Institutional Opportunities for Individual Investors This is neither an offer to sell nor a solicitation of an offer to buy shares of KBS Real Estate Investment Trust III, Inc. ("KBS REIT III"); offering is only made by prospectus (www.kbsreits.com). This information must be preceded or accompanied by a prospectus in order to understand fully all of the implications and risks of the offering. Neither the Attorney General of the State of New York nor any other state regulators have passed on or endorsed the merits of this offering. Any representation to the contrary is unlawful. Investing in KBS REIT III includes significant risks. These risks include, but are not limited to: the possibility of losing your entire investment; no guarantees regarding future performance; upon sale or distribution of assets you may receive less than your initial investment; fluctuation of the value of the assets owned by KBS REIT III; lack of a public market for shares of KBS REIT III; limited liquidity; limited transferability; reliance on the advisor to select and manage assets; payment of significant fees; and various economic factors that may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Shares of KBS REIT III are not suitable for all investors. Please see other important "Risk Factor" disclosures located throughout the brochure.
WHY REAL ESTATE? Income Streams One of the most popular features of real estate is its ability to produce income. Some income producing properties may fluctuate in income and value more than others, but those often have a greater potential to provide higher cash flow in the future. Other properties are designed to perform differently and carry less risk. In the end, the consistency of a property s monthly net income depends on numerous factors including lease terms, physical condition, tenant quality and expenses. Intrinsic Value Every parcel of real estate has some intrinsic value, and in certain markets (i.e., Manhattan, San Francisco), the values can increase significantly. For some properties, the improvements represent most of the value, while in other locations the value of the building is inconsequential compared to the underlying land. Although some investments can drop in value to virtual worthlessness, investment real estate typically has a base value that can survive a natural disaster, the departure of tenants or a change in zoning. Many real estate owners take comfort in knowing they own something real. Investment Diversification Real diversification requires mixing assets that fundamentally behave differently from the broader stock market. We call this noncorrelation. 1 Historically, real estate investing has proven to be an effective way to achieve noncorrelation with the overall stock market. Think of real estate as a completely different basket for an important portion of the eggs in your portfolio. Inflation Hedge Hedging inflation involves investing in assets that are less likely to be eroded by increased cost of living. It is generally accepted that real estate assets are better positioned to keep up with inflation than many other investments because landlords can pass on increased expenses in the form of rent increases. On the other hand, as with other investments, any inflation that occurs can diminish the real value of those investments and the income they produce. Therefore, comparatively, real estate may play a part in helping to preserve the real value of your portfolio. 1 Due to the lack of a market for non-traded REITs, valuation changes are not known until priced and actual values of the securities may or may not correlate with the stock market. RISK LEVELS OF DIRECT REAL ESTATE VS. EQUITIES AND PUBLICLY TRADED REITS 1998-2008 Standard Deviation of Annual Returns * Past performances is no guarantee of future results. This chart is for illustration purposes only and not indicative of any investment. An investment cannot be made directly in an index. Chart Benchmarks: Direct Real Estate is represented by the NCREIF Property Index (NPI). If an investor is evaluating a specific real estate offering, it may differ materially to the direct real estate transactions that make up the NPI. The NPI is a leading benchmark of institutionally owned, private real estate programs. The NPI is based on values of the unleveraged returns from a large pool of individual, investment grade commercial real estate properties across Retail, Office, Industrial, and Apartment sectors. The market values of the properties in the NPI are determined by appraisals rather by market-based prices of the programs. The NPI is not a measure of non-traded REIT performance, but our management feels that the NPI is an appropriate and accepted index for the purpose of evaluating real estate risk levels against the risk levels of other types of investments. KBS REIT III differs from NPI and its program in several material respects, including the facts that: KBS REIT III uses debt; KBS REIT III requires the payment of significant up-front and other fees that typically exceed those of institutional programs, as well as expenses related to being a public company; and an investment in KBS REIT III may not be based solely on the appraised value of underlying properties. The NPI shows gross return at the property level and does not reflect the impact of management and other investment-entity fees and expenses as well as those associated with raising capital, which lowers returns. It is not expected that investments in KBS REIT III will reflect NPI returns. The Lehman U.S. Bond indices are used to represent both the Credit Bonds and the U.S. High Yield Bonds. Large Cap Stocks are represented by the Standard & Poor s 500 which is an unmanaged group of securities and considered to be representative of the stock market in general. Small Cap Stocks are represented by the Russell 2000 index and International Stocks are represented by Morgan Stanley Capital International Europe, Australasia and Far East (EAFE ) Index. The date assumes reinvestment of all income and does not account for taxes or transaction cost.
