Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

2014

Commission File Number: 000-53650

Behringer Harvard Opportunity REIT II, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

20-8198863

Maryland20-8198863
(State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer

Identification No.)

15601 Dallas Parkway, Suite 600, Addison, Texas 75001

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code:  (866) 655-3600

None

(Former name, former address and former fiscal year, if changed since last report)

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 xý No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, 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 xý No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No xý

As of April 30, 2013,2014, Behringer Harvard Opportunity REIT II, Inc. had 26,040,58226,002,347 shares of common stock outstanding.





Table of Contents


BEHRINGER HARVARD OPPORTUNITY REIT II, INC.

FORM 10-Q

Quarter Ended March 31, 2013

2014

Page

PART I

FINANCIAL INFORMATION

Page

PART I

FINANCIAL INFORMATION

Condensed Consolidated Balance Sheets as of March 31, 20132014 and December 31, 2012

2013

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 20132014 and 2012

2013

Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 20132014 and 2012

2013

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 20132014 and 2012

2013

23

32

33

34

34

34

35

35

35

35

36

2



2

Table of Contents


PART I

FINANCIAL INFORMATION

Item 1.                   Financial Statements.

Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except shares)

(unaudited)

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Real estate

 

 

 

 

 

Land and improvements, net

 

$

65,531

 

$

73,380

 

Buildings and improvements, net

 

217,237

 

199,915

 

Real estate under development

 

6

 

838

 

Total real estate

 

282,774

 

274,133

 

 

 

 

 

 

 

Assets associated with real estate held for sale

 

24,520

 

 

Cash and cash equivalents

 

69,427

 

77,752

 

Restricted cash

 

3,841

 

3,491

 

Accounts receivable, net

 

3,063

 

3,008

 

Receivable from related party

 

 

3,269

 

Prepaid expenses and other assets

 

1,469

 

1,781

 

Furniture, fixtures and equipment, net

 

7,816

 

6,864

 

Acquisition deposits

 

609

 

 

Deferred financing fees, net

 

3,609

 

3,398

 

Lease intangibles, net

 

5,304

 

5,370

 

Total assets

 

$

402,432

 

$

379,066

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Notes payable

 

$

199,156

 

$

183,308

 

Accounts payable

 

1,489

 

1,777

 

Payables to related parties

 

568

 

 

Acquired below-market leases, net

 

805

 

904

 

Accrued and other liabilities

 

6,957

 

6,544

 

Obligations associated with real estate held for sale

 

11,322

 

 

Total liabilities

 

220,297

 

192,533

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding

 

 

 

Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding

 

 

 

Common stock, $.0001 par value per share; 350,000,000 shares authorized, 26,040,582 and 26,060,612 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

 

3

 

3

 

Additional paid-in capital

 

233,112

 

233,283

 

Accumulated distributions and net loss

 

(62,581

)

(58,249

)

Accumulated other comprehensive income

 

(197

)

126

 

Total Behringer Harvard Opportunity REIT II, Inc. equity

 

170,337

 

175,163

 

Noncontrolling interest

 

11,798

 

11,370

 

Total equity

 

182,135

 

186,533

 

Total liabilities and equity

 

$

402,432

 

$

379,066

 

  March 31, 2014 December 31, 2013
Assets  
  
Real estate  
  
Land and improvements, net $65,377
 $65,407
Buildings and improvements, net 218,620
 219,523
Real estate under development 316
 99
Total real estate 284,313
 285,029
Cash and cash equivalents 93,204
 94,877
Restricted cash 4,956
 5,343
Accounts receivable, net 2,187
 3,017
Prepaid expenses and other assets 1,277
 1,196
Investment in unconsolidated joint venture 12,112
 11,985
Furniture, fixtures and equipment, net 7,757
 7,923
Deferred financing fees, net 2,964
 3,185
Lease intangibles, net 1,493
 1,820
Total assets $410,263
 $414,375
Liabilities and Equity  
  
Notes payable $211,446
 $212,037
Accounts payable 695
 513
Payables to related parties 1,263
 840
Acquired below-market leases, net 294
 324
Distributions payable to noncontrolling interest 56
 20
Income taxes payable 
 183
Accrued and other liabilities 6,901
 7,669
Total liabilities 220,655
 221,586
     
Commitments and contingencies 
 
     
Equity  
  
Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding 
 
Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding 
 
Common stock, $.0001 par value per share; 350,000,000 shares authorized, 26,002,347 and 26,015,980 shares issued and outstanding at March 31, 2014 and December 31, 2013, respectively 3
 3
Additional paid-in capital 232,786
 232,903
Accumulated distributions and net loss (52,404) (49,520)
Accumulated other comprehensive income 539
 498
Total Behringer Harvard Opportunity REIT II, Inc. equity 180,924
 183,884
Noncontrolling interest 8,684
 8,905
Total equity 189,608
 192,789
Total liabilities and equity $410,263
 $414,375
See Notes to Unaudited Condensed Consolidated Financial Statements.

