Table of Contents

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 March 31, 2018
OR
¨
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 000-54687
______________________________________________________
 
KBS REAL ESTATE INVESTMENT TRUST III, INC.
(Exact Name of Registrant as Specified in Its Charter)
______________________________________________________
 
Maryland
 
27-1627696
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
800 Newport Center Drive, Suite 700
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   ¨
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   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
¨
 
Accelerated Filer
 
¨
Non-Accelerated Filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     ¨
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 May 4, 2018 , there were 177,842,487 outstanding shares of common stock of KBS Real Estate Investment Trust III, Inc.

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST III, INC.
FORM 10-Q
March 31, 2018
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
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
March 31, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate:
 
 
 
 
Land
 
$
390,685

 
$
390,685

Buildings and improvements
 
2,696,747

 
2,680,838

Construction in progress
 
79,958

 
67,826

Tenant origination and absorption costs
 
225,407

 
230,576

Total real estate held for investment, cost
 
3,392,797

 
3,369,925

Less accumulated depreciation and amortization
 
(463,090
)
 
(435,808
)
Total real estate held for investment, net
 
2,929,707

 
2,934,117

Real estate held for sale, net
 
28,021

 
28,017

Total real estate, net
 
2,957,728

 
2,962,134

Cash and cash equivalents
 
59,065

 
65,486

Investment in unconsolidated joint venture
 
34,401

 
33,997

Rents and other receivables, net
 
84,772

 
79,317

Above-market leases, net
 
5,423

 
5,861

Assets related to real estate held for sale, net
 
1,791

 
1,786

Prepaid expenses and other assets
 
97,390

 
72,226

Total assets
 
$
3,240,570

 
$
3,220,807

Liabilities and equity
 
 
 
 
Notes payable, net
 
 
 
 
Notes payable related to real estate held for investment, net
 
$
2,004,854

 
$
1,920,138

Note payable related to real estate held for sale, net
 
21,672

 
21,648

Total notes payable, net
 
2,026,526

 
1,941,786

Accounts payable and accrued liabilities
 
65,220

 
71,012

Due to affiliate
 
3,411

 
3,239

Distributions payable
 
9,836

 
9,982

Below-market leases, net
 
22,787

 
24,610

Liabilities related to real estate held for sale, net
 
47

 
50

Redeemable common stock payable
 
9,232

 
18,870

Other liabilities
 
31,133

 
30,935

Total liabilities
 
2,168,192

 
2,100,484

Commitments and contingencies (Note 10)
 


 


Redeemable common stock
 
5,041

 
40,915

Equity
 
 
 
 
KBS Real Estate Investment Trust III, Inc. stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value per share; 10,000,000 shares authorized, no shares issued and outstanding
 
—

 
—

Common stock, $.01 par value per share; 1,000,000,000 shares authorized, 176,993,282 and 180,864,707 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
 
1,770

 
1,809

Additional paid-in capital
 
1,591,679

 
1,591,640

Cumulative distributions and net losses
 
(526,594
)
 
(514,451
)
Accumulated other comprehensive income
 
182

 
110

Total KBS Real Estate Investment Trust III, Inc. stockholders’ equity
 
1,067,037

 
1,079,108

Noncontrolling interest
 
300

 
300

Total equity
 
1,067,337

 
1,079,408

Total liabilities and equity
 
$
3,240,570

 
$
3,220,807

See accompanying condensed notes to consolidated financial statements.
 

2
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
Three Months Ended March 31,
 
2018
 
2017
Revenues:
 
 
 
Rental income
$
78,964

 
$
80,821

Tenant reimbursements
19,500

 
19,105

Other operating income
5,715

 
5,474

Total revenues
104,179

 
105,400

Expenses:
 
 
 
Operating, maintenance and management
23,153

 
22,489

Real estate taxes and insurance
16,774

 
15,922

Asset management fees to affiliate
6,620

 
6,205

General and administrative expenses
1,523

 
1,224

Depreciation and amortization
38,982

 
41,695

Interest expense
810

 
12,901

Total expenses
87,862

 
100,436

Other income (loss):
 
 
 
Other income
301

 
—

Other interest income
12

 
23

Equity in loss of unconsolidated joint venture
—

 
(1
)
Total other income, net
313

 
22

Net income
16,630

 
4,986

Net loss attributable to noncontrolling interest
—

 
—

Net income attributable to common stockholders
$
16,630

 
$
4,986

Net income per common share attributable to common stockholders, basic and diluted
$
0.09

 
$
0.03

Weighted-average number of common shares outstanding, basic and diluted
179,537,623

 
181,445,091

See accompanying condensed notes to consolidated financial statements.

3
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
16,630

 
$
4,986

Other comprehensive income (loss):
 
 
 
Unrealized income on derivative instruments designated as cash flow hedges
84

 
725

Reclassification adjustment realized in net income (effective portion)
(12
)
 
894

Total other comprehensive income
72

 
1,619

Total comprehensive income
16,702

 
6,605

Total comprehensive income attributable to noncontrolling interest
—

 
—

Total comprehensive income attributable to common stockholders
$
16,702

 
$
6,605

See accompanying condensed notes to consolidated financial statements.


4
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2017 and the Three Months Ended March 31, 2018 (unaudited)
(dollars in thousands)
 
 
 
Common Stock
 
Additional Paid-in Capital
 
Cumulative Distributions and Net Income (Losses)
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interest
 
Total Equity
 
 
Shares
 
Amounts
 
 
 
 
 
Balance, December 31, 2016
 
180,890,572

 
$
1,809

 
$
1,591,652

 
$
(398,087
)
 
$
(2,298
)
 
$
1,193,076

 
$
300

 
$
1,193,376

Net income
 
—

 
—

 
—

 
1,374

 
—

 
1,374

 
—

 
1,374

Other comprehensive income
 
—

 
—

 
—

 
—

 
2,408

 
2,408

 
—

 
2,408

Issuance of common stock
 
5,919,223

 
59

 
59,726

 
—

 
—

 
59,785

 
—

 
59,785

Transfers from redeemable common stock
 
—

 
—

 
2,086

 
—

 
—

 
2,086

 
—

 
2,086

Redemptions of common stock
 
(5,945,088
)
 
(59
)
 
(61,812
)
 
—

 
—

 
(61,871
)
 
—

 
(61,871
)
Distributions declared
 
—

 
—

 
—

 
(117,738
)
 
—

 
(117,738
)
 
—

 
(117,738
)
Other offering costs
 
—

 
—

 
(12
)
 
—

 
—

 
(12
)
 
—

 
(12
)
Balance, December 31, 2017
 
180,864,707

 
$
1,809

 
$
1,591,640

 
$
(514,451
)
 
$
110

 
$
1,079,108

 
$
300

 
$
1,079,408

Net income
 
—

 
—

 
—

 
16,630

 
—

 
16,630

 
—

 
16,630

Other comprehensive income
 
—

 
—

 
—

 
—

 
72

 
72

 
—

 
72

Issuance of common stock
 
1,280,085

 
13

 
14,260

 
—

 
—

 
14,273

 
—

 
14,273

Transfers from redeemable common stock
 
—

 
—

 
45,511

 
—

 
—

 
45,511

 
—

 
45,511

Redemptions of common stock
 
(5,151,510
)
 
(52
)
 
(59,732
)
 
—

 
—

 
(59,784
)
 
—

 
(59,784
)
Distributions declared
 
—

 
—

 
—

 
(28,773
)
 
—

 
(28,773
)
 
—

 
(28,773
)
Balance, March 31, 2018
 
176,993,282

 
$
1,770

 
$
1,591,679

 
$
(526,594
)
 
$
182

 
$
1,067,037

 
$
300

 
$
1,067,337

See accompanying condensed notes to consolidated financial statements.

5
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
16,630

 
$
4,986

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
38,982

 
41,695

Equity in loss of unconsolidated joint venture
 
—

 
1

Deferred rents
 
(3,624
)
 
(4,063
)
Bad debt (recovery) expense
 
(232
)
 
211

Amortization of above- and below-market leases, net
 
(1,371
)
 
(1,571
)
Amortization of deferred financing costs
 
1,549

 
1,210

Unrealized gains on derivative instruments
 
(18,037
)
 
(2,538
)
Changes in operating assets and liabilities:
 
 
 
 
Rents and other receivables
 
(1,621
)
 
(4,069
)
Prepaid expenses and other assets
 
(12,415
)
 
(12,834
)
Accounts payable and accrued liabilities
 
(10,606
)
 
(6,857
)
Other liabilities
 
1,843

 
3,207

Due from affiliate
 
—

 
(223
)
Due to affiliates
 
10

 
(58
)
Net cash provided by operating activities
 
11,108

 
19,097

Cash Flows from Investing Activities:
 
 
 
 
Improvements to real estate
 
(21,155
)
 
(15,218
)
Payments for construction in progress
 
(7,279
)
 
(11,213
)
Investment in unconsolidated joint venture
 
(311
)
 
(32,773
)
Escrow deposits for tenant improvements
 
—

 
(7,744
)
Insurance proceeds received for property damage
 
2,544

 
—

Net cash used in investing activities
 
(26,201
)
 
(66,948
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes payable
 
83,875

 
59,675

Principal payments on notes payable
 
(747
)
 
(532
)
Payments of deferred financing costs
 
(26
)
 
(1,162
)
Payments to redeem common stock
 
(59,784
)
 
(12,482
)
Payments of other offering costs
 
—

 
(1
)
Distributions paid to common stockholders
 
(14,646
)
 
(14,067
)
Net cash provided by financing activities
 
8,672

 
31,431

Net decrease in cash and cash equivalents
 
(6,421
)
 
(16,420
)
Cash and cash equivalents, beginning of period
 
65,486

 
72,068

Cash and cash equivalents, end of period
 
$
59,065

 
$
55,648

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Interest paid, net of capitalized interest of $1,070 and $170 for the three months ended March 31, 2018 and 2017, respectively
 
$
16,807

 
$
13,527

Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
 
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan
 
$
14,273

 
$
14,987

Increase in construction in progress payable
 
$
4,656

 
$
—

Increase in acquisition fee related to construction in progress due to affiliate
 
$
69

 
$
117

Increase in acquisition fee on unconsolidated joint venture due to affiliate
 
$
93

 
$
—

See accompanying condensed notes to consolidated financial statements.

6
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited)



1.
ORGANIZATION
KBS Real Estate Investment Trust III, Inc. (the “Company”) was formed on December 22, 2009 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2011 and it intends to continue to operate in such manner. Substantially all of the Company’s business is conducted through KBS Limited Partnership III (the “Operating Partnership”), a Delaware limited partnership. The Company is the sole general partner of and owns a 0.1% partnership interest in the Operating Partnership. KBS REIT Holdings III LLC (“REIT Holdings III”), the limited partner of the Operating Partnership, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings III.
Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company entered into with the Advisor (the “Advisory Agreement”). On January 26, 2010, the Company issued 20,000  shares of its common stock to the Advisor at a purchase price of $10.00  per share. As of March 31, 2018 , the Advisor owned 20,000 shares of the Company’s common stock.
The Company owns a diverse portfolio of real estate investments. As of March 31, 2018 , the Company owned 28 office properties ( one of which was held for sale) and one mixed-use office/retail property and had made an investment in an unconsolidated joint venture to develop and subsequently operate an office/retail property, which is currently under construction. Additionally, as of March 31, 2018 , the Company had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project, which is currently under construction.
The Company commenced its initial public offering (the “Offering”) on October 26, 2010. Upon commencing the Offering, the Company retained KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Company, to serve as the dealer manager of the Offering pursuant to a dealer manager agreement, as amended and restated (the “Dealer Manager Agreement”). The Company ceased offering shares of common stock in the primary Offering on May 29, 2015 and terminated the primary Offering on July 28, 2015.
The Company sold 169,006,162 shares of common stock in the primary Offering for gross proceeds of $1.7 billion . As of March 31, 2018 , the Company had also sold 24,172,536 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $239.0 million . Also as of March 31, 2018 , the Company had redeemed 16,463,879 shares sold in the Offering for $174.2 million .
Additionally, on October 3, 2014, the Company issued 258,462 shares of common stock for $2.4 million in private transactions exempt from the registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933.
The Company continues to offer shares of common stock under its dividend reinvestment plan. In some states, the Company will need to renew the registration statement annually or file a new registration statement to continue its dividend reinvestment plan offering. The Company may terminate its dividend reinvestment plan offering at any time.
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, 2017 , except for the Company’s adoption of the revenue recognition standards issued by the Financial Accounting Standards Board (“FASB”) effective on January 1, 2018. 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, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

7
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(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 Accounting Standards Codification (“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 months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The consolidated financial statements include the accounts of the Company, REIT Holdings III, the Operating Partnership, their direct and indirect wholly owned subsidiaries, and a joint venture in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.
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 condensed notes. Actual results could materially differ from those estimates.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s adoption.  Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018.  A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. The Company elected to apply this standard only to contracts that were not completed as of January 1, 2018. 
Based on the Company’s evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. For the three months ended March 31, 2018 , tenant reimbursements for substantial services accounted for under ASU No. 2014-09 was $1.6 million which was included in tenant reimbursements on the accompanying statements of operations.
Sales of Real Estate
Prior to January 1, 2018, gains on real estate sold were recognized using the full accrual method at closing when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. Gain on sales of real estate may have been deferred in whole or in part until the requirements for gain recognition had been met.
Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which  applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business.  Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20.

