal amount of the loan.

26

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2012
(unaudited)

10.
DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates on its variable rate real estate loans receivable and notes payable. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. When the Company purchases or originates a variable rate debt instrument for investment, or obtains variable rate financing, it considers several factors in determining whether or not to use a derivative instrument to hedge the related interest rate risk. These factors include the Company’s return objectives, the expected life of the investment, the expected life of the financing instrument, interest rates, costs to purchase hedging instruments, the terms of the debt investment, the terms of the financing instrument, the overall interest rate risk exposure of the Company, and other factors.
The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. All of the Company’s derivative instruments are designated as cash flow hedges.
The following table summarizes the notional and fair value of the Company’s derivative financial instruments as of September 30, 2012 and December 31, 2011. The notional value is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
Fair Value of Asset (Liability)
Derivative Instruments
 
Effective    
Date
 
Maturity    
Date
 
Notional    
Valu