WHY KBS? Proven Real Estate Operating Firm* SEC Registered Investment Advisor founded in 1992 by industry leaders Peter Bren and Charles J. Schreiber, Jr. KBS has provided direct real estate investments on behalf of large institutional clients such as public and private pension plans, endowments, foundations and sovereign wealth funds. Large institutional investors have selected KBS because the senior staff is comprised of real estate professionals with extensive hands-on real estate experience. Unique strategic debt investment program headed by Keith Hall and Peter McMillan, veteran finance executives with over 50 years of collective structured debt and capital markets experience. Invested or managed over $13.3 billion in 643 assets nationwide (over 99.9 million square feet***). KBS has sold 468 assets since inception.** Thirteen investment funds totaling over 42.5 million square feet of real estate have gone full-cycle.** *Information for all KBS entities and not specific to KBS REIT III. **All data as of June 30, 2011 ***Square footage does not include REIT acquired debt assets KBS Institutional Investors The list below includes some of the largest investors (based on dollar amount invested) in KBS private real estate funds. None of these institutional investors named below have endorsed this offering or purchased shares of KBS REIT III. By including their names, we do not suggest that any of these investors approved of the services provided by KBS affiliates. The names are included only for purposes of your evaluation of the experience and reputation of KBS affiliates and their team of real estate professionals. BASF Corporation Pension Master Trust Blue Cross/Blue Shield Associate National Retirement Trust Deseret Mutual Howard Hughes Medical Institute IBM Retirement Trust Illinois State Board of Investment Kodak Retirement Income Plan Omaha School Employees Retirement System Pacific Life Insurance Company Public Employees Retirement Association of Colorado School Employees Retirement Board of Ohio State of Wisconsin Investment Board State Treasurer of the State of Michigan The Rockefeller Foundation Teachers Retirement System of the State of Illinois U.S. Steel Retirement Plan Trust Virginia Retirement System Western Region Regional President Acquisition Officers Historical Activity* Total Invested Capital: $3.27 Billion Total Assets: 143 Total Sq. Ft.: 18.6 Million Total Sold: $1.58 Billion Total Held: $1.90 Billion Central Region Regional President Acquisition Officers Historical Activity* Total Invested Capital: $4.06 Billion Total Assets: 216 Total Sq. Ft.: 33.8 Million Total Sold: $1.44 Billion Total Held: $2.62 Billion Eastern Region Regional President Acquisition Officers Historical Activity* Total Invested Capital: $4.16 Billion Total Assets: 154 Total Sq. Ft.: 35.2 Million Total Sold: $1.90 Billion Total Held: $2.65 Billion Mortgages, CMBs and debt InvestMents Total Invested Capital...$1.83 Billion Total Assets...130 Total Sold...$0.89 Billion Total Held...$1.15 Billion Data as of 06/30/11 *The information represents all KBS activities and does not include KBS REIT III activities, as KBS REIT III has not yet acquired any assets. Atlanta Regional activity includes equity assets only. Square footage does not include debt acquisitions. Total invested capital represents purchase price (including acquisition fees and closings costs) plus subsequent capital expenditures for equity assets or subsequent loan draws for debt assets. Total sold represents sales prices of sold assets or total payoffs of debt assets. Total held represents invested capital in assets held as of June 30, 2011.