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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09.  Under ASC 610-20, if the Company determines it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. 
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 months ended March 31, 2018 and 2017 , respectively.
Distributions declared per common share were $ 0.160 and $ 0.160 for the three months ended March 31, 2018 and 2017 , respectively. Distributions declared per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2018 and 2017 , respectively. For each day that was a record date for distributions during the three months ended March 31, 2018 and 2017 , distributions were calculated at a rate of $0.00178082 per share per day. Each day during the periods from January 1, 2017 through March 31, 2017 and January 1, 2018 through March 31, 2018 was a record date for distributions.
Segments
The Company has invested in core real estate properties and real estate-related investments with the goal of acquiring a portfolio of income-producing investments.  The Company’s real estate properties exhibit similar long-term financial performance and have similar economic characteristics to each other.  As of March 31, 2018 , the Company aggregated its investments in real estate properties into one reportable business segment. 
Recently Issued Accounting Standards Update
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires lessors to identify lease and non-lease components under their leasing arrangements and allocate the total consideration in the lease agreement to these lease and non-lease components based on their relative standalone selling prices. Non-lease components will be subject to the new revenue recognition standard upon the Company’s adoption of the new leasing standard on January 1, 2019. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In March 2018, the FASB affirmed a proposed amendment to the leases ASU, which would add a transition option to the new leases standard that would allow entities to apply the transition provisions of the new standard at its adoption date instead of the earliest comparative periods presented in its financial statements. The FASB also tentatively approved a practical expedient that would permit lessors to not separate lease and non-lease components if certain conditions are met. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements and if adopted by the FASB, applying the transition option and electing the practical expedient of the proposed amendment.

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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”).  ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income.  The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.  ASU No. 2016-13 also amends the impairment model for available-for-sale securities.  An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required.   ASU No. 2016-13 also requires new disclosures.  For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes.  For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.  ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.

10
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

3.
REAL ESTATE
Real Estate Held for Investment
As of March 31, 2018 , the Company’s real estate portfolio held for investment was composed of 27 office properties and one mixed-use office/retail property encompassing in the aggregate approximately 10.9 million rentable square feet. In addition, the Company had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project, which is currently under construction. As of March 31, 2018 , the Company’s real estate portfolio was collectively 92% occupied. The following table summarizes the Company’s investments in real estate as of March 31, 2018 (in thousands):
Property
 
Date Acquired
 
City
 
State
 
Property Type
 
Total Real Estate,
at Cost
 
Accumulated Depreciation and Amortization
 
Total Real Estate, Net
Domain Gateway
 
09/29/2011
 
Austin
 
TX
 
Office
 
$
47,482

 
$
(14,074
)
 
$
33,408

Town Center
 
03/27/2012
 
Plano
 
TX
 
Office
 
115,755

 
(25,893
)
 
89,862

McEwen Building
 
04/30/2012
 
Franklin
 
TN
 
Office
 
37,156

 
(7,509
)
 
29,647

Gateway Tech Center
 
05/09/2012
 
Salt Lake City
 
UT
 
Office
 
24,598

 
(5,962
)
 
18,636

Tower on Lake Carolyn
 
12/21/2012
 
Irving
 
TX
 
Office
 
51,508

 
(11,053
)
 
40,455

RBC Plaza
 
01/31/2013
 
Minneapolis
 
MN
 
Office
 
153,814

 
(33,155
)
 
120,659

One Washingtonian Center
 
06/19/2013
 
Gaithersburg
 
MD
 
Office
 
91,463

 
(16,274
)
 
75,189

Preston Commons
 
06/19/2013
 
Dallas
 
TX
 
Office
 
118,047

 
(20,714
)
 
97,333

Sterling Plaza
 
06/19/2013
 
Dallas
 
TX
 
Office
 
79,761

 
(12,426
)
 
67,335

201 Spear Street
 
12/03/2013
 
San Francisco
 
CA
 
Office
 
143,531

 
(13,265
)
 
130,266

500 West Madison
 
12/16/2013
 
Chicago
 
IL
 
Office
 
438,217

 
(65,896
)
 
372,321

222 Main
 
02/27/2014
 
Salt Lake City
 
UT
 
Office
 
161,387

 
(26,283
)
 
135,104

Anchor Centre
 
05/22/2014
 
Phoenix
 
AZ
 
Office
 
95,149

 
(14,402
)
 
80,747

171 17th Street
 
08/25/2014
 
Atlanta
 
GA
 
Office
 
133,415

 
(23,055
)
 
110,360

Reston Square
 
12/03/2014
 
Reston
 
VA
 
Office
 
46,816

 
(7,282
)
 
39,534

Ten Almaden
 
12/05/2014
 
San Jose
 
CA
 
Office
 
122,256

 
(13,976
)
 
108,280

Towers at Emeryville
 
12/23/2014
 
Emeryville
 
CA
 
Office
 
271,090

 
(29,530
)
 
241,560

101 South Hanley
 
12/24/2014
 
St. Louis
 
MO
 
Office
 
71,720

 
(9,466
)
 
62,254

3003 Washington Boulevard
 
12/30/2014
 
Arlington
 
VA
 
Office
 
151,134

 
(16,416
)
 
134,718

Village Center Station
 
05/20/2015
 
Greenwood Village
 
CO
 
Office
 
78,183

 
(10,599
)
 
67,584

Park Place Village
 
06/18/2015
 
Leawood
 
KS
 
Office/Retail
 
128,678

 
(14,819
)
 
113,859

201 17th Street
 
06/23/2015
 
Atlanta
 
GA
 
Office
 
102,620

 
(11,430
)
 
91,190

Promenade I & II at Eilan
 
07/14/2015
 
San Antonio
 
TX
 
Office
 
62,643

 
(7,497
)
 
55,146

CrossPoint at Valley Forge
 
08/18/2015
 
Wayne
 
PA
 
Office
 
90,352

 
(9,260
)
 
81,092

515 Congress
 
08/31/2015
 
Austin
 
TX
 
Office
 
118,766

 
(12,265
)
 
106,501

The Almaden
 
09/23/2015
 
San Jose
 
CA
 
Office
 
167,501

 
(13,696
)
 
153,805

3001 Washington Boulevard
 
11/06/2015
 
Arlington
 
VA
 
Office
 
57,135

 
(3,532
)
 
53,603

Carillon
 
01/15/2016
 
Charlotte
 
NC
 
Office
 
152,662

 
(13,361
)
 
139,301

Hardware Village (1)
 
08/26/2016
 
Salt Lake City
 
UT
 
Development/Apartment
 
79,958

 
—

 
79,958

 
 
 
 
 
 
 
 
 
 
$
3,392,797

 
$
(463,090
)
 
$
2,929,707

_____________________
(1) On August 26, 2016, the Company, through an indirect wholly-owned subsidiary, entered into a joint venture (the “Hardware Village Joint Venture”) to develop and subsequently operate a multifamily apartment complex, located on the developable land at Gateway Tech Center. The Company owns a 99.24% equity interest in the joint venture.


11
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

As of March 31, 2018 , the following property represented more than 10% of the Company’s total assets:
Property
 
Location
 
Rentable
Square Feet
 
Total Real Estate, Net
(in thousands)
 
Percentage
of Total Assets
 
Annualized Base Rent
(in thousands) (1)
 
Average Annualized Base Rent per sq. ft.
 
Occupancy
500 West Madison
 
Chicago, IL
 
1,457,724

 
$
372,321

 
11.5
%
 
$
33,324

 
$
28.37

 
80.6
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of March 31, 2018 , adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.
Operating Leases
The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2018 , the leases had remaining terms, excluding options to extend, of up to 13.8 years with a weighted-average remaining term of 4.4 years . Some of the leases have provisions to extend the term of the leases, options for early termination for all or a part of the leased premises after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. 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 the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. 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 $11.6 million and $11.5 million as of March 31, 2018 and December 31, 2017 , respectively.
During the three months ended March 31, 2018 and 2017 , the Company recognized deferred rent from tenants of $3.6 million and $4.1 million , respectively. As of March 31, 2018 and December 31, 2017 , the cumulative deferred rent balance was $78.2 million and $74.4 million , respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $9.1 million and $9.3 million of unamortized lease incentives as of March 31, 2018 and December 31, 2017 , respectively.
As of March 31, 2018 , the future minimum rental income from the Company’s properties under its non-cancelable operating leases was as follows (in thousands):
April 1, 2018 through December 31, 2018
$
223,171

2019
280,816

2020
248,987

2021
219,360

2022
185,290

Thereafter
530,492

 
$
1,688,116


12
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

As of March 31, 2018 , the Company’s real estate properties were leased to approximately 900 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentration (greater than 10% of annualized base rent) was as follows:
Industry
 
Number of Tenants
 
Annualized Base Rent (1)
(in thousands)
 
Percentage of Annualized Base Rent
Finance
 
151
 
$
60,743

 
19.9
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of March 31, 2018 , adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.
As of March 31, 2018 , no other tenant industries accounted for more than 10% of annualized base rent and no tenant accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.
Geographic Concentration Risk
As of March 31, 2018 , the Company’s net investments in real estate in California, Texas and Illinois represented 20% , 15% and 11% of the Company’s total assets, respectively.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California, Texas and Illinois real estate markets.  Any adverse economic or real estate developments in these markets, 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 and its ability to pay distributions to stockholders.
Property Damage
In December 2017, 222 Main located in Salt Lake City, Utah suffered physical damages due to a broken sprinkler pipe. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to $5,000 per incident. Based on management’s estimates, the Company recognized an estimated aggregate loss due to damages of $7.9 million during the year ended December 31, 2017, which was reduced by $7.9 million of estimated insurance recoveries related to such damages, which the Company determined were probable of collection. The aggregate net loss of $5,000 due to damages during the year ended December 31, 2017 was classified as operating, maintenance and management expenses in the Company’s consolidated statement of operations for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC and relates to the Company’s insurance deductible. During the three months ended March 31, 2018 , the Company received $2.5 million in insurance recoveries relating to the property damage.
During the three months ended March 31, 2018 , the Company recorded $0.5 million of business interruption insurance recovery, which is included in rental income on the accompanying consolidated statements of operations. During the three months ended March 31, 2018 , the Company received $1.1 million of business interruption insurance recovery, consisting of $0.7 million of revenue related to the year ended December 31, 2017 and $0.4 million of revenue related to January and February 2018.
As of March 31, 2018 , the Company recorded $5.5 million of insurance recoveries receivable, which is included in prepaid expenses and other assets on the accompanying consolidated balance sheet.

13
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

Real Estate Held for Sale
In accordance with ASU No. 2014-08,  Presentation of Financial Statements (Topic 205)   and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity  (“ASU No. 2014-08”), results of operations from properties that are classified as held for sale in the ordinary course of business would generally be included in continuing operations on the Company’s consolidated statements of operations. As of March 31, 2018 , the Company had classified one property as held for sale.
The results of operations for this property as of March 31, 2018 are included in continuing operations on the Company’s consolidated statements of operations. The following table summarizes certain revenues and expenses related to this property for the three months ended March 31, 2018 (in thousands):
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Revenues
 
 
 
 
Rental income
 
$
1,128

 
$
1,114

Tenant reimbursements and other operating income
 
84

 
30

Total revenues
 
$
1,212

 
$
1,144

Expenses
 
 
 
 
Operating, maintenance, and management
 
$
309

 
$
293

Real estate taxes and insurance
 
142

 
108

Asset management fees to affiliate
 
65

 
65

Depreciation and amortization
 
—

 
525

Interest expense
 
193

 
143

Total expenses
 
$
709

 
$
1,134

The following summary presents the major components of assets and liabilities related to real estate held for sale as of March 31, 2018 and December 31, 2017 (in thousands):
 
March 31, 2018
 
December 31, 2017
Assets related to real estate held for sale
 
 
 
Total real estate, at cost
$
33,579

 
$
33,575

Accumulated depreciation and amortization
(5,558
)
 
(5,558
)
Real estate held for sale, net
28,021

 
28,017

Other assets
1,791

 
1,786

Total assets related to real estate held for sale
$
29,812

 
$
29,803

Liabilities related to real estate held for sale
 
 
 
Notes payable, net
21,672

 
21,648

Other liabilities
47

 
50

Total liabilities related to real estate held for sale
$
21,719

 
$
21,698



14
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

4.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES
As of March 31, 2018 and December 31, 2017 , 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
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
 
March 31, 2018
 
December 31, 2017
Cost
$
225,407

 
$
230,576

 
$
11,956

 
$
12,301

 
$
(45,734
)
 