3



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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share amounts)

(unaudited)

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

Rental revenue

 

$

8,665

 

$

7,924

 

Hotel revenue

 

3,617

 

2,475

 

 

 

 

 

 

 

Total revenues

 

12,282

 

10,399

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

Property operating expenses

 

5,815

 

5,261

 

Interest expense

 

2,044

 

1,878

 

Real estate taxes

 

1,189

 

1,052

 

Property management fees

 

446

 

380

 

Asset management fees

 

681

 

770

 

General and administrative

 

801

 

624

 

Acquisition expense

 

1,871

 

 

Depreciation and amortization

 

3,684

 

3,773

 

Total expenses

 

16,531

 

13,738

 

 

 

 

 

 

 

Interest income, net

 

32

 

31

 

Other income (expense)

 

(11

)

30

 

 

 

 

 

 

 

Loss from continuing operations

 

(4,228

)

(3,278

)

 

 

 

 

 

 

Income (loss) from discontinued operations, including gains on disposition

 

(285

)

7,400

 

 

 

 

 

 

 

Net income (loss)

 

(4,513

)

4,122

 

 

 

 

 

 

 

Noncontrolling interest in continuing operations

 

124

 

244

 

Noncontrolling interest in discontinued operations

 

57

 

(673

)

Net (income) loss attributable to the noncontrolling interest

 

181

 

(429

)

 

 

 

 

 

 

Net income (loss) attributable to the Company

 

$

(4,332

)

$

3,693

 

 

 

 

 

 

 

Amounts attributable to the Company

 

 

 

 

 

Continuing operations

 

$

(4,104

)

$

(3,034

)

Discontinued operations

 

(228

)

6,727

 

Net income (loss) attributable to the Company

 

$

(4,332

)

$

3,693

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic and diluted

 

26,054

 

25,728

 

 

 

 

 

 

 

Net income (loss) per share

 

 

 

 

 

Continuing operations

 

$

(0.16

)

$

(0.12

)

Discontinued operations

 

(0.01

)

0.26

 

Basic and diluted income (loss) per share

 

$

(0.17

)

$

0.14

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

Net income (loss)

 

$

(4,513

)

$

4,122

 

Other comprehensive income (loss):

 

 

 

 

 

Reclassification of unrealized loss on interest rate derivatives to net income

 

32

 

 

Unrealized loss on interest rate derivatives

 

 

(1

)

Foreign currency translation gain (loss)

 

(352

)

97

 

Total other comprehensive income (loss)

 

(320

)

96

 

Comprehensive income (loss)

 

(4,833

)

4,218

 

Comprehensive (income) loss attributable to noncontrolling interest

 

178

 

(429

)

Comprehensive income (loss) attributable to common shareholders

 

$

(4,655

)

$

3,789

 

  Three Months Ended March 31,
  2014 2013
Revenues  
  
Rental revenue $7,881
 $5,852
Hotel revenue 4,364
 3,617
Total revenues 12,245
 9,469
Expenses  
  
Property operating expenses 2,724
 1,875
Hotel operating expenses 3,022
 2,753
Interest expense, net 2,063
 1,811
Real estate taxes 1,413
 904
Property management fees 427
 324
Asset management fees 970
 681
General and administrative 859
 801
Acquisition expense 
 1,871
Depreciation and amortization 3,662
 2,871
Total expenses 15,140
 13,891
Interest income, net 46
 29
Other income 
 (11)
Loss from continuing operations (2,849) (4,404)
Loss from discontinued operations 
 (109)
Net loss (2,849) (4,513)
Noncontrolling interest in continuing operations (35) 142
Noncontrolling interest in discontinued operations 
 39
Net (income) loss attributable to the noncontrolling interest (35) 181
Net loss attributable to the Company $(2,884) $(4,332)
Amounts attributable to the Company  
  
Continuing operations $(2,884) $(4,262)
Discontinued operations 
 (70)
Net loss attributable to the Company $(2,884) $(4,332)
Weighted average shares outstanding:  
  
Basic and diluted 26,011
 26,054
Net loss per share  
  
Continuing operations $(0.11) $(0.16)
Discontinued operations 
 (0.01)
Basic and diluted loss per share $(0.11) $(0.17)
Comprehensive loss:  
  
Net loss $(2,849) $(4,513)
Other comprehensive income (loss):  
  
Reclassification of unrealized loss on interest rate derivatives to net income 17
 32
Foreign currency translation gain (loss) 27
 (352)
Total other comprehensive income (loss) 44
 (320)
Comprehensive loss (2,805) (4,833)
Comprehensive (income) loss attributable to noncontrolling interest (38) 178
Comprehensive loss attributable to the Company $(2,843) $(4,655)

See Notes to Unaudited Condensed Consolidated Financial Statements.