INCOME AND LONG TERM GROWTH Q: How does KBS generate both income and long term growth for its non-traded REITs? A: Quality assets, knowledgeable people, and the delivery of these five key factors: Dollars in the Ground Among the lowest-fee non-traded REITs in the United States, KBS REIT III puts more of its investors dollars in the ground than most other programs. Lower up-front fees translate into more of the REIT s capital invested in the portfolio and working for investors. 1 Capitalization Rates and Purchase Prices For income-producing properties, price ranges are driven largely by capitalization rates. KBS REIT III looks for properties with capitalization rates that will support the targeted income distribution to the investor while also fitting the desired risk profile of the portfolio. As a large-volume purchaser, KBS affiliates potentially can negotiate purchase prices that may result in a more advantageous capitalization rate than can other buyers. Today s typical capitalization rates are higher (translation: property prices are lower) than in recent years, which suggests KBS REIT III may be buying at the right time, especially if overall capitalization rates come back down in the near future (translation: property prices are higher). Lease Terms and Rent Roll All things being equal, a REIT portfolio with enhanced lease terms between the owners and higher-quality tenants likely will perform better than programs with less attractive lease structures. KBS affiliates have always pursued building portfolios of diversified, quality tenants with a desirably staggered schedule of lease expirations, a policy that KBS REIT III will continue. Loan Terms and Leverage Again, due to their relative financial strength and purchasing power, KBS affiliates enjoy preferred loan terms for their properties. With a targeted total portfolio loan-to-value ratio of 35%-65% 2, KBS REIT III should have the flexibility to achieve the ideal risk-reward balance necessary to optimize return to investors and to obtain advantageous loan terms across its leveraged portfolio. Cash Flow and Dividend Coverage The primary objective of KBS REIT III is to provide income for its investors while preserving capital and ultimately creating an opportunity for principal growth. In order to provide an income distribution that does not erode the potential for appreciation, a REIT must generate sufficient earnings early enough in its life-cycle to adequately cover the amount of its distributions. The philosophy of KBS REIT III is not to pay distributions to investors from offering proceeds. KBS REIT III is committed to covering its distributions to investors from its funds from operations (FFO) and seeks to achieve this via its unique hybrid investment strategy. 1 2010 Fall Stanger Report. 2 The prospectus provides that we may incur debt up to 75% of the cost of our tangible assets and we may exceed this limit with the approval of the conflicts committee of our board of directors.
5068-C_reit brochure 8/24/11 2:21 PM Page 6 H YBRID STRATEGY Own. CLASS A CORE WHY A HYBRID APPROACH? EQUITY ACQUISITIONS Credit-rated Tenants Professional Management Mature Properties with High Occupancies Consistent Cash Flow FIRST MORTGAGES KBS REIT III employs a unique hybrid investment strategy, focused on both equity and debt investments, with approximately 70% of invested capital in core real estate assets while the remaining 30% is targeted at potentially higher yielding structured debt investments and value-added properties. This strategy is intended to provide increased risk management as well as broad portfolio diversification by property type, geographic region, investment size and investment risk. The objectives of KBS REIT III are preservation and return of capital, attractive and stable income and long-term growth. Industrial and Office 1 Loan. STRUCTURED DEBT Mezzanine, Bridge loan and Subordinated debt: Capital Preservation Income Steady Income Stream Senior Priority Opportunity for Growth on Discounted Debt Higher Yield Potential Higher Risk Flexible Capital Structure Growth KEY TERMS The buildings pictured are assets owned by other KBS REIT offerings and are shown to provide the investor with a representation of the types of properties KBS REIT III may purchase. ALIGNED INTEREST Our advisor will not receive any of its net cash flow-based incentive fee until its investors have received their initial investment back plus an amount equal to 8% of their initial investment (per annum, cumulative, non-compounded return). In other words, our advisor doesn t receive additional funds until our investors receive additional funds.2 2 KBS Capital Advisors will receive substantial fees prior to the calculation of the net cash flows regardless of whether or not the 8% cumulative non-compounded return rate is reached. 1 The REIT may also purchase enhanced return equity acquisitions, which may provide increased postpurchase value from capital improvement, active management, increasing and stabilizing cash flow and repositioning, but also are riskier than class A acquisitions Equity: The hypothetical value of the ownership interest in a property as a net of its market price minus all debt. Equity Mezzanine Debt: Higher-interest loan in which the lender reserves the right to take over an ownership interest if the loan is not paid on time and in full; typically shorter term loans. Mezzanine Debt First Mortgage First Mortgage: A senior loan collateralized by real property; has priority over all other liens except those imposed by law. Flow of Payments
KBS REIT III Investment Vehicle Overview Non-traded Real Estate Investment Trust $2 Billion Primary Offering Size Portfolio Profile The portfolio will consist primarily of core real estate assets and real estate-related assets. Share Redemption Program 1 Share Price Anniversary (Year) Less than 1 1 2 3 4 Redemption Price No Redemption 92.5% 95.0% 97.5% 100.0% Objective Attractive and stable cash distributions, capital preservation and long term growth with a 5-7 year disposition strategy. 300 N. LaSalle is an asset owned by KBS Real Estate Investment Trust II, Inc., and is shown to provide the investor with a representation of the types of properties KBS REIT III may purchase. Portfolio diversified by property type, geographic region, investment size and investment risk. 1 Redemption may be available at purchase price (unless an estimated value per share has been established) due to qualifying exceptions such as death, disability or determination of incompetence of the stockholder. Redemption of shares is limited to 5% of shareholder s outstanding balance per year and is also limited to funds available from net proceeds from the sale of shares under our dividend reinvestment program during the prior calendar year. The share redemption program may be amended, suspended or terminated at any time by the board of directors.