$
(47,459
)
Accumulated Amortization
(111,051
)
 
(108,078
)
 
(6,533
)
 
(6,440
)
 
22,947

 
22,849

Net Amount
$
114,356

 
$
122,498

 
$
5,423

 
$
5,861

 
$
(22,787
)
 
$
(24,610
)
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 months ended March 31, 2018 and 2017 were as follows (in thousands):
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
For the Three Months Ended March 31,
 
For the Three Months Ended March 31,
 
For the Three Months Ended March 31,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Amortization
$
(8,142
)
 
$
(11,106
)
 
$
(456
)
 
$
(703
)
 
$
1,827

 
$
2,274


15
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

5.
INVESTMENT IN UNCONSOLIDATED JOINT VENTURE
Village Center Station II Equity Method Investment
On March 3, 2017, the Company, through an indirect wholly owned subsidiary, acquired a 75% equity interest in an existing company and created a joint venture (the “Village Center Station II Joint Venture”) with an unaffiliated developer, Shea Village Center Station II, LLC (the “Developer”) to develop and subsequently operate a 12-story office building and an adjacent two-story office/retail building in the Denver submarket of Greenwood Village, Colorado (together, “Village Center Station II”). The total projected cost of the development is approximately $113.1 million and the Company’s initial capital contribution to the Village Center Station II Joint Venture was $32.3 million . The Village Center Station II Joint Venture intends to fund the construction of Village Center Station II with capital contributions from its members and proceeds from a construction loan for borrowings of up to $78.5 million . As of March 31, 2018 , $51.6 million had been drawn under the construction loan. The Company has concluded that the Village Center Station II Joint Venture qualifies as a Variable Interest Entity (“VIE”) and determined that it is not the primary beneficiary of this VIE and to account for its investment in the project under the equity method of accounting. Under the joint venture agreement, the Company may be required to contribute up to 75% of additional requested contributions to the Village Center Station II Joint Venture. The Developer will fund all cost overruns (excluding certain overruns described in the Charter Communications lease) once the Village Center Station II Joint Venture has used all available funds in the development of Village Center Station II. Upon completion of Village Center Station II, the Company expects to purchase the Developer’s 25% equity interest. The Developer has an option, provided the put conditions have been satisfied, the most significant of which is completion of the project, to require the Company to purchase its 25% equity interest. If the Developer does not make such request, the Company has the right to purchase the Developer’s 25% equity interest. The expected purchase price of the Developer’s 25% equity interest is approximately $25.0 million .
As of March 31, 2018 , the book value of the Company’s investment in the Village Center Station II Joint Venture was $34.4 million which includes $2.1 million of acquisition costs and capitalized interest incurred directly by the Company. As of March 31, 2018 , the Company’s maximum loss exposure related to its investment in the Village Center Station II Joint Venture is equal to the carrying value of its $34.4 million investment.
Summarized financial information for the Village Center Station II Joint Venture follows (in thousands):
 
 
March 31, 2018
Assets:
 
 
Construction in progress
 
$
99,393

      Cash and cash equivalents
 
48

      Other assets
 
2,290

Total assets
 
$
101,731

Liabilities and equity:
 
 
Accounts payable
 
$
6,740

Notes payable, net
 
51,646

      Other liabilities
 
230

      Members’ capital
 
43,115

Total liabilities and equity
 
$
101,731


16
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

6.
NOTES PAYABLE
As of March 31, 2018 and December 31, 2017 , the Company’s notes payable consisted of the following (dollars in thousands):
 
 
Book Value as of
March 31, 2018
 
Book Value as of
December 31, 2017
 
Contractual Interest Rate as of
March 31, 2018 (1)
 
Effective Interest Rate as of
March 31, 2018 (1)
 
Payment Type
 
Maturity Date (2)
Portfolio Loan (4)
 
$
188,460

 
$
188,460

 
One-month LIBOR + 1.90%
 
3.56%
 
Interest Only
 
06/01/2019
222 Main Mortgage Loan
 
98,990

 
99,471

 
3.97%
 
3.97%
 
Principal & Interest
 
03/01/2021
Anchor Centre Mortgage Loan
 
50,000

 
50,000

 
One-month LIBOR + 1.50%
 
3.18%
 
Interest Only
 
06/01/2018
171 17th Street Mortgage Loan
 
85,084

 
85,292

 
One-month LIBOR + 1.45%
 
2.91%
 
Principal & Interest
 
09/01/2018
Reston Square Mortgage Loan
 
29,742

 
29,800

 
One-month LIBOR + 1.50%
 
3.71%
 
Principal & Interest
 
02/01/2019
101 South Hanley Mortgage Loan
 
41,345

 
40,557

 
One-month LIBOR + 1.55%
 
3.80%
 
Principal & Interest
 
01/01/2020
3003 Washington Boulevard Mortgage Loan
 
90,378

 
90,378

 
One-month LIBOR + 1.55%
 
3.54%
 
Interest Only
 
02/01/2020
Rocklin Corporate Center Mortgage Loan
 
21,689

 
21,689

 
One-month LIBOR + 1.50%
 
3.16%
 
Interest Only
 
06/05/2018
201 17th Street Mortgage Loan
 
64,428

 
64,428

 
One-month LIBOR + 1.40%
 
3.43%
 
Interest Only
 
08/01/2018
CrossPoint at Valley Forge Mortgage Loan
 
51,000

 
51,000

 
One-month LIBOR + 1.50%
 
3.33%
 
Interest Only (3)
 
09/01/2022
The Almaden Mortgage Loan
 
93,000

 
93,000

 
4.20%
 
4.20%
 
Interest Only
 
01/01/2022
Promenade I & II at Eilan Mortgage Loan
 
37,300

 
37,300

 
One-month LIBOR + 1.75%
 
3.57%
 
Interest Only
 
10/01/2022
515 Congress Mortgage Loan
 
69,135

 
68,381

 
One-month LIBOR + 1.70%
 
3.62%
 
Interest Only
 
11/01/2020
201 Spear Street Mortgage Loan
 
100,000

 
100,000

 
One-month LIBOR + 1.66%
 
3.33%
 
Interest Only
 
01/01/2019
Carillon Mortgage Loan
 
91,055

 
90,248

 
One-month LIBOR + 1.65%
 
3.32%
 
Interest Only
 
02/01/2020
3001 Washington Boulevard Mortgage Loan
 
28,404

 
28,404

 
One-month LIBOR + 1.60%
 
3.03%
 
Interest Only
 
02/01/2019
Hardware Village Loan Facility (5)
 
24,537

 
21,011

 
One-month LIBOR + 3.25%
 
4.92%
 
Interest Only
 
02/23/2020
Portfolio Loan Facility (6)
 
875,500

 
797,500

 
One-month LIBOR + 1.80%
 
3.76%
 
Interest Only
 
11/03/2020
Total notes payable principal outstanding
 
2,040,047

 
1,956,919

 
 
 
 
 
 
 
 
Deferred financing costs, net
 
(13,521
)
 
(15,133
)
 
 
 
 
 
 
 
 
Total notes payable, net
 
$
2,026,526

 
$
1,941,786

 
 
 
 
 
 
 
 

17
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2018 . Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2018 (consisting of the contractual interest rate and the effect of interest rate swaps and caps, if applicable), using interest rate indices as of March 31, 2018 , where applicable. For further information regarding the Company's derivative instruments, see Note 7, “Derivative Instruments.”
(2) Represents the maturity date as of March 31, 2018 ; subject to certain conditions, the maturity dates of certain loans may be extended beyond the dates shown.
(3) Represents the payment type required under the loan as of March 31, 2018 . Certain future monthly payments due under the loan also include amortizing principal payments. For more information on the Company’s contractual obligations under its notes payable, see the five-year maturity table below.
(4) As of March 31, 2018 , the Portfolio Loan was secured by Domain Gateway, the McEwen Building, Gateway Tech Center, the Tower on Lake Carolyn, Park Place Village and Village Center Station. The face amount of the Portfolio Loan is $ 255.0 million , of which $ 127.5 million is term debt and $ 127.5 million is revolving debt. As of March 31, 2018 , the outstanding balance under the loan consisted of $127.5 million of term debt and $61.0 million of revolving debt. As of March 31, 2018 , an additional $65.5 million of revolving debt remained available for immediate future disbursements, subject to certain conditions set forth in the loan agreement. The remaining $1.0 million of revolving debt is available for future disbursements upon the Company meeting certain financial coverage ratios and subject to certain conditions set forth in the loan agreement. During the remaining term of the Portfolio Loan, the Company has an option, which may be exercised up to two times, to increase the loan amount to a maximum of $350.0 million , of which 50% would be term debt and 50% would be revolving debt, with the addition of one or more properties to secure the Portfolio Loan, subject to certain conditions contained in the loan documents.
(5) As of March 31, 2018 , $24.5 million had been disbursed and $49.5 million remained available for future disbursements, subject to certain conditions contained in the loan documents.
(6) As of March 31, 2018 , the Portfolio Loan Facility was secured by RBC Plaza, Preston Commons, Sterling Plaza, One Washingtonian Center, Towers at Emeryville, Ten Almaden, Town Center and 500 West Madison. The face amount of the Portfolio Loan Facility is $1.01 billion , of which $757.5 million is term debt and $252.5 million is revolving debt. As of March 31, 2018 , the outstanding balance under the loan consisted of $757.5 million of term debt and $118.0 million of revolving debt. As of March 31, 2018 , an additional $134.5 million of revolving debt remained available for immediate future disbursements, subject to certain conditions set forth in the loan agreement. During the remaining term of the Portfolio Loan Facility, the Company has an option to increase the loan amount by up to an additional $400.0 million in increments of $25.0 million , to a maximum of $1.41 billion , of which 75% would be term debt and 25% would be revolving debt, subject to certain conditions contained in the loan documents.
During the three months ended March 31, 2018 and 2017 , the Company incurred $0.8 million and $12.9 million of interest expense, respectively. Included in interest expense was: (i) the amortization of deferred financing costs of $1.6 million and $1.2 million for the three months ended March 31, 2018 and 2017 , respectively, and (ii) interest expense (including gains and losses) incurred as a result of the Company’s derivative instruments, which reduced interest expense by $16.9 million and $0.1 million for the three months ended March 31, 2018 and 2017 , respectively. Additionally, during the three months ended March 31, 2018 and 2017 , the Company capitalized $1.1 million and $0.2 million of interest related to construction in progress, respectively. As of March 31, 2018 and December 31, 2017 , $6.5 million and $6.1 million of interest expense were payable, respectively.
The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of March 31, 2018 (in thousands):
April 1, 2018 through December 31, 2018
 
$
223,327

2019
 
348,924

2020
 
1,193,250

2021
 
93,957

2022
 
180,589

 
 
$
2,040,047

The Company’s notes payable contain financial debt covenants. As of March 31, 2018 , the Company was in compliance with these debt covenants.

18
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

7.
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. 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. The Company does not enter into derivatives for speculative purposes.
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.
The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are 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 interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.
The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of March 31, 2018 and December 31, 2017 . The notional amount 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):
 
 
March 31, 2018
 
December 31, 2017
 
 
 
Weighted-Average
 Fix Pay Rate
 
Weighted-Average Remaining
Term in Years
Derivative Instruments
 
Number of Instruments
 
Notional Amount
 
Number of Instruments
 
Notional Amount
 
Reference Rate as of
March 31, 2018
 
 
Derivative instruments designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Swaps
 
2
 
$
118,400

 
2
 
$
118,400

 
One-month LIBOR/
Fixed at 1.41% - 1.68%
 
1.53%
 
0.3
Derivative instruments not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Swaps
 
15
 
$
1,209,506

 
16
 
$
1,209,643

 
One-month LIBOR/
Fixed at 1.39% - 2.37%
 
1.97%
 
3.3

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of March 31, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
March 31, 2018
 
December 31, 2017
Derivative Instruments
 
Balance Sheet Location
 
Number of
Instruments
 
Fair Value
 
Number of
Instruments
 
Fair Value
Derivative instruments designated as hedging instruments
 
 
 
 
Interest Rate Swaps
 
Prepaid expenses and other assets, at fair value
 
2
 
$
182

 
1
 
$
128

Interest Rate Swaps
 
Other liabilities, at fair value
 
—
 
$
—

 
1
 
$
(18
)
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
 
Interest Rate Swaps
 
Prepaid expenses and other assets, at fair value
 
13
 
$
22,795

 
10
 
$
6,386

Interest Rate Swaps
 
Other liabilities, at fair value
 
2
 
$
(49
)
 
6
 
$
(1,677
)

19
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) and as other comprehensive income on the accompanying consolidated statements of equity. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flows.  The change in fair value of the ineffective portion is recognized directly in earnings. With respect to swap agreements that are terminated for which it remains probable that the original hedged forecasted transactions (i.e., LIBOR-based debt service payments) will occur, the loss related to the termination of these swap agreements is included in accumulated other comprehensive income (loss) and is reclassified into earnings over the period of the original forecasted hedged transaction. The change in fair value of a derivative instrument that is not designated as a cash flow hedge is recorded as interest expense in the accompanying consolidated statements of operations. The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations (in thousands):
 
For the Three Months Ended March 31,
 
2018
 
2017
Income statement related
 
 
 
Derivatives designated as hedging instruments
 
 
 
Amount of expense recognized on interest rate swaps (effective portion)
$
(12
)
 
$
894

 
(12
)
 
894

Derivatives not designated as hedging instruments
 
 
 
Realized loss recognized on interest rate swaps
1,108

 
1,543

Unrealized gains on interest rate swaps
(18,037
)
 
(2,538
)
 
(16,929
)
 
(995
)
Decrease in interest expense as a result of derivatives
$
(16,941
)
 
$
(101
)
 
 
 
 
Other comprehensive income related
 
 
 
Unrealized income on derivative instruments
$
84

 
$
725

During the three months ended March 31, 2018 and 2017 , there was no ineffective portion related to the change in fair value of the derivative instruments designated as cash flow hedges. During the next 12 months, the Company expects to recognize additional interest income related to derivative instruments designated as cash flow hedges. The present value of the unrealized income expected to be recognized over the next 12 months related to derivative instruments designated as cash flow hedges totaled $0.2 million as of March 31, 2018 and was included in accumulated other comprehensive income (loss).