4



4

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Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of  Equity

(unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Convertible Stock

 

Common Stock

 

Additional

 

Accumulated

 

Other

 

 

 

 

 

 

 

Number

 

Par

 

Number

 

Par

 

Paid-in

 

Distributions and

 

Comprehensive

 

Noncontrolling

 

Total

 

 

 

of Shares

 

Value

 

of Shares

 

Value

 

Capital

 

Net (Loss)

 

Income (loss)

 

Interest

 

Equity

 

Balance at January 1, 2012

 

1

 

$

 

25,267

 

$

3

 

$

225,968

 

$

(43,657

)

$

83

 

$

14,607

 

$

197,004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

3,693

 

 

 

429

 

4,122

 

Issuance of common stock, net

 

 

 

 

 

835

 

 

7,654

 

 

 

 

 

 

 

7,654

 

Redemption of common stock

 

 

 

 

 

(80

)

 

 

(725

)

 

 

 

 

 

 

(725

)

Distributions declared on common stock

 

 

 

 

 

 

 

 

 

 

 

(16,257

)

 

 

 

 

(16,257

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,209

 

1,209

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,687

)

(6,687

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses on interest rate derivatives

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

(1

)

Foreign currency translation gain

 

 

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

97

 

Balance at March 31, 2012

 

1

 

 

26,022

 

3

 

232,897

 

(56,221

)

179

 

9,558

 

$

186,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

1

 

$

 

26,060

 

$

3

 

$

233,283

 

$

(58,249

)

$

126

 

$

11,370

 

$

186,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(4,332

)

 

 

(181

)

(4,513

)

Redemption of common stock

 

 

 

 

 

(20

)

 

 

(171

)

 

 

 

 

 

 

(171

)

Contributions from noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

663

 

663

 

Distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(57

)

(57

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of unrealized loss on interest rate derivatives to net income

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

3

 

32

 

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(352

)

 

 

(352

)

Balance at March 31, 2013

 

1

 

$

 

26,040

 

$

3

 

$

233,112

 

$

(62,581

)

$

(197

)

$

11,798

 

$

182,135

 

(unaudited)
 Convertible Stock Common Stock   Accumulated Distributions and Net Income(Loss) Accumulated Other Comprehensive Income (Loss)    
 Number of Shares Par Value Number of Shares Par Value Additional Paid-in Capital   Noncontrolling Interest Total Equity
Balance at January 1, 20131
 $
 26,060
 $3
 $233,283
 $(58,249) $126
 $11,370
 $186,533
Net loss 
  
  
  
  
 (4,332)  
 (181) (4,513)
Redemption of common stock 
  
 (20)  
 (171)  
  
  
 (171)
Contributions from noncontrolling interest 
  
  
  
  
  
  
 663
 663
Distributions to noncontrolling interest 
  
  
  
  
  
  
 (57) (57)
Other comprehensive loss: 
  
  
  
  
  
  
  
  
Reclassification of unrealized losses on interest rate derivatives to net income 
  
  
  
  
  
 29
 3
 32
Foreign currency translation loss 
  
  
  
  
  
 (352)  
 (352)
Balance at March 31, 20131
 $
 26,040
 $3
 $233,112
 $(62,581) $(197) $11,798
 $182,135
                  
Balance at January 1, 20141
 $
 26,016
 $3
 $232,903
 $(49,520) $498
 $8,905
 $192,789
Net loss 
  
  
  
  
 (2,884)  
 35
 (2,849)
Redemption of common stock 
  
 (14)  
 (117)  
  
  
 (117)
Distributions to noncontrolling interest 
  
  
  
  
  
  
 (259) (259)
Other comprehensive income: 
  
  
  
  
  
  
  
  
Reclassification of unrealized loss on interest rate derivatives to net income 
  
  
  
  
  
 14
 3
 17
Foreign currency translation gain 
  
  
  
  
  
 27
  
 27
Balance at March 31, 20141
 $
 26,002
 $3
 $232,786
 $(52,404) $539
 $8,684
 $189,608
See Notes to Unaudited Condensed Consolidated Financial Statements.

5



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Table of Contents


Behringer Harvard Opportunity REIT II, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(4,513

)

$

4,122

 

Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,913

 

4,382

 

Amortization of deferred financing fees

 

256

 

253

 

Gain on sale of discontinued operations

 

 

(9,264

)

Loss on early extinguishment of debt

 

 

1,236

 

Loss on derivatives

 

71

 

 

Change in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(278

)

(104

)

Interest receivable-real estate loan receivable

 

 

 

Prepaid expenses and other assets

 

92

 

(328

)

Accounts payable

 

(249

)

(2,219

)

Accrued and other liabilities

 

379

 

1,166

 

Payables to related parties

 

5

 

28

 

Addition of lease intangibles

 

(501

)

(103

)

Cash used in operating activities

 

(825

)

(831

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition deposits

 

(290

)

 

Purchases of real estate

 

(35,337

)

 

Proceeds from sale of discontinued operations

 

 

38,684

 

Additions of property and equipment

 

(2,827

)

(1,839

)

Change in restricted cash

 

(152

)

(337

)

Cash provided by (used in) investing activities

 

(38,606

)

36,508

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Financing costs

 

(471

)

(788

)

Proceeds from notes payable

 

28,089

 

25

 

Payments on notes payable

 

(393

)

(20,188

)

Purchase of interest rate derivatives

 

(133

)

 

Payment of loan deposits

 

(60

)