REIT FEATURES AND BENEFITS A REIT is an investment company that buys and manages real estate and real estate-related assets. A REIT can have thousands of investors, creating purchasing power to give a REIT the potential to buy institutional-class properties otherwise unavailable to individual investors. Both traded and nontraded REITs provide investors with all the advantages of real estate investment without the unmanageable capital and labor challenges. More importantly, both REIT types pass 90+ percent of their taxable income to shareholders income that is not subject to corporate income tax. But unlike traded REITs, non-traded REITs do not trade on a public exchange, so their share value is generally unaffected by the day-to-day volatility of the traded securities markets. Non-traded REITs behave more like a hard asset: their performance is derived from tenant leases which is less correlated than traded REITs with the direction of the overall market. Non-traded REITs represent long-term investments, and are illiquid compared to traded REITs. ADDITIONAL DISCLOSURES: KBS REIT III s organizational documents do not restrict it from paying distributions from any source and do not restrict the amount of distributions it may pay from any source, including offering proceeds. Distributions paid from sources other than current or accumulated earnings and profits may constitute a return of capital. A return of capital would reduce the amount KBS REIT III would have for investment, which could reduce an investor's return on investment. There are no guarantees that KBS REIT III will pay distributions. KBS Capital Advisors and its affiliates, its executive officers, some of its directors and other key professionals will face conflicts of interest, including significant conflicts created by its advisor s compensation arrangements with the REIT and other KBS-sponsored programs and investors. KBS REIT III expects to use debt in connection with its investments, which increases the risk of loss associated with these investments and could hinder its ability to pay distributions to its stockholders or could decrease the value of its stockholders investments if income on, or the value of, the property securing the debt declines. KBS REIT III may make adjustments to its target portfolio based on real estate market conditions and investment opportunities, and it may change its targeted investments and investment guidelines at any time without the consent of its stockholders. Some of the real estate-related investments may have additional risk exposure; such as interest rate risk, default risk and decrease in property values, which could impact the value of the real estate-related investments. KBS REIT III has no operating history and does not currently own any real estate properties or real estate-related assets and has not identified any assets to acquire or originate with proceeds from this offering. KBS REIT III elected to be taxed as a REIT beginning with the taxable year that will end December 31, 2011. Should KBS REIT III not qualify as a REIT, it will be subject to adverse tax consequences. Please refer to the prospectus for more detailed information regarding these consequences. The offering price of KBS REIT III is set arbitrarily and is unrelated to the book or net value of the assets or to expected operating income. Substantial fees and expenses are paid to the advisor, its affiliates and participating broker-dealers. These fees increase an investor's risk of loss. Fees paid to the advisor in connection with transactions involving the acquisition or origination and management of the investments are based on the cost of the investment, not on the quality of the investment or services rendered. Current market conditions have and may continue to have a significant impact on real estate investments. In addition, these market conditions have impacted tenants businesses, which makes it more difficult for them to meet current lease obligations and places pressure on them to negotiate favorable lease terms upon renewal. Continued disruptions in the financial markets and uncertain economic conditions could adversely affect the value of KBS REIT III s investments. An investment in KBS REIT III is complex. Investors should read and understand the prospectus, which contains additional important information. Financial Professional information: KBS Capital Markets Group, LLC 660 Newport Center Drive, Suite 1200 Newport Beach, CA 92660 (866) KBS-4CMG (5 2 7-4 2 6 4 ) www.kbs-cmg.com 0910-08 Copyright 2010, KBS Capital Markets Group, LLC Securities distributed by KBS Capital Markets Group, LLC, Member FINRA & SIPC. 5068-C