20
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

8.
FAIR VALUE DISCLOSURES
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
•
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
•
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.
The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of assets and liabilities for which it is practicable to estimate the fair value:
Cash and cash equivalents, rent and other receivables, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.
Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk. The fair value of interest rate caps (floors) are determined using the market standard methodology of discounting the future expected cash payments (receipts) which would occur if variable interest rates rise above (below) the strike rate of the caps (floors). The variable interest rates used in the calculation of projected payments (receipts) on the caps (floors) are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities.
Notes payable: The fair values of the Company’s notes payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of a liability in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.

21
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

The following were the face values, carrying amounts and fair values of the Company’s notes payable as of March 31, 2018 and December 31, 2017 , which carrying amounts generally do not approximate the fair values (in thousands):
 
 
March 31, 2018
 
December 31, 2017
 
 
Face Value
 
Carrying Amount
 
Fair Value
 
Face Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Notes payable
 
$
2,040,047

 
$
2,026,526

 
$
2,038,482

 
$
1,956,919

 
$
1,941,786

 
$
1,950,965

Disclosure of the fair values of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Low levels of transaction volume for certain financial instruments have made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.
As of March 31, 2018 , the Company measured the following assets and liabilities at fair value (in thousands):
 
 
 
 
Fair Value Measurements Using
 
 
Total        
 
Quoted Prices in Active Markets 
for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)        
 
Significant Unobservable Inputs
(Level 3)         
Recurring Basis:
 
 
 
 
 
 
 
 
Asset derivatives - interest rate swaps
 
$
22,977

 
$
—

 
$
22,977

 
$
—

Liability derivatives - interest rate swaps
 
(49
)
 
—

 
(49
)
 
—

9.
RELATED PARTY TRANSACTIONS
The Company has entered into the Advisory Agreement with the Advisor and the Dealer Manager Agreement with the Dealer Manager. These agreements entitled the Advisor and/or the Dealer Manager to specified fees upon the provision of certain services with regard to the Offering and reimbursement of organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company and entitle the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate investments, the management of those investments, among other services, and the disposition of investments, as well as entitle the Advisor and/or the Dealer Manager to reimbursement of offering costs related to the dividend reinvestment plan incurred by the Advisor and the Dealer Manager on behalf of the Company and certain costs incurred by the Advisor in providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement. The Company has also entered into a fee reimbursement agreement with the Dealer Manager pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the DTCC Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve or served as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Strategic Opportunity REIT, Inc. (“KBS Strategic Opportunity REIT”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).

22
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS Strategic Opportunity REIT, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. In June 2017, the Company renewed its participation in the program, and the program is effective through June 30, 2018. As KBS REIT I was implementing its plan of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage.
Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2018 and 2017 , respectively, and any related amounts payable as of March 31, 2018 and December 31, 2017 (in thousands):
 
Incurred
 
Payable as of
 
Three Months Ended March 31,
 
March 31,
 
December 31,
 
2018
 
2017
 
2018
 
2017
Expensed
 
 
 
 
 
 
 
Asset management fees
$
6,620

 
$
6,205

 
$
2,289

 
$
2,262

Reimbursement of operating expenses (1)
146

 
141

 
104

 
121

Capitalized
 
 
 
 
 
 
 
Acquisition fee on development project
69

 
110

 
635

 
566

Acquisition fee on unconsolidated joint venture
93

 
324

 
383

 
290

Asset management fee on development project
—

 
48

 
—

 
—

Asset management fee on unconsolidated joint venture
—

 
14

 
—

 
—

 
$
6,928

 
$
6,842

 
$
3,411

 
$
3,239

_____________________
(1) Reimbursable operating expenses primarily consists of internal audit personnel costs, accounting software and cybersecurity related expenses incurred by the Advisor under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $89,000 and $65,000 for the three months ended March 31, 2018 and 2017 , respectively, and were the only type of employee costs reimbursed under the Advisory Agreement for the three months ended March 31, 2018 and 2017 , respectively. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition or origination fees or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company's direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company.

In connection with the Offering, the Company’s sponsor, KBS Holdings LLC, agreed to provide additional indemnification to one of the participating broker-dealers.  The Company agreed to add supplemental coverage to its directors’ and officers’ insurance coverage to insure the sponsor’s obligations under this indemnification agreement in exchange for reimbursement by the sponsor to the Company for all costs, expenses and premiums related to this supplemental coverage. During each of the three months ended March 31, 2018 and 2017 , the Advisor had not incurred any costs for the supplemental coverage obtained by the Company.
During the three months ended March 31, 2017 , the Advisor paid the Company a $0.2 million property insurance rebate.

23
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

Lease to Affiliate
On May 29, 2015, the indirect wholly owned subsidiary of the Company that owns 3003 Washington Boulevard entered into a lease with an affiliate of the Advisor for 5,046 rentable square feet, or approximately 2.3% of the total rentable square feet, at 3003 Washington Boulevard. The lease commenced on October 1, 2015 and terminates on August 31, 2019. The annualized base rent, which represents annualized contractual base rental income as of March 31, 2018 , adjusted to straight-line any contractual tenant concessions (including free rent) and rent increases from the lease’s inception through the balance of the lease term, for this lease is approximately $0.2 million , and the average annual rental rate (net of rental abatements) over the lease term is $46.38 per square foot. During the three months ended March 31, 2018 and 2017 , the Company recognized $0.1 million and $0.1 million of revenue related to this lease, respectively.
Prior to their approval of the lease, the Company’s conflicts committee and board of directors determined the lease to be fair and reasonable to the Company.
During the three months ended March 31, 2018 and 2017 , no other business transactions occurred between the Company and KBS REIT I, KBS REIT II, KBS Strategic Opportunity REIT, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, KBS Growth & Income REIT, the Advisor, the Dealer Manager or other KBS-affiliated entities.
10.
COMMITMENTS AND CONTINGENCIES
Economic Dependency
The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide the respective services, the Company will be required to obtain such services from other sources.
Legal Matters
From time to time, the Company may be party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.
Environmental
As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of March 31, 2018 .
11.
SUBSEQUENT EVENTS
The Company evaluates subsequent events up until the date the consolidated financial statements are issued.
Distributions Paid
On April 2, 2018 , the Company paid distributions of $9.8 million , which related to distributions declared for daily record dates for each day in the period from March 1, 2018 through March 31, 2018 . On May 1, 2018 , the Company paid distributions of $9.5 million , which related to distributions declared for daily record dates for each day in the period from April 1, 2018 through April 30, 2018 .

24
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS REAL ESTATE INVESTMENT TRUST III, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2018
(unaudited)

Distributions Authorized
On May 8, 2018 , the Company’s board of directors authorized distributions based on daily record dates for the period from June 1, 2018 through June 30, 2018 , which the Company expects to pay in July 2018 , and distributions based on daily record dates for the period from July 1, 2018 through July 31, 2018 , which the Company expects to pay in August 2018 . Investors may choose to receive cash distributions or purchase additional shares through the Company’s dividend reinvestment plan.
Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082  per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 5.54% annualized rate based on the Company's December 6, 2017 estimated value per share of $11.73 .
Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date
On May 8, 2018, the Company’s Board of Directors approved an increase of the funding available for the redemption of shares under the Company’s share redemption program by up to an additional $10.0 million for the May 2018 redemption date, with such increased amount to be used solely for redemptions sought in connection with a stockholder’s death, “Qualifying Disability” or “Determination of Incompetence” (each as defined in the share redemption program and together with redemptions sought in connection with a stockholder’s death, “Special Redemptions”) that are received in good order and eligible for redemption for the May 2018 redemption date.
Fourth Amended and Restated Share Redemption Program
On May 8, 2018, the Company’s Board of Directors approved the amendment and restatement of the Company’s share redemption program (as amended and restated, the “Fourth Amended and Restated SRP”), which amendment and restatement will be effective on June 8, 2018 . Pursuant to the Fourth Amended and Restated SRP, all redemptions other than Special Redemptions will be made at a price per share equal to 95% of the Company’s most recent estimated value per share as of the applicable redemption date. Special Redemptions will be made at a price per share equal to the Company’s most recent estimated value per share as of the applicable redemption date.
The Fourth Amended and Restated SRP provides that, for calendar year 2018 only, in addition to the number of shares that the Company could purchase with the amount of net proceeds from the sale of shares under the Company’s dividend reinvestment plan during calendar year 2017, the Company may redeem up to an additional $42.0 million of shares, less the actual dollar amount of Special Redemptions processed on the May 2018 redemption date (such difference, the “2018 Additional Funding”); provided, however, that once the Company has received requests for redemptions, whether in connection with Special Redemptions or otherwise, that if honored would result in the amount of the remaining 2018 Additional Funding being $10.0 million or less, the remaining $10.0 million of the 2018 Additional Funding shall be reserved exclusively for Special Redemptions. During any calendar year subsequent to calendar year 2018, once the Company has received requests for redemptions, whether in connection with Special Redemptions or otherwise, that if honored, and when combined with all prior redemptions made during the calendar year, would result in the amount of remaining funds available for the redemption of additional shares in such calendar year being $10.0 million or less, the last $10.0 million of available funds shall be reserved exclusively for Special Redemptions.
In addition, the notice provision of the program was amended to provide that the Company may amend, suspend or terminate the Fourth Amended and Restated SRP for any reason upon ten business days’ notice to the Company’s stockholders. The Company may provide notice by including such information in a (i) Current Report on Form 8-K or in its annual or quarterly reports, all publicly filed with the SEC or (ii) separate mailing to the stockholders.
There were no other material changes made in the Fourth Amended and Restated SRP.



25
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Real Estate Investment Trust III, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Real Estate Investment Trust III, Inc., a Maryland corporation, and, as required by context, KBS Limited Partnership III, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.
Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Real Estate Investment Trust III, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
•
We are dependent on KBS Capital Advisors LLC (“KBS Capital Advisors”), our advisor, to identify investments, to manage our investments and for the disposition of our investments.
•
All of our executive officers, our affiliated directors and other key real estate and debt finance professionals are also officers, affiliated directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and/or other KBS-affiliated entities. As a result, our executive officers, our affiliated directors, some of our key real estate and debt finance professionals, our advisor and its affiliates face conflicts of interest, including significant conflicts created by our advisor’s and its affiliates’ compensation arrangements with us and other KBS-sponsored programs and KBS-advised investors and conflicts in allocating time among us and these other programs and investors. Furthermore, these individuals may become employees of another KBS-sponsored program in an internalization transaction or, if we internalize our advisor, may not become our employees as a result of their relationship with other KBS-sponsored programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
•
Our advisor and its affiliates receive fees in connection with transactions involving the purchase or origination, management and disposition of our investments. Acquisition and asset management fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us. We may also pay significant fees during our listing/liquidation stage. Although most of the fees payable during our listing/liquidation stage are contingent on our stockholders first enjoying agreed-upon investment returns, the investment return thresholds may be reduced subject to approval by our conflicts committee and to other limitations in our charter. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase the risk of loss to our stockholders.
•
Our charter permits us to pay distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. As of March 31, 2018 , we had used a combination of cash flow from operations and proceeds from debt financings to fund distributions. From time to time during our operational stage, we may use proceeds from third party financings to fund at least a portion of distributions in anticipation of cash flow to be received in later periods. We may also fund such distributions from the sale of assets or from the maturity, payoff or settlement of any real estate-related investments, to the extent we make any such additional investments. If we pay distributions from sources other than our cash flow from operations, the overall return to our stockholders may be reduced.
•
We may incur debt until our total liabilities would exceed 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), and we may exceed this limit with the approval of the conflicts committee of our board of directors. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt such that our total liabilities would exceed this limit. High debt levels could limit the amount of cash we have available to distribute and could result in a decline in the value of an investment in us.