 

Issuance of common stock

 

 

6,141

 

Redemptions of common stock

 

(171

)

(725

)

Offering costs receivable from related party

 

3,832

 

(553

)

Distributions

 

 

(1,100

)

Contributions from noncontrolling interest holders

 

663

 

1,209

 

Distributions to noncontrolling interest holders

 

(57

)

(6,687

)

Cash provided by (used in) financing activities

 

31,299

 

(22,666

)

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(193

)

28

 

Net change in cash and cash equivalents

 

(8,325

)

13,039

 

Cash and cash equivalents at beginning of period

 

77,752

 

80,130

 

Cash and cash equivalents at end of period

 

$

69,427

 

$

93,169

 


  Three Months Ended March 31,
  2014 2013
Cash flows from operating activities:  
  
Net loss $(2,849) $(4,513)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:  
  
Depreciation and amortization 3,634
 3,913
Amortization of deferred financing fees 221
 256
Loss on derivatives 56
 71
Change in operating assets and liabilities:  
  
Accounts receivable 330
 (278)
Prepaid expenses and other assets (120) 92
Accounts payable 201
 (249)
Accrued and other liabilities (1,165) 379
Payables to related parties 423
 5
Addition of lease intangibles (20) (501)
Cash provided by (used in) operating activities 711
 (825)
     
Cash flows from investing activities:  
  
Acquisition deposits reimbursed 500
 
Acquisition deposits paid 
 (290)
Purchases of real estate 
 (35,337)
Investment in unconsolidated joint venture (127) 
Additions of property and equipment (2,307) (2,827)
Change in restricted cash 387
 (152)
Cash used in investing activities (1,547) (38,606)
     
Cash flows from financing activities:  
  
Financing costs 
 (471)
Proceeds from notes payable 
 28,089
Payments on notes payable (529) (393)
Purchase of interest rate derivatives 
 (133)
Payment of loan deposits 
 (60)
Redemptions of common stock (117) (171)
Offering costs receivable from (payable to) related party 
 3,832
Contributions from noncontrolling interest holders 
 663
Distributions to noncontrolling interest holders (223) (57)
Cash provided by (used in) financing activities (869) 31,299
     
Effect of exchange rate changes on cash and cash equivalents 32
 (193)
     
Net change in cash and cash equivalents (1,673) (8,325)
Cash and cash equivalents at beginning of period 94,877
 77,752
Cash and cash equivalents at end of period $93,204
 $69,427
See Notes to Unaudited Condensed Consolidated Financial Statements.

6



6

Table of Contents


Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)

(Unaudited)


1.Business and Organization

Business

Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.

We acquire and operate commercial real estate and real estate-related assets.  In particular, we focus generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  In addition, our current opportunistic investment strategy also includes investments in real estate-related assets that present opportunities for higher current income.  Such investments may have capital gain characteristics, whether as a result of a discount purchase or related equity participations.  We may acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily, and other real properties.  These properties may be existing, income-producing properties, newly constructed properties, or properties under development or construction.  They may include multifamily properties purchased for conversion into condominiums and single-tenant properties that may be converted for multi-tenant use.  We may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  Further, we also may originate or invest in collateralized mortgage-backed securities and mortgage, bridge or mezzanine loans, or in entities that make investments similar to the foregoing.  We expect to make our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions.  As of March 31, 2013,2014, we had 1113 real estate investments, all12 of which were consolidated into our condensed consolidated financial statements including the remaining three buildings at Interchange Business Center classified as held for sale.

(two wholly owned and ten properties consolidated through investments in joint ventures).

Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (“Behringer Harvard Opportunity OP II”).  As of March 31, 2013,2014, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, was the sole general partner of Behringer Harvard Opportunity OP II and owned a 0.1% partnership interest in Behringer Harvard Opportunity OP II.  As of March 31, 2013,2014, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of Behringer Harvard Opportunity OP II and owned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.

We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC.LLC (the "Advisor").  The Advisor is responsible for managing our day-to-day affairs and for identifying and making acquisitions and investments on our behalf.

Organization
Organization

In connection with our initial capitalization, on January 19, 2007, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings.  Behringer Harvard Holdings, LLC ("BHH").  BHH transferred its shares of convertible stock to the Advisorone of its affiliates on April 2, 2010.

As of March 31, 2013,2014, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by Behringer Harvard HoldingsBHH and 2.2 million shares issued through the distribution reinvestment plan (the “DRP”).  As of March 31, 2013,2014, we had redeemed 0.7 million shares of our common stock and had 26.026 million shares of common stock outstanding.  As of March 31, 2013,2014, we had 1,000 shares of convertible stock issued and outstanding to the Advisor.

held by an affiliate of BHH.

Our common stock is not currently listed on a national securities exchange.  DependingThe timing of a liquidity event will depend upon then prevailing market conditions, it is our intentionconditions. We currently intend to consider beginning the process of disposing assets, liquidating, our assets and distributing the net proceeds to our stockholders within no later than three to six years after the termination of our initial public offering of common stock.stock, which occurred on July 3, 2011.  Economic or market conditions may, however, result in different holding periods for different assets. If we do not begin an orderly liquidation, within that period, we may seek to have our shares listed on a national securities exchange.

exchange or seek alternative liquidation opportunities. 