26
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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

•
We depend on tenants for the revenue generated by our real estate investments and, accordingly, the revenue generated by our real estate investments is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in occupancy (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our debt service obligations and limiting our ability to pay distributions to our stockholders.
•
Because investment opportunities that are suitable for us may also be suitable for other KBS-sponsored programs or KBS-advised investors, our advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.
•
We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes including, but not limited to: the repurchase of shares under our share redemption program; capital expenditures, tenant improvement costs and leasing costs related to our real estate properties; reserves required by any financings of our real estate investments; the acquisition or origination of real estate investments, which include payment of acquisition or origination fees to our advisor; and the repayment of debt. If such funds are not available from our dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.
•
Disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to stockholders. In addition, our real estate investments may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders.
•
Our charter does not require us to liquidate our assets and dissolve by a specified date, nor does our charter require our directors to list our shares for trading by a specified date. No public market currently exists for our shares of common stock, and we have no plans at this time to list our shares on a national securities exchange. Until our shares are listed, if ever, our stockholders may not sell their shares unless the buyer meets the applicable suitability and minimum purchase standards. Any sale must comply with applicable state and federal securities laws. In addition, our charter prohibits the ownership of more than 9.8% of our stock, unless exempted by our board of directors, which may inhibit large investors from purchasing our shares. Our shares cannot be readily sold and, if our stockholders are able to sell their shares, they would likely have to sell them at a substantial discount from the price our stockholders paid to acquire the shares and from our estimated value per share.
•
Because of the limitations on the dollar amount of shares that may be redeemed under our share redemption program and the number of shares that may be redeemed during a calendar year, it is likely that we will not be able to redeem all shares submitted for redemption during 2018. During any calendar year, we may redeem (i) only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year unless our board of directors authorizes additional funds for redemption and (ii) no more than 5% of the weighted average number of shares outstanding during the prior calendar year. On May 8, 2018, our board of directors approved (i) additional funds for the May 2018 redemption date to be used solely for redemptions sought in connection with a stockholder’s death, “Qualifying Disability” or “Determination of Incompetence” (each as defined in the share redemption program and together with redemptions sought in connection with a stockholder’s death, “Special Redemptions”) and (ii) the amendment and restatement of our share redemption program (as amended and restated, the “Fourth Amended and Restated SRP”), which amendment and restatement will be effective for the June 2018 redemption date and provides for, among other changes, additional funds for the redemption of shares for the remainder of calendar year 2018. For more information, see Part II, Item 5, “Other Information - Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date” and “ - Fourth Amended and Restated Share Redemption Program.”
All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission (the “SEC”) and in Part II, Item 1A herein.

27
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview
We were formed on December 22, 2009 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2011 and we intend to continue to operate in such a manner. We conduct our business primarily through our Operating Partnership, of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by our advisor pursuant to an advisory agreement and our advisor conducts our operations and manages our portfolio of real estate investments. Our advisor owns 20,000 shares of our common stock. We have no paid employees.
We have invested in a diverse portfolio of real estate investments. As of March 31, 2018 , we owned 28 office properties (one of which was held for sale) and one mixed-use office/retail property and had made an investment in an unconsolidated joint venture to develop and subsequently operate an office/retail property, which is currently under construction. Additionally, as of March 31, 2018 , we had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project, which is currently under construction.
On February 4, 2010, we filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of up to 280,000,000 shares, or up to $2,760,000,000 of shares, of common stock for sale to the public, of which up to 200,000,000 shares, or up to $2,000,000,000 of shares, were registered in our primary offering and up to 80,000,000 shares, or up to $760,000,000 of shares, were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on May 29, 2015 and terminated the primary offering on July 28, 2015 upon the completion of review of subscriptions submitted in accordance with our processing procedures. We sold 169,006,162 shares of common stock in our now-terminated primary initial public offering for gross offering proceeds of $1.7 billion . As of March 31, 2018 , we had also sold 24,172,536 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $239.0 million . Also as of March 31, 2018 , we had redeemed 16,463,879 shares sold in our initial public offering for $174.2 million .
Additionally, on October 3, 2014, we issued 258,462 shares of common stock, for $2.4 million, in private transactions exempt from the registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933.
We continue to offer shares under our dividend reinvestment plan. In some states, we will need to renew the registration statement annually or file a new registration statement to continue the dividend reinvestment plan offering. We may terminate our dividend reinvestment plan offering at any time.
Market Outlook – Real Estate and Real Estate Finance Markets
Volatility in global financial markets and changing political environments can cause fluctuations in the performance of the U.S. commercial real estate markets.  Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Increases in the cost of financing due to higher interest rates  may cause difficulty in refinancing debt obligations prior to or at maturity or at terms as favorable as the terms of existing indebtedness.  Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.
Liquidity and Capital Resources
We have invested all of the proceeds from our now-terminated primary initial public offering, net of selling commissions and dealer manager fees and other organization and offering costs, and proceeds from debt financing in a diverse portfolio of real estate investments. To date, proceeds from our dividend reinvestment plan have been used primarily to fund redemptions of shares under our share redemption program and for capital expenditures on our real estate investments.
Our principal demands for funds during the short and long-term are and will be for operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; capital commitments and development expenses under our joint venture agreements; and payments of distributions to stockholders. Our primary sources of capital for meeting our cash requirements are as follows:
•
Cash flow generated by our real estate investments;
•
Debt financings (including amounts currently available under existing loan facilities); and
•
Proceeds from common stock issued under our dividend reinvestment plan.

28
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our real estate properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate properties is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectability of rent and operating recoveries from our tenants and how well we manage our expenditures.
As of March 31, 2018 , we had mortgage debt obligations in the aggregate principal amount of $2.0 billion , with a weighted-average remaining term of 2.1 years. The maturity dates of certain loans may be extended beyond their current maturity date, subject to certain terms and conditions contained in the loan documents. Assuming our notes payable are fully extended under the terms of the respective loan agreements and other loan documents, we do not have debt obligations maturing during the 12 months ending March 31, 2019. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates. Our debt obligations consisted of $192.0 million of fixed rate notes payable and $1.8 billion of variable rate notes payable. As of March 31, 2018 , the interest rates on $1.3 billion of our variable rate notes payable were effectively fixed through interest rate swap agreements. As of March 31, 2018 , we had $200.0 million of revolving debt available for immediate future disbursement under two portfolio loans, subject to certain conditions set forth in the loan agreements.
We paid distributions to our stockholders during the three months ended March 31, 2018 using cash flow from operations from current and prior periods. We believe that our cash flow from operations, cash on hand, proceeds from our dividend reinvestment plan, proceeds from the sale of real estate and current and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future.
Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters ended March 31, 2018 did not exceed the charter-imposed limitation.
Cash Flows from Operating Activities
During the three months ended March 31, 2018 , net cash provided by operating activities was $11.1 million , compared to net cash provided by operating activities of $19.1 million during the three months ended March 31, 2017 . Net cash provided by operating activities decreased in 2018 primarily as a result of a decrease in lease termination fees and the timing of payments for operating expenses.
Cash Flows from Investing Activities
Net cash used in investing activities was $26.2 million for the three months ended March 31, 2018 and primarily consisted of the following:
•
$21.1 million used for improvements to real estate;
•
$7.3 million used for construction in progress related to Hardware Village (defined below);
•
$2.5 million of insurance proceeds received for property damage; and
•
$0.3 million used for investments in an unconsolidated joint venture.
Cash Flows from Financing Activities
During the three months ended March 31, 2018 , net cash provided by financing activities was $8.7 million and primarily consisted of the following:
•
$83.2 million of net cash provided by debt financing as a result of proceeds from notes payable of $83.9 million, partially offset by principal payments on notes payable of $0.7 million;
•
$59.8 million of cash used for redemptions of common stock; and
•
$14.6 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $14.3 million.

29
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

We expect that our debt financing and other liabilities will be between 45% and 65% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves). There is no limitation on the amount we may borrow for the purchase of any single asset. We limit our total liabilities to 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), meaning that our borrowings and other liabilities may exceed our maximum target leverage of 65% of the cost of our tangible assets without violating these borrowing restrictions. We may exceed the 75% limit only if a majority of the conflicts committee approves each borrowing in excess of this limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. To the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt in excess of this limit. From time to time, our total liabilities could also be below 45% of the cost of our tangible assets due to the lack of availability of debt financing. As of March 31, 2018 , our borrowings and other liabilities were approximately 60% of both the cost (before deducting depreciation and other noncash reserves) and book value (before deducting depreciation) of our tangible assets, respectively.
We also expect to use our capital resources to make certain payments to our advisor. During our operational stage, we expect to make payments to our advisor in connection with the management of our investments and costs incurred by our advisor in providing services to us. We also pay fees to our advisor in connection with the disposition of investments.
Among the fees payable to our advisor is an asset management fee. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition expenses related thereto (but excludes acquisition fees paid or payable to our advisor). In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment (but excluding acquisition fees paid to our advisor). With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination expenses related thereto but is exclusive of acquisition or origination fees paid or payable to our advisor) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination expenses related to the acquisition or funding of such investment (excluding acquisition or origination fees paid or payable to our advisor), as of the time of calculation.
Pursuant to the advisory agreement, with respect to asset management fees accruing from March 1, 2014, our advisor agreed to defer, without interest, our obligation to pay asset management fees for any month in which our modified funds from operations (“MFFO”) for such month, as such term is defined in the practice guideline issued by the Institute for Portfolio Alternatives (“IPA”) in November 2010 and interpreted by us, excluding asset management fees, does not exceed the amount of distributions declared by us for record dates of that month. We remain obligated to pay our advisor an asset management fee in any month in which our MFFO, excluding asset management fees, for such month exceeds the amount of distributions declared for the record dates of that month (such excess amount, an “MFFO Surplus”); however, any amount of such asset management fee in excess of the MFFO Surplus will also be deferred under the advisory agreement. If the MFFO Surplus for any month exceeds the amount of the asset management fee payable for such month, any remaining MFFO Surplus will be applied to pay any asset management fee amounts previously deferred in accordance with the advisory agreement.
However, notwithstanding the foregoing, any and all deferred asset management fees that are unpaid will become immediately due and payable at such time as our stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) an 8% per year cumulative, noncompounded return on net invested capital (the “Stockholders’ 8% Return”) and (ii) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price, reduced by any amounts to repurchase shares pursuant to our share redemption program. The Stockholders’ 8% Return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of our stockholders to have received any minimum return in order for our advisor to receive deferred asset management fees.

30
Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

As of March 31, 2018 , we had reimbursed our advisor for all accrued and deferred asset management fees in accordance with the terms noted above.  The amount of asset management fees deferred, if any, will vary on a month-to-month basis and the total amount of asset management fees deferred as well as the timing of the deferrals and repayments are difficult to predict as they will depend on the amount of and terms of the debt we use to acquire assets, the level of operating cash flow generated by our real estate investments and other factors. In addition, deferrals and repayments may occur in the same period, and it is possible that there could be additional deferrals in the future.As of March 31, 2018 , we had $2.3 million of asset management fees payable related to asset management fees incurred for the month of March 2018, which were subsequently paid in April 2018.
On September 27, 2017, we and our advisor renewed the advisory agreement. The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our conflicts committee.
Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of March 31, 2018 (in thousands):
 
 
 
 
Payments Due During the Years Ended December 31,
Contractual Obligations
 
Total
 
Remainder of 2018
 
2019-2020
 
2021-2022
 
Thereafter
Outstanding debt obligations (1)
 
$
2,040,047

 
$
223,327

 
$
1,542,174

 
$
274,546

 
$
—

Interest payments on outstanding debt obligations (2)
 
164,713

 
55,552

 
99,462

 
9,699

 
—

Development obligations
 
31,201

 
(3)  
 
(3)  
 
—

 
—

_____________________
(1) Amounts include principal payments only.
(2) Projected interest payments are based on the outstanding principal amounts, maturity dates and interest rates in effect as of March 31, 2018 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable). We incurred interest expense of $18.3 million, excluding amortization of deferred financing costs totaling $1.6 million and unrealized gain on derivative instruments of $18.0 million and including interest capitalized of $1.1 million during the three months ended March 31, 2018 .
(3) We have entered into the Hardware Village joint venture to develop a two-building multifamily apartment complex consisting of 466 units and expect to incur approximately $31.2 million in additional development obligations through 2019. As of March 31, 2018 , $24.5 million had been disbursed under the Hardware Village Loan Facility and $49.5 million remained available for future disbursements, subject to certain conditions contained in the Hardware Village Loan Facility documents.
As of March 31, 2018 , we expect to acquire the developer’s 25% equity interest in the Village Center Station II joint venture upon completion of Village Center Station II (defined below) in 2018 for approximately $25.0 million. Upon such acquisition, we would own 100% of the equity interests in Village Center Station II.
Results of Operations
Overview
As of March 31, 2017 and 2018 , we owned 28 office properties, one mixed-use office/retail property and had made an investment in an unconsolidated joint venture to develop and subsequently operate an office/retail property (“Village Center Station II”), which is currently under construction. In addition, we had entered into a consolidated joint venture to develop and subsequently operate a multifamily apartment project (“Hardware Village”), which is currently under construction. Subsequent to March 31, 2017 , we classified one office property as held for sale.

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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended March 31, 2018 versus the three months ended March 31, 2017
The following table provides summary information about our results of operations for the three months ended March 31, 2018 and 2017 (dollar amounts in thousands):
 
 
Three Months Ended March 31,
 
Increase (Decrease)
 
Percentage Change
 
 
2018
 
2017
 
 
Rental income
 
$
78,964

 
$
80,821

 
$
(1,857
)
 
(2
)%
Tenant reimbursements
 
19,500

 
19,105

 
395

 
2
 %
Other operating income
 
5,715

 
5,474

 
241

 
4
 %
Operating, maintenance and management costs
 
23,153

 
22,489

 
664

 
3
 %
Real estate taxes and insurance
 
16,774

 
15,922

 
852

 
5
 %
Asset management fees to affiliate
 
6,620

 
6,205

 
415

 
7
 %
General and administrative expenses
 
1,523

 
1,224

 
299

 
24
 %
Depreciation and amortization
 
38,982

 
41,695

 
(2,713
)
 
(7
)%
Interest expense
 
810

 
12,901

 
(12,091
)
 
(94
)%
Other income
 
301

 
—

 
301

 
100
 %
Rental income and tenant reimbursements from our real estate properties decreased from $99.9 million for the three months ended March 31, 2017 to $98.5 million for the three months ended March 31, 2018 . The decrease in rental income and tenant reimbursements was primarily due to lease terminations during 2017. We expect rental income and tenant reimbursements to vary in future periods based on occupancy rates and rental rates of our real estate investments and increase based on the development and subsequent operation of Hardware Village and upon our acquisition of the developer's 25% equity interest in and subsequent operation of Village Center Station II. However, rental income and tenant reimbursements would decrease to the extent that we sell any of our real estate properties.
Other operating income increased from $5.5 million during the three months ended March 31, 2017 to $5.7 million for the three months ended March 31, 2018 . The increase in other operating income was primarily due to an increase in parking revenues. We expect other operating income to vary in future periods based on occupancy rates and parking rates at our real estate properties and increase upon our acquisition of the developer's 25% equity interest in and subsequent operation of Village Center Station II. However, other operating income would decrease to the extent that we sell any of our real estate properties.
Operating, maintenance and management costs increased from $22.5 million for the three months ended March 31, 2017 to $23.2 million for the three months ended March 31, 2018 . The increase in operating, maintenance and management costs was primarily due to an increase in repairs and maintenance. We expect operating, maintenance and management costs to increase in future periods as a result of the development and subsequent operation of Hardware Village, upon our acquisition of the developer's 25% equity interest in and subsequent operation of Village Center Station II and general inflation. However, operating, maintenance and management costs would decrease to the extent that we sell any of our real estate properties.
Real estate taxes and insurance increased from $15.9 million for the three months ended March 31, 2017 to $16.8 million for the three months ended March 31, 2018 . The increase in real estate taxes and insurance was primarily due to higher property taxes as a result of property tax reassessments. We expect real estate taxes and insurance to increase in future periods as a result of the development and subsequent operation of Hardware Village, upon our acquisition of the developer's 25% equity interest in and subsequent operation of Village Center Station II and general increases due to future property tax reassessments. However, real estate taxes and insurance would decrease to the extent that we sell any of our real estate properties.
Asset management fees with respect to our real estate investments increased from $6.2 million for the three months ended March 31, 2017 to $6.6 million for the three months ended March 31, 2018 . We expect asset management fees to increase in future periods as a result of the development and completion of Hardware Village, our acquisition of the developer's 25% equity interest in and subsequent completion of Village Center Station II and as a result of any improvements we make to our properties, which increase would be offset to the extent we dispose of any of our assets. As of March 31, 2018 , $2.3 million of asset management fees were payable, which were subsequently paid in April 2018.

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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

General and administrative expenses increased from $1.2 million for the three months ended March 31, 2017 to $1.5 million for the three months ended March 31, 2018 . The increase in general and administrative expenses was primarily due to an increase in portfolio legal fees, board of directors fees and distribution processing costs. We expect general and administrative expenses to vary in future periods.
Depreciation and amortization decreased from $41.7 million for the three months ended March 31, 2017 to $39.0 million for the three months ended March 31, 2018 , primarily as a result of a decrease in amortization of tenant origination and absorption costs related to early lease terminations and the classification of a real estate property as held for sale. Upon classifying a property as held for sale, we cease depreciation and amortization expense for that property. We expect depreciation and amortization to vary in future periods as a result of a decrease in amortization related to fully amortized tenant origination and absorption costs and increase as a result of the development and subsequent operation of Hardware Village and upon our acquisition of the developer's 25% equity interest in and subsequent operation of Village Center Station II. However, depreciation and amortization would decrease to the extent that we sell any of our real estate properties.
Interest expense decreased from $12.9 million for the three months ended March 31, 2017 to $0.8 million for the three months ended March 31, 2018 . Included in interest expense was (i) the amortization of deferred financing costs of $1.2 million and $1.6 million for the three months ended March 31, 2017 and 2018 , respectively, and (ii) interest expense (including gains and losses) incurred as a result of our derivative instruments, which reduced interest expense by $0.1 million and $16.9 million for the three months ended March 31, 2017 and 2018 , respectively. Additionally, during the three months ended March 31, 2017 and 2018 , we capitalized $0.2 million and $1.1 million of interest related to construction in progress, respectively. The decrease in interest expense was primarily due to unrealized gains on derivative instruments. We expect interest expense to increase in future periods as a result of additional borrowings for capital expenditures and development activity. In addition, our interest expense in future periods will vary based on fair value changes with respect to our interest rate swaps that are not accounted for as cash flow hedges and fluctuations in one-month LIBOR (for our variable rate debt).  However, interest expense would decrease to the extent that we sell any of our real estate properties and repay the debt secured by such properties.
During the three months ended March 31, 2018 , we received $0.3 million in proceeds from a one-time easement agreement, which is included in other income in the accompanying consolidated statements of operations.
Funds from Operations and Modified Funds from Operations
We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.
Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses MFFO as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses); adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above and below market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the IPA in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

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PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO.  Management believes that excluding acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses) from MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time.  MFFO also excludes non-cash items such as straight-line rental revenue.  Additionally, we believe that MFFO provides investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance.  MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies.  MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.
FFO and MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO and MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO and MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO and MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO and MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.
Although MFFO includes other adjustments, the exclusion of adjustments for straight-line rent, the amortization of above- and below-market leases and unrealized (gains) losses on derivative instruments are the most significant adjustments for the periods presented.  We have excluded these items based on the following economic considerations:
•
Adjustments for straight-line rent.  These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease.  We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;
•
Amortization of above- and below-market leases.   Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue.  Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate; and
•
Unrealized (gains) losses on derivative instruments.   These adjustments include unrealized (gains) losses from mark-to-market adjustments on interest rate swaps. The change in fair value of interest rate swaps not designated as a hedge are non-cash adjustments recognized directly in earnings and are included in interest expense.  We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the economic impact of our interest rate swap agreements.

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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculation of MFFO, for the three months ended March 31, 2018 and 2017 , respectively (in thousands). No conclusions or comparisons should be made from the presentation of these periods.
 
For the Three Months Ended March 31,
 
2018
 
2017
Net income attributable to common stockholders
$
16,630

 
$
4,986

Depreciation of real estate assets
23,155

 
20,759

Amortization of lease-related costs
15,827

 
20,936

FFO attributable to common stockholders (1)
55,612

 
46,681

      Straight-line rent and amortization of above- and below-market leases, net
(4,995
)
 
(5,634
)
      Unrealized gains on derivative instruments
(18,037
)
 
(2,538
)
MFFO attributable to common stockholders (1)
$
32,580

 
$
38,509

_____________________
(1) FFO and MFFO includes $0.3 million and $4.3 million of lease termination income for the three months ended March 31, 2018 and 2017 , respectively.
FFO and MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO and MFFO, such as tenant improvements, building improvements and deferred leasing costs.
Distributions
Distributions declared, distributions paid and cash flow from operating activities were as follows for the first quarter of 2018 (in thousands, except per share amounts):
 
 
Distributions Declared (1)
 
Distributions Declared
Per Share (1) (2)
 
Distributions Paid  (3)
 
Cash Flow from
Operating Activities
Period
 
 
 
Cash
 
Reinvested
 
Total
 
First Quarter 2018
 
$
28,773

 
$
0.160

 
$
14,646

 
$
14,273

 
$
28,919

 
$
11,108

_____________________
(1)  
Distributions for the period from January 1, 2018 through March 31, 2018 were based on daily record dates and were calculated at a rate of $0.00178082 per share per day.
(2)  
Assumes share was issued and outstanding each day during the period presented.
(3)  
Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid on or about the first business day of the following month.
For the three months ended March 31, 2018 , we paid aggregate distributions of $28.9 million , including $14.6 million of distributions paid in cash and $14.3 million of distributions reinvested through our dividend reinvestment plan. Our net income attributable to common stockholders for the three months ended March 31, 2018 was $16.6 million. FFO for the three months ended March 31, 2018 was $55.6 million and cash flow from operating activities was $11.1 million . See the reconciliation of FFO to net income attributable to common stockholders above. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $11.1 million of cash flow from current operating activities and $17.8 million of cash flow from operating activities in excess of distributions paid during prior periods. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Over the long-term, we generally expect our distributions will be paid from cash flow from operating activities from current periods or prior periods (except with respect to distributions related to sales of our assets and distributions related to the repayment of principal under any real estate-related investments we make). From time to time during our operational stage, we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities, the overall return to our stockholders may be reduced. Further, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including those discussed under “Forward-Looking Statements” and “-Market Outlook - Real Estate and Real Estate Finance Markets,” “-Liquidity and Capital Resources,” and “-Results of Operations” herein, and the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 , as filed with the SEC. Those factors include: the future operating performance of our real estate investments in the existing real estate and financial environment; the success and economic viability of our tenants; our ability to refinance existing indebtedness at comparable terms; changes in interest rates on any variable rate debt obligations we incur; and the level of participation in our dividend reinvestment plan. In the event our FFO and/or cash flow from operating activities decrease in the future, the level of our distributions may also decrease.  In addition, future distributions declared and paid may exceed FFO and/or cash flow from operating activities.
Critical Accounting Policies
Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC. There have been no significant changes to our policies during 2018 , except for our adoption of the revenue recognition standards issued by the Financial Accounting Standards Board effective on January 1, 2018.
Revenue Recognition
Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of our adoption.  Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018.  A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. We elected to apply this standard only to contracts that were not completed as of January 1, 2018. 
Based on our evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at our properties. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. For the three months ended March 31, 2018 , tenant reimbursements for substantial services accounted for under ASU No. 2014-09 was $1.6 million which was included in tenant reimbursements on the accompanying statements of operations.
Sales of Real Estate
Prior to January 1, 2018, gains on real estate sold were recognized using the full accrual method at closing when collectibility of the sales price was reasonably assured, we were not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. Gain on sales of real estate may have been deferred in whole or in part until the requirements for gain recognition had been met.
Effective January 1, 2018, we adopted the guidance of ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which  applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business.  Generally, our sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20.

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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09.  Under ASC 610-20, if we determine it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, we would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer. 
Subsequent Events
We evaluate subsequent events up until the date the consolidated financial statements are issued.
Distributions Paid
On April 2, 2018 , we paid distributions of $9.8 million , which related to distributions declared for daily record dates for each day in the period from March 1, 2018 through March 31, 2018 . On May 1, 2018 , we paid distributions of $9.5 million , which related to distributions declared for daily record dates for each day in the period from April 1, 2018 through April 30, 2018 .
Distributions Authorized
On May 8, 2018 , our board of directors authorized distributions based on daily record dates for the period from June 1, 2018 through June 30, 2018 , which we expect to pay in July 2018 , and distributions based on daily record dates for the period from July 1, 2018 through July 31, 2018 , which we expect to pay in August 2018 . Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.
Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082  per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 5.54% annualized rate based on our December 6, 2017 estimated value per share of $11.73 .
Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date
On May 8, 2018, our board of directors approved additional funds for the May 2018 redemption date to be used solely for redemptions sought in connection with Special Redemptions. For more information, see Part II, Item 5, “Other Information - Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date.”
Fourth Amended and Restated Share Redemption Program
On May 8, 2018, our board of directors approved the Fourth Amended and Restated SRP, which amendment and restatement will be effective June 8, 2018 . For more information relating to the changes contained in the Fourth Amended and Restated SRP, see Part II, Item 5, “Other Information - Fourth Amended and Restated Share Redemption Program.”