7

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)



2.Interim Unaudited Financial Information

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2012,2013, which was filed with the SEC on March 28, 2013.26, 2014.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheet as of March 31, 2013,2014, the condensed consolidated statements of

7



Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

operations and comprehensive income (loss), changes in for the three months ended March 31, 2014 and 2013 and condensed consolidated statements of equity and cash flows for the three months ended March 31, 20132014 and 20122013 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of March 31, 20132014 and December 31, 20122013 and our condensed consolidated results of operations and cash flows for the periods ended March 31, 20132014 and 2012.2013.  Such adjustments are of a normal recurring nature.

In the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.

3.3.                                     Summary of Significant Accounting Policies


Described below are certain of our significant accounting policies.  The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, and profits have been eliminated in consolidation.  Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.  InFor entities in which we have less than a controlling interest or entities which we are not deemed to be the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousandsprimary beneficiary, we account for the investment using the equity method of dollars and shares, respectively, unless otherwise noted.

accounting.

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.


8

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Real Estate

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which we obtain control of the real estate property.  The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships.  Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in the period incurred.  Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants.  The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases.  We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.

The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering current market conditions.  In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on current market conditions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.


9

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Anticipated amortization expense associated with the acquired lease intangibles for each of the following five years excluding properties classified as discontinued operations as of March 31, 20132014 is as follows:

Year

 

Lease / Other
Intangibles

 

April 1, 2013 - December 31, 2013

 

$

1,418

 

2014

 

709

 

2015

 

380

 

2016

 

244

 

2017

 

195

 

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Year
Lease / Other
Intangibles
April 1, 2014 - December 31, 2014$196
2015125
2016109
201758
201823

Accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows:

 

 

 

 

 

 

 

 

Acquired

 

 

 

Buildings and

 

Land and

 

Lease

 

Below-Market

 

March 31, 2013

 

Improvements

 

Improvements

 

Intangibles

 

Leases

 

Cost

 

$

236,087

 

$

67,467

 

$

14,168

 

$

(2,173

)

Less: depreciation and amortization

 

(18,850

)

(1,936

)

(8,864

)

1,368

 

 

 

 

 

 

 

 

 

 

 

Net (1)

 

$

217,237

 

$

65,531

 

$

5,304

 

$

(805

)

 

 

 

 

 

 

 

 

Acquired

 

 

 

Buildings and

 

Land and

 

Lease

 

Below-Market

 

December 31, 2012

 

Improvements

 

Improvements

 

Intangibles

 

Leases

 

Cost

 

$

217,343

 

$

75,873

 

$

14,041

 

$

(2,196

)

Less: depreciation and amortization

 

(17,428

)

(2,493

)

(8,671

)

1,292

 

 

 

 

 

 

 

 

 

 

 

Net

 

$

199,915

 

$

73,380

 

$

5,370

 

$

(904

)


(1)Excludes the remaining three industrial buildings at Interchange Business Center, which were sold on April 12, 2013 (classified as held for sale as of March 31, 2013).

March 31, 2014 Buildings and Improvements Land and Improvements Lease Intangibles Acquired
Below-Market Leases
Cost $243,645
 $66,964
 $4,697
 $(748)
Less: depreciation and amortization (25,025) (1,587) (3,204) 454
Net $218,620
 $65,377
 $1,493
 $(294)
December 31, 2013 Buildings and Improvements Land and Improvements Lease Intangibles Acquired
Below-Market Leases
Cost $241,881
 $66,828
 $8,102
 $(768)
Less: depreciation and amortization (22,358) (1,421) (6,282) 444
Net $219,523
 $65,407
 $1,820
 $(324)

Real Estate Held for Sale

We classify properties as held for sale when certain criteria are met, in accordance with GAAP.  At that time we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  As of March 31, 2013, the remaining three industrial buildings at Interchange Business Center wereWe had no property classified as held for sale and a sale of the property was completed on April 12,at March 31, 2014 or December 31, 2013.

Investment Impairment

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer and Chief Accounting Officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other

10

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


factors in our assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.

In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements.

We also evaluate our investments in unconsolidated joint ventures at each reporting date.  If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations.  We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture.  In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.
We believe the carrying value of our operating real estate is currently recoverable.  Accordingly, there were no impairment charges for the three months ended March 31, 20132014 or 2012.2013.  However, if market conditions worsen beyond our current expectations, or if changes in our strategy significantly affect any key assumptions used in our fair value calculations,

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.