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Table of Contents
PART I. FINANCIAL INFORMATION (CONTINUED)
Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage and other loans. Our profitability and the value of our real estate investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that variable rate exposure is kept at an acceptable level or by utilizing a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for the payment of distributions to our stockholders and that the losses may exceed the amount we invested in the instruments.
We borrow funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt, unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of March 31, 2018 , the fair value of our fixed rate debt was $190.7 million and the outstanding principal balance of our fixed rate debt was $192.0 million .  The fair value estimate of our fixed rate debt is calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loan was originated as of March 31, 2018 .  As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations. 
Conversely, movements in interest rates on our variable rate debt would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of variable rate instruments. As of March 31, 2018 , we were exposed to market risks related to fluctuations in interest rates on $520.1 million of variable rate debt outstanding after giving consideration to the impact of interest rate swap agreements on approximately $1.3 billion of our variable rate debt. Based on interest rates as of March 31, 2018 , if interest rates were 100 basis points higher or lower during the 12 months ending March 31, 2019, interest expense on our variable rate debt would increase or decrease by $5.2 million.
The weighted-average interest rates of our fixed rate debt and variable rate debt as of March 31, 2018 were 4.1% and 3.6%, respectively.  The weighted-average interest rates represent the actual interest rate in effect as of March 31, 2018 (consisting of the contractual interest rate and the effect of interest rate swaps, if applicable), using interest rate indices as of March 31, 2018 where applicable.
For a discussion of the interest rate risks related to the current capital and credit markets, see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Outlook - Real Estate and Real Estate Finance Markets” herein and the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 , as filed with the SEC.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

38
Table of Contents
PART II. OTHER INFORMATION


Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
In addition to the risk discussed below, please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 , as filed with the SEC.
Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to our company, our directors, our officers or our employees (we note we currently have no employees).  This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or employees, which may discourage meritorious claims from being asserted against us and our directors, officers and employees.  Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.  We adopted this provision because we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements, and we believe the risk of a court declining to enforce this provision is remote, as the General Assembly of Maryland has specifically amended the Maryland General Corporation Law to authorize the adoption of such provisions.
Because of the limitations on the dollar amount of shares that may be redeemed under our share redemption program and the number of shares that may be redeemed during a calendar year, it is likely that we will not be able to redeem all shares submitted for redemption during 2018.
During any calendar year, we may redeem (i) only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year unless our board of directors authorizes additional funds for redemption and (ii) no more than 5% of the weighted average number of shares outstanding during the prior calendar year.
As a result of such limitations, on November 30, 2017, we exhausted all funds available for redemptions for the year ended December 31, 2017. Thus, we had no funds available for redemptions for the December 2017 redemption date. Effective January 1, 2018, this limitation was reset, and based on the amount of net proceeds raised from the sale of shares under our dividend reinvestment plan during 2017, we had $59.8 million available for redemptions of shares eligible for redemption in 2018. As a result of the above-referenced limitations on the number of shares we can purchase pursuant to the share redemption program, as of March 31, 2018, we had exhausted all funds available for redemptions in 2018. As of April 30, 2018, we had a total $20.6 million of outstanding and unfulfilled redemption requests, representing 1,773,091 shares.
On May 8, 2018, our board of directors approved (i) additional funds for the May 2018 redemption date to be used solely for redemptions sought in connection with Special Redemptions and (ii) the Fourth Amended and Restated SRP, which will be effective for the June 2018 redemption date and provides for, among other changes, additional funds for the redemption of shares for the remainder of calendar year 2018. For more information, see Part II, Item 5, “Other Information - Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date” and “ - Fourth Amended and Restated Share Redemption Program.”
However, given the volume of redemption requests in 2017 and 2018, and because of the limitations on the dollar amount of shares that may be redeemed under our share redemption program and the number of shares that may be redeemed during a calendar year, it is likely that we will not be able to redeem all shares submitted for redemption during 2018.


39
Table of Contents
PART II. OTHER INFORMATION (CONTINUED)
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

a)
During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.
b)
Not applicable.
c)
We have a share redemption program that may enable stockholders to sell their shares to us in limited circumstances. The restrictions of our share redemption program will severely limit our stockholders’ ability to sell their shares should they require liquidity and will limit our stockholders’ ability to recover an amount equal to our estimated value per share. The following is a description of our share redemption program as of March 31, 2018. On May 8, 2018, our board of directors approved (i) additional funds for the May 2018 redemption date to be used solely for redemptions sought in connection with Special Redemptions and (ii) the Fourth Amended and Restated SRP, which will be effective for the June 2018 redemption date and provides for, among other changes, additional funds for the redemption of shares for the remainder of calendar year 2018. For more information, see Part II, Item 5, “Other Information - Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date” and “ - Fourth Amended and Restated Share Redemption Program.”
There are several limitations on our ability to redeem shares under our share redemption program:
•
Unless the shares are being redeemed in connection with Special Redemptions, we may not redeem shares unless the stockholder has held the shares for one year.
•
During any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. Notwithstanding anything contained in our share redemption program to the contrary, we may increase or decrease the funding available for the redemption of shares pursuant to the program upon ten business days’ notice to our stockholders. We may provide notice by including such information (a) in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC or (b) in a separate mailing to our stockholders.
•
During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
•
We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland General Corporation Law, as amended from time to time, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
For a stockholder’s shares to be eligible for redemption in a given month, the administrator must receive a written redemption request from the stockholder or from an authorized representative of the stockholder setting forth the number of shares requested to be redeemed at least five business days before the redemption date. If we cannot redeem all shares presented for redemption in any month because of the limitations on redemptions set forth in our share redemption program, then we will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in our currently effective, or the most recently effective, registration statement, as such registration statement has been amended or supplemented, then we would redeem all of such stockholder’s shares.
If we do not completely satisfy a redemption request on a redemption date because the program administrator did not receive the request in time, because of the limitations on redemptions set forth in our share redemption program or because of a suspension of our share redemption program, then we will treat the unsatisfied portion of the redemption request as a request for redemption at the next redemption date funds are available for redemption, unless the redemption request is withdrawn. Any stockholder can withdraw a redemption request by sending written notice to the program administrator, provided such notice is received at least five business days before the redemption date.
Upon a transfer of shares, any pending redemption requests with respect to such transferred shares will be canceled as of the date we accept the transfer. Stockholders wishing us to continue to consider a redemption request related to any transferred shares must resubmit their redemption request.

40
PART II. OTHER INFORMATION (CONTINUED)
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds (continued)

Pursuant to our share redemption program, redemptions made in connection with Special Redemptions are made at a price per share equal to the most recent estimated value per share of our common stock as of the applicable redemption date. The price at which we will redeem all other shares eligible for redemption is as follows:
•
For those shares held by the redeeming stockholder for at least one year, 92.5% of our most recent estimated value per share as of the applicable redemption date;
•
For those shares held by the redeeming stockholder for at least two years, 95.0% of our most recent estimated value per share as of the applicable redemption date;
•
For those shares held by the redeeming stockholder for at least three years, 97.5% of our most recent estimated value per share as of the applicable redemption date; and
•
For those shares held by the redeeming stockholder for at least four years, 100% of our most recent estimated value per share as of the applicable redemption date.
On December 6, 2017, our board of directors approved an estimated value per share of our common stock of $11.73 based on the estimated value of our assets less the estimated value of our liabilities divided by the number of shares outstanding, all as of September 30, 2017, with the exception of a reduction to our net asset value for deferred financing costs related to a portfolio loan facility that closed subsequent to September 30, 2017. This estimated value per share became effective for the December 2017 redemption date, which was December 29, 2017.
For purposes of determining the time period a redeeming stockholder has held each share, the time period begins as of the date the stockholder acquired the share; provided, that shares purchased by the redeeming stockholder pursuant to our dividend reinvestment plan will be deemed to have been acquired on the same date as the initial share to which the dividend reinvestment plan shares relate. The date of the share’s original issuance by us is not determinative. In addition, as described above, the shares owned by a stockholder may be redeemed at different prices depending on how long the stockholder has held each share submitted for redemption.
We currently expect to utilize an independent valuation firm to update our estimated value per share in December 2018. We will report the estimated value per share of our common stock in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC. We will also provide information about our estimated value per share on our website, www.kbsreitiii.com (such information may be provided by means of a link to our public filings on the SEC’s website, www.sec.gov ).
Our board may amend, suspend or terminate our share redemption program upon 30 days’ notice to stockholders, provided that we may increase or decrease the funding available for the redemption of shares pursuant to our share redemption program upon 10 business days’ notice.
The complete share redemption program document is filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2013 and is available at the SEC’s website at www.sec.gov .

41
PART II. OTHER INFORMATION (CONTINUED)
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During the three months ended March 31, 2018 , we funded redemptions under our share redemption program with the net proceeds from our dividend reinvestment plan, and we redeemed shares pursuant to our share redemption program as follows:
Month
 
Total Number
of Shares Redeemed  (1)
 
Average Price Paid
Per Share  (2)
 
Approximate Dollar Value of Shares Available That May Yet Be  Redeemed Under the Program
January 2018
 
2,551,890

 
$
11.58

 
(3)  
February 2018
 
1,297,844

 
$
11.62

 
(3)  
March 2018
 
1,301,776

 
$
11.64

 
(3)  
Total
 
5,151,510

 
 
 
 
_____________________
(1) We announced the adoption and commencement of the program on October 14, 2010. We announced amendments to the program on March 8, 2013 (which amendment became effective on April 7, 2013) and on March 7, 2014 (which amendment became effective on April 6, 2014).
(2) The prices at which we redeem shares under the program are as set forth above.
(3) We limit the dollar value of shares that may be redeemed under the program as described above. One of these limitations is that during each calendar year, our share redemption program limits the number of shares we may redeem to those that we could purchase with the amount of the net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. However, we may increase or decrease the funding available for the redemption of shares upon ten business days’ notice to our stockholders. In 2017, our net proceeds from the dividend reinvestment plan were $59.8 million. During the three months ended March 31, 2018 , we exhausted all funds available for redemptions in 2018 and we had a total of $9.2 million of outstanding and unfulfilled redemption requests, representing 793,401 shares.  We recorded $9.2 million of redemptions payable in other liabilities on the accompanying consolidated balance sheets.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
Approval of Additional Funds for Special Redemptions for the May 2018 Redemption Date
On May 8, 2018, our board of directors approved an increase of the funding available for the redemption of shares under our share redemption program by up to an additional $10 million for the May 2018 redemption date, with such increased amount to be used solely for redemptions sought in connection with Special Redemptions that are received in good order and eligible for redemption for the May 2018 redemption date.
Fourth Amended and Restated Share Redemption Program
On May 8, 2018, our board of directors approved the Fourth Amended and Restated SRP, which will be effective June 8, 2018 . Pursuant to the Fourth Amended and Restated SRP, all redemptions other than Special Redemptions will be made at a price per share equal to 95% of our most recent estimated value per share as of the applicable redemption date. Special Redemptions will be made at a price per share equal to our most recent estimated value per share as of the applicable redemption date.
The Fourth Amended and Restated SRP provides that, for calendar year 2018 only, in addition to the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during calendar year 2017, we may redeem up to an additional $42.0 million of shares, less the actual dollar amount of Special Redemptions processed on the May 2018 redemption date (such difference, the “2018 Additional Funding”); provided, however, that once we have received requests for redemptions, whether in connection with Special Redemptions or otherwise, that if honored would result in the amount of the remaining 2018 Additional Funding being $10.0 million or less, the remaining $10.0 million of the 2018 Additional Funding shall be reserved exclusively for Special Redemptions. During any calendar year subsequent to calendar year 2018, once we have received requests for redemptions, whether in connection with Special Redemptions or otherwise, that if honored, and when combined with all prior redemptions made during the calendar year, would result in the amount of remaining funds available for the redemption of additional shares in such calendar year being $10.0 million or less, the last $10.0 million of available funds shall be reserved exclusively for Special Redemptions.

42
PART II. OTHER INFORMATION (CONTINUED)
Item 5.    Other Information (continued)

In addition, the notice provision of the program was amended to provide that we may amend, suspend or terminate the Fourth Amended and Restated SRP for any reason upon ten business days’ notice to our stockholders. We may provide notice by including such information in a (i) Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC or (ii) separate mailing to our stockholders.
There were no other material changes made in the Fourth Amended and Restated SRP.
Item 6. Exhibits
Ex.
 
Description
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
99.1
 
 
 
 
99.2
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase

43

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
KBS REAL ESTATE INVESTMENT TRUST III, INC.
 
 
 
 
Date:
May 9, 2018
By:
/S/  C HARLES  J. S CHREIBER , J R.         
 
 
 
Charles J. Schreiber, Jr.
 
 
 
Chairman of the Board,
Chief Executive Officer and Director
 
 
 
(principal executive officer)
 
 
 
 
Date:
May 9, 2018
By:
/S/  J EFFREY  K. W ALDVOGEL         
 
 
 
Jeffrey K. Waldvogel
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)

44


Exhibit 31.1
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Charles J. Schreiber, Jr., certify that:
1.
I have reviewed this quarterly report on Form 10-Q of KBS Real Estate Investment Trust III, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
May 9, 2018
By:
/ S / C HARLES  J. S CHREIBER , J R .    
 