Investment in Unconsolidated Joint Venture
We provide funding to third party developers for the acquisition, development and construction of real estate (“ADC Arrangement”).  Under the ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property.  We evaluate this arrangement to determine if they have characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner.  When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting (Note 8) or a direct investment (consolidated basis of accounting) instead of applying loan accounting.  The ADC Arrangement is periodically reassessed.
Revenue Recognition

We recognize rental income generated from leases on real estate assetsof our operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rental revenuerent was a charge of $0.2 million andless than $0.1 million recognized in rental revenues for the three months ended March 31, 2014. Straight-line rent was income of $0.2 million recognized in rental revenues for the three months ended March 31, 2013 and 2012, respectively, and includesincluded amounts recognized in discontinued operations. Leases associated with our multifamily and student housing assets are generally short-term in nature, and thus have no straight-line rent. Net below marketabove-market lease amortization of less than $0.1$0.1 million was recognized in rental revenues for the three months ended March 31, 2014 and 2013 and 2012 and includes amounts recognizedrecognition of lease amortization in discontinued operations.

operations in 2013.

Hotel revenue is derived from the operations of the Courtyard Kauai at Coconut Beach Hotel consistingand consists primarily of guest room, food and beverage, and other ancillary revenues such as long distance telephone service, laundry and parking. Hotel revenue and is recognized as the services are rendered.


Accounts Receivable

Accounts receivable primarily consist of receivables related to our consolidated properties of $3.2$2.2 million which includesand $3 million as of March 31, 2014 and December 31, 2013, respectively, and include straight-line rental revenue receivables of $1.4$1 million as of March 31, 2013.  Accounts receivable primarily consisted of receivables related to our consolidated properties of $2.8 million which includes straight-line rental revenue receivables of $1.2 million as of2014 and December 31, 2012.

2013. 



11

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Furniture, Fixtures, and Equipment

Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the company’sCompany’s capitalization policy which uses the straight-line method over their estimated useful lives of five to seven years.years.  Maintenance and repairs are charged to operations as incurred.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $2.7$4.7 million and $2.3$4.2 million as of March 31, 20132014 and December 31, 2012,2013, respectively.

Deferred Financing Fees

Deferred financing fees are recorded at cost and are amortized to interest expense of our notes payable using a straight-line method that approximates the effective interest method over the life of the related debt.  Accumulated amortization of deferred financing fees was $1.6$2 million and $1.4$1.8 million as of March 31, 20132014 and December 31, 2012,2013, respectively.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT.

Taxable income from non-REIT activities managed through a taxable REIT subsidiary ("TRS") is subject to applicable federal, state, and local income and margin taxes. We have no taxable income associated with a TRS. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.


We have reviewed our tax positions under GAAP guidance that clarifiesclarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that the tax positions taken relative to our status as a REIT will be sustained in any tax examination.

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Foreign Currency Translation

For our international investmentinvestments where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss) (“OCI”("OCI"). Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations and comprehensive income (loss).


The Euro is the functional currency for the operations of Holstenplatz and Alte Jakobstraße. We also maintain a Euro-denominated bank account that is translated into U.S. dollars at the current exchange rate at each reporting period. For the three months ended March 31, 2014, the foreign currency translation adjustment was a gain of less than $0.1 million. For the three months ended March 31, 2013, the foreign currency translation adjustment was a loss of $0.4 million.  For the three months ended March 31, 2012, the foreign currency translation adjustment was a gain of $0.1 million.

Concentration of Credit Risk

At March 31, 20132014 and December 31, 2012,2013, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.



12

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Geographic Concentration

At any one time, a significant portion of our investments could be in one property class or concentrated in one or several geographic regions that are subject to higher risk of foreclosure. To the extent that our portfolio is concentrated in limited geographic regions, types of assets, industries or business sectors, downturns relating generally to such region, type of asset, industry or business sector may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations.

Noncontrolling Interest

Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage.  In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”).  If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interest which is different from the standard pro-rata allocation percentage.

Earnings per Share

Net income (loss) per share is calculated based on the weighted average number of common shares outstanding during each period.  The weighted average shares outstanding used to calculate both basic and diluted income (loss) per share were the same for each of the three months ended March 31, 20132014 and 2012,2013, as there were no potentially dilutive securities outstanding.

Reclassification
To conform to the current year presentation, which presents hotel operating expense as a separate component of property operating expense on our condensed consolidated statements of operations and comprehensive income, we reclassified $2.8 million from property operating expense to hotel operating expense for the three months ended March 31, 2013.

Subsequent Events

We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements and noted no subsequent events that would require adjustment to the condensed consolidated financial statements or additional disclosure.

disclosure other than the two disclosed herein. See Note 8 Investment in Unconsolidated Joint Venture and Note 17 Subsequent Events.


4.New Accounting Pronouncements

In February 2013,April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-022014-08 (“ASU 2013-02”2014-08”), Comprehensive Income (Topic 220)Presentation of Financial Statements and Property, Plant, and Equipment (Topics 205 and 360): Reporting Discontinued Operations and Disclosures of Amounts Reclassified OutDisposals of Accumulated Other Comprehensive Income.Components of an Entity.  The update clarifies howchanges the definition of discontinued operations by limiting discontinued operations reporting to reportdisposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. In addition, ASU 2014-08 requires expanded disclosures for discontinued operations so users of the effectfinancial statements will be provided with more information about the assets, liabilities, revenues and expenses of significant reclassifications out of accumulated other comprehensive income.discontinued operations. ASU 2013-022014-08 is effective prospectively for fiscal years,all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years,years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. We are currently evaluating the impact the adoption of this guidance may have on our condensed consolidated financial condition, results of operations, cash flows or disclosures.