 
 
Charles J. Schreiber, Jr.
 
 
 
Chairman of the Board,
Chief Executive Officer and Director
 
 
 
(principal executive officer)





Exhibit 31.2
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeffrey K. Waldvogel, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of KBS Real Estate Investment Trust III, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
May 9, 2018
By:
/S/ J EFFREY  K. W ALDVOGEL
 
 
 
Jeffrey K. Waldvogel
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)





Exhibit 32.1
Certification pursuant to 18 U.S.C. Section 1350,
as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of KBS Real Estate Investment Trust III, Inc. (the “Registrant”) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Charles J. Schreiber, Jr., Chief Executive Officer and Director of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date:
May 9, 2018
By:
/ S / C HARLES  J. S CHREIBER , J R .     
 
 
 
Charles J. Schreiber, Jr.
 
 
 
Chairman of the Board,
Chief Executive Officer and Director
 
 
 
(principal executive officer)





Exhibit 32.2
Certification pursuant to 18 U.S.C. Section 1350,
as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of KBS Real Estate Investment Trust III, Inc. (the “Registrant”) for the quarter ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Jeffrey K. Waldvogel, the Chief Financial Officer of the Registrant, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date:
May 9, 2018
By:
/S/ J EFFREY  K. W ALDVOGEL
 
 
 
Jeffrey K. Waldvogel
 
 
 
Chief Financial Officer
 
 
 
(principal financial officer)




Exhibit 99.2
FOURTH AMENDED AND RESTATED SHARE REDEMPTION PROGRAM
Adopted May 8, 2018
The board of directors of KBS Real Estate Investment Trust III, Inc., a Maryland corporation (the “ Company ”), has adopted a Fourth Amended and Restated Share Redemption Program (the “ SRP ”), the terms and conditions of which are set forth below. Capitalized terms shall have the same meaning as set forth in the Company’s charter unless otherwise defined herein.
1.     Qualifying Stockholders . “ Qualifying Stockholders ” are (a) holders of the Company’s shares of Common Stock (the “ Shares ”) who have held their Shares for at least one year, provided that, for purposes of determining whether a redeeming stockholder has held the Share submitted for redemption for at least one year, the time period begins as of the date the stockholder acquired the Share; provided further, that Shares purchased by the redeeming stockholder pursuant to the Company’s dividend reinvestment plan or received as a stock dividend will be deemed to have been acquired on the same date as the initial Share to which the dividend reinvestment plan Shares or stock dividend Shares relate, and (b) stockholders or authorized representatives of stockholders qualifying for the special redemption provisions set forth in paragraphs 6, 7 and 8 below.
2.     Share Redemption . Subject to the terms and conditions of this SRP, including the limitations on redemptions set forth in paragraph 4 and the procedures for redemption set forth in paragraph 5, the Company will redeem such number of Shares as requested by a Qualifying Stockholder.
3.     Redemption Price . Except as stated in paragraph 6 below with respect to redemption requests made upon a stockholder’s death, Qualifying Disability (as defined in paragraph 7 below) or Determination of Incompetence (as defined in paragraph 8 below), the Company will redeem the Shares of a Qualifying Stockholder at a price per Share equal to 95.0% of the Company’s most recent estimated value per Share as of the applicable Redemption Date (as defined in paragraph 5 below).
4.     Limitations on Redemption . Notwithstanding anything contained in this SRP to the contrary, the Company’s obligation to redeem Shares pursuant to paragraphs 2 and 6 hereof is limited by each of the following:
a.
Unless the Shares are being redeemed in connection with a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8), the Company may not redeem Shares unless the stockholder has held the Shares for one year. For purposes of determining the time period a redeeming stockholder has held each Share, the time period begins as of the date the stockholder acquired the Share; provided, that Shares purchased by the redeeming stockholder pursuant to the Company’s dividend reinvestment plan or received as a stock dividend will be deemed to have been acquired on the same date as the initial Share to which the dividend reinvestment plan Shares or stock dividend Shares relate. The date of the Share’s original issuance by the Company is not determinative.


b.
During any calendar year, the Company may redeem only the number of Shares that the Company could purchase with the amount of net proceeds from the sale of Shares under the Company’s dividend reinvestment plan during the prior calendar year. Notwithstanding anything contained in this paragraph 4(b) to the contrary, the Company may increase or decrease the funding available for the redemption of Shares pursuant to this SRP upon ten business days’ notice to the Company’s stockholders. The Company may provide notice by including such information in a (a) Current Report on Form 8-K or in its annual or quarterly reports, all publicly filed with the Securities and Exchange Commission or (b) separate mailing to the stockholders.
c.
Notwithstanding anything in this paragraph 4 to the contrary:
i.
For calendar year 2018 only, in addition to the number of Shares that the Company could purchase with the amount of net proceeds from the sale of Shares under the Company’s dividend reinvestment plan during calendar year 2017, commencing with and including the June 2018 Redemption Date, the Company may redeem up to an additional $42.0 million of Shares less the actual dollar amount of Shares redeemed on the May 2018 Redemption Date in connection with redemptions related to a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8) (such difference, the “2018 Additional Funding”); provided, however, once the Company has received requests for redemptions, whether in connection with a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8), or otherwise, that if honored would result in the amount of the remaining 2018 Additional Funding being $10.0 million or less, the remaining $10.0 million of the 2018 Additional Funding shall be reserved exclusively for Shares being redeemed in connection with a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8); and
ii.
During any calendar year subsequent to calendar year 2018, once the Company has received requests for redemptions, whether in connection with a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8), or otherwise, that if honored, and when combined with all prior redemptions made during the calendar year, would result in the amount of remaining funds available for the redemption of additional Shares in such calendar year being $10.0 million or less, the last $10.0 million of available funds shall be reserved exclusively for Shares being redeemed in connection with a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8).
d.
During any calendar year, the Company may redeem no more than 5% of the weighted-average number of Shares outstanding during the prior calendar year.

2

e.
The Company has no obligation to redeem Shares if the redemption would violate the restrictions on distributions under Maryland General Corporation Law, as amended from time to time, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
5.     Procedures for Redemption . The Company has engaged a third party to administer the SRP. Upon any change to the identity or the mailing address of the program administrator, the Company will notify stockholders of such change. The date on which the Company will redeem Shares (the “ Redemption Date ”) will be the last business day of each month, provided that the first Redemption Date following the Company’s announcement of an updated estimated value per Share shall be no less than 10 business days after the Company’s announcement of an estimated value per Share in a filing with the Securities and Exchange Commission and the Redemption Date shall be set forth in such filing. The Company will provide information about the estimated value per Share in public filings with the Securities and Exchange Commission and on its web site (such information may be provided by means of a link to the Company’s public filings on the Securities and Exchange Commission’s web site, www.sec.gov). The Company will also report the redemption price in its annual report and three quarterly reports publicly filed with the Securities and Exchange Commission.
For a stockholder’s Shares to be eligible for redemption in a given month, the program administrator must receive a written redemption request from the stockholder or from an authorized representative of the stockholder setting forth the number of Shares requested to be redeemed at least five business days before the Redemption Date. If the Company cannot repurchase all Shares presented for redemption in any month because of the limitations on redemptions set forth in paragraph 4, then the Company will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in a currently effective, or the most recently effective, registration statement of the Company, as such registration statement has been amended or supplemented, then the Company would redeem all of such stockholder’s Shares.
If the Company does not completely satisfy a redemption request on a Redemption Date because the program administrator did not receive the request in time, because of the limitations on redemptions set forth in paragraph 4 or because of a suspension of the SRP, then the Company will treat the unsatisfied portion of the redemption request as a request for redemption at the next Redemption Date funds are available for redemption, unless the redemption request is withdrawn. Any stockholder can withdraw a redemption request by sending written notice to the program administrator, provided such notice is received at least five business days before the Redemption Date.
6.     Special Provisions upon a Stockholder’s Death, Qualifying Disability or Determination of Incompetence . The Company will treat redemption requests made upon a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8) differently, as follows:
a.    There is no one-year holding requirement.

3

b.
The redemption price per Share will be the Company’s most recent estimated value per Share as of the applicable Redemption Date (as defined in paragraph 5 above).
Except as specifically set forth in this paragraph 6, redemptions upon a stockholder’s death, Qualifying Disability (as defined in paragraph 7) or Determination of Incompetence (as defined in paragraph 8) are subject to the same limitations and terms and conditions as other redemptions, including the limitations on redemptions set forth in paragraph 4 and the redemption request procedures set forth in paragraph 5.
7.     Qualifying Disability Determinations . In order for a disability to entitle a stockholder to the special redemption terms described in paragraph 6 (a “ Qualifying Disability ”), (1) the stockholder must receive a determination of disability based upon a physical or mental condition or impairment arising after the date the stockholder acquired the Shares to be redeemed, and (2) such determination of disability must be made by the governmental agency responsible for reviewing the disability retirement benefits that the stockholder could be eligible to receive (the “ Applicable Government Agency ”). The Applicable Government Agencies are limited to the following: (i) if the stockholder paid Social Security taxes and, therefore, could be eligible to receive Social Security disability benefits, then the Applicable Governmental Agency is the Social Security Administration or the agency charged with responsibility for administering Social Security disability benefits at that time if other than the Social Security Administration; (ii) if the stockholder did not pay Social Security taxes and, therefore, could not be eligible to receive Social Security disability benefits, but the stockholder could be eligible to receive disability benefits under the Civil Service Retirement System (“ CSRS ”), then the Applicable Governmental Agency is the U.S. Office of Personnel Management or the agency charged with responsibility for administering CSRS benefits at that time if other than the Office of Personnel Management; or (iii) if the stockholder did not pay Social Security taxes and, therefore, could not be eligible to receive Social Security benefits but suffered a disability that resulted in the stockholder’s discharge from military service under conditions that were other than dishonorable and, therefore, could be eligible to receive military disability benefits, then the Applicable Governmental Agency is the Department of Veterans Affairs or the agency charged with the responsibility for administering military disability benefits at that time if other than the Department of Veterans Affairs.
Disability determinations by governmental agencies for purposes other than those listed above, including but not limited to worker’s compensation insurance, administration or enforcement of the Rehabilitation Act or Americans with Disabilities Act, or waiver of insurance premiums will not entitle a stockholder to the special redemption terms described in paragraph 6. Redemption requests following an award by the applicable governmental agency of disability benefits must be accompanied by: (1) the investor’s initial application for disability benefits and (2) a Social Security Administration Notice of Award, a U.S. Office of Personnel Management determination of disability under CSRS, a Department of Veterans Affairs record of disability-related discharge or such other documentation issued by the Applicable Governmental Agency that the Company deems acceptable and that demonstrates an award of the disability benefits.
As the following disabilities do not entitle a worker to Social Security disability benefits, they do not qualify for special redemption terms, except in the limited circumstances when the investor is awarded disability benefits by the other Applicable Governmental Agencies described above:

4

a.
disabilities occurring after the legal retirement age; and
b.
disabilities that do not render a worker incapable of performing substantial gainful activity.
8.     Determination of Incompetence . In order for a determination of incompetence or incapacitation to entitle a stockholder to the special redemption terms described in paragraph 6 (a “ Determination of Incompetence ”), a state or federal court located in the United States (a “ U.S. Court ”) must declare, determine or find the stockholder to be (i) mentally incompetent to enter into a contract, to prepare a will or to make medical decisions or (ii) mentally incapacitated, in both cases such determination must be made by a U.S. Court after the date the stockholder acquired the Shares to be redeemed.
A determination of incompetence or incapacitation by any person or entity other than a U.S. Court, or for any purpose other than those listed above, will not entitle a stockholder to the special redemption terms described in paragraph 6. Redemption requests following a Determination of Incompetence by a U.S. Court must be accompanied by the court order, determination or the certificate of the court declaring the stockholder incompetent or incapacitated.
9.     Termination, Suspension or Amendment of the SRP by the Company . The Company may (a) amend, suspend or terminate the SRP for any reason, or (b) increase or decrease the funding available for the redemption of Shares pursuant to paragraph 4 of the SRP, each upon ten business days’ notice to the Company’s stockholders. The Company may provide notice by including such information in a (i) Current Report on Form 8-K or in its annual or quarterly reports, all publicly filed with the Securities and Exchange Commission or (ii) separate mailing to the stockholders.
The SRP provides stockholders a limited ability to redeem Shares for cash until a secondary market develops for the Shares. If and when such a secondary market develops, the SRP will terminate.
10.     Notice of Redemption Requests . Qualifying Stockholders who desire to redeem their Shares must provide written notice to the Company on the form provided by the Company.
11.     Liability of the Company . The Company shall not be liable for any act done in good faith or for any good faith omission to act.
12.     Governing Law . The SRP shall be governed by the laws of the State of Maryland.

5