In February 2013, the FASB issued updated guidance for the measurement and disclosure of obligations. The guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. The guidance in the update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. This guidance was effective for the first interim or annual

13

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


period beginning on or after December 15, 2012 and is to be applied prospectively.  Our2013. The adoption of this ASU in the first quarter of 2013guidance did not materially change the presentation ofhave a material impact on our consolidated condensed financial statements.statements or disclosures.

5.

5.Assets and Liabilities Measured at Fair Value

Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or

12



Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Recurring Fair Value Measurements

Currently, we use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of March 31, 2013,2014, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of March 31, 20132014 and December 31, 2012.

March 31, 2013

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

106

 

$

 

$

106

 

December 31, 2012

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

$

 

$

13

 

$

 

$

13

 

2013:

March 31, 2014 Level 1 Level 2 Level 3 Total
Assets  
  
  
  
Derivative financial instruments $
 $137
 $
 $137
December 31, 2013 Level 1 Level 2 Level 3 Total
Assets  
  
  
  
Derivative financial instruments $
 $174
 $
 $174
Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet.


14

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)



6.Financial Instruments not Reported at Fair Value

We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

As of March 31, 20132014 and December 31, 2012,2013, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities, and payables/receivables from related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities.  The notes payable including the loan classified as obligations associated with real estate held for sale at March 31, 2013 secured by the three remaining industrial buildings at Interchange Business Center, totaling $210.4of $211.4 million and $183.3$212 million as of March 31, 20132014 and December 31, 2012,2013, respectively, have a fair value of approximately $207.2$208.0 million and $179.4$207.8 million as of March 31, 20132014 and December 31, 2012,2013, respectively, based upon interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  The fair value of the notes payable is categorized as a Level 2 basis.  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.  Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 20132014 and December 31, 2012.

132013. 




Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

7.Real Estate and Real Estate-Related Investments


As of March 31, 2013,2014, we consolidated 1112 real estate investments, including one investment classified as held for sale on our condensed consolidated balance sheet.assets.  The following table presents certain information about our consolidated investments as of March 31, 2013:

Property Name

 

Location

 

Date Acquired

 

Ownership
Interest

 

1875 Lawrence

 

Denver, CO

 

October 28, 2008

 

100

%

Holstenplatz

 

Hamburg, Germany

 

June 30, 2010

 

100

%

Florida MOB Portfolio

(1)

South Florida

 

October 8, 2010/October 20, 2010

 

90

%

Courtyard Kauai Coconut Beach Hotel

 

Kauai, Hawaii

 

October 20, 2010

 

80

%

Interchange Business Center

(2)

San Bernardino, California

 

November 23, 2010

 

80

%

River Club and the Townhomes at River Club

 

Athens, Georiga

 

April 25, 2011

 

85

%

Babcock Self Storage

 

San Antonio, Texas

 

August 30, 2011

 

85

%

Lakes of Margate

 

Margate, Florida

 

October 19, 2011

 

92.5

%

Arbors Harbor Town

 

Memphis, Tennessee

 

December 20, 2011

 

94

%

Alte Jakobstraße

 

Berlin, Germany

 

April 5, 2012

 

99.7

%

Wimberly at Deerwood

 

Jacksonville, Florida

 

February 19, 2013

 

95

%

2014:


Property NameDescriptionLocationDate Acquired
Ownership
Interest
1875 LawrenceOffice buildingDenver, COOctober 28, 2008100%
HolstenplatzOffice buildingHamburg, GermanyJune 30, 2010100%
Gardens Medical Pavilion(1)
Medical office buildingPalm Beach Gardens, FloridaOctober 20, 201079.8%
Courtyard Kauai Coconut Beach HotelHotelKauai, HawaiiOctober 20, 201080%
River Club and the Townhomes at River ClubStudent housingAthens, GeorgiaApril 25, 201185%
Babcock Self StorageSelf storageSan Antonio, TexasAugust 30, 201185%
Lakes of MargateMultifamilyMargate, FloridaOctober 19, 201192.5%
Arbors Harbor TownMultifamilyMemphis, TennesseeDecember 20, 201194%
Alte JakobstraßeOffice buildingBerlin, GermanyApril 5, 201299.7%
Wimberly at Deerwood ("Wimberly")MultifamilyJacksonville, FloridaFebruary 19, 201395%
22 ExchangeStudent housingAkron, OhioApril 16, 201390%
Parkside Apartments ("Parkside")MultifamilySugarland, TexasAugust 8, 201390%
 ________________________________
(1) 
We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio on October 8, 2010.  We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010.  Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion were referred to as the Florida MOB Portfolio.  The Florida MOB Portfolio consisted of nine medical office buildings.  On September 20, 2013, we sold the Original Florida MOB Portfolio. As of March 31, 2014, we own approximately 79.8% of the ninth building, Gardens Medical Pavilion.

15

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)



8.Investment in Unconsolidated Joint Venture
On May 24, 2013, we provided mezzanine financing totaling $13.7 million to an unaffiliated third-party entity that owns and will develop an apartment complex in Denver, Colorado (“Prospect Park”).  The developer also has a portfoliosenior construction loan with a third-party lender, in an aggregate principal amount of eight medical office buildings, known as$35.6 million.  The senior construction loan is guaranteed by the Original Florida MOB Portfolio on October 8, 2010.  We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010.  Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion are referred to as the Florida MOB Portfolio.  The Florida MOB Portfolio consists of nine Medical Office Buildings.  We own 90% of each of eightowners of the buildings.developer.  Our mezzanine loan to the developer is subordinate to the senior construction loan.  The loan is collateralized by the property and has an annual interest rate of 10% for the first three years of the term, followed by twoone-year extension options at which point, the annual interest rate would increase to 14%.  We own 90% ofhave evaluated this ADC Arrangement and determined that the characteristics are similar to a 90%jointly-owned investment or partnership, and accordingly, the investment is accounted for as an unconsolidated joint venture interestunder the equity method of accounting instead of loan accounting since we will participate in the ninth building, Gardens Medical Pavilion.

(2) On October 18, 2012, we sold oneresidual interests through the sale or refinancing of the four industrial buildings at Interchange Business Center.  On April 12, 2013, we sold the remaining three buildings.  The three buildings are classified as held for sale on our condensed consolidated balance sheet asproperty.

As of March 31, 2013.

Real Estate Asset Acquisitions

Wimberly at Deerwood

On February 19, 2013, we acquired Wimberly at Deerwood (“Wimberly”), a 322-unit multifamily community in Jacksonville, Florida, from an unaffiliated third party.  The purchase price for Wimberly, excluding closing costs,2014, the outstanding principal balance under our mezzanine loan was approximately $35.6 million.  In connection with the acquisition of Wimberly, on February 19, 2013, we entered into a loan for approximately $26.7$13.7 million with an unaffiliated third party.   The loan bears interest at a variable annual rate of approximately 2.28% plus 30-day LIBOR and requires interest-only payments. Interest capitalized for the first 24 months.  The loan may not be prepaid in whole or in part during the first year.  After the first year, the loan may be prepaid in whole (but not in part) with payment of prepayment fees.  The loan must be repaid in its entirety by March 2023.

Wimberly contributed rental revenue of $0.4 million and a GAAP net loss of $1.2 million to our condensed consolidated statements of operations for the period from February 19, 2013 throughthree months ending March 31, 2013. During2014 was $0.1 million.  For the three months ended March 31, 2013,2014, we incurred $0.8 millionrecorded no equity in unaffiliated third party acquisition expensesearnings (losses) of unconsolidated joint venture related to the acquisition of Wimberly. our investment in Prospect Park.

The following unaudited pro forma summary presents consolidated information as iftable sets forth our ownership interest in Prospect Park: 
Property Name Ownership Interest at March 31, 2014 Carrying Amount at March 31, 2014  
Prospect Park N/A $12,112 (1)
  ______________________________
(1)During the three months ended March 31, 2014, we capitalized $0.1 million of interest. For the year ended December 31, 2013, approximately $2 million of the $2.4 million of distributions was an interest reserve funded at closing (classified as restricted cash on the condensed consolidated balance sheet). The balance of the interest reserve was $0.8 million at March 31, 2014.

On April 28, 2014, after the business combination had occurred on January 1, 2012:

 

 

Pro Forma for the Three Months Ended March 31,

 

 

 

2013

 

2012

 

Revenue

 

$

12,852

 

$

11,360

 

Net income (loss)

 

$

(4,698

)

$

898

 

Net income (loss) per share

 

$

(0.18

)

$

0.03

 

These pro forma amounts have been calculated after applying our accounting policiesend of the quarter, the senior construction lender issued a notice of an event of default and adjusting the resultsreservation of Wimberly to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustmentsrights letter to the tangibledeveloper and intangible assets had been applied from January 1, 2012.  Includedprincipal owner of Prospect Park.  The senior construction lender cited projected cost overruns as a material adverse change, which they determined to be an event of default under the senior loan agreement.  A default under the senior loan agreement constitutes a default under our mezzanine loan agreement.  As a result, we, as the mezzanine lender, also issued a notice of an event of default and reservation of rights letter to the developer and principal owner of Prospect Park on April 5, 2014. The developer is currently in negotiations with the pro forma net income (loss) forconstruction lender, as well as us, to remedy the three months ended March 31, 2013event of default. We will continue to monitor this situation and 2012 is depreciation and amortization expense of $0.4 million and $1 million, respectively.

14

any impact this event might have on our ability to ultimately realize our asset.



16

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)




(Unaudited)9.

The following table summarizes the amounts of identified assets acquired at the acquisition date:

 

 

Wimberly

 

Building

 

$

28,089

 

Land

 

4,540

 

Furniture, fixtures and equipment

 

1,204

 

Lease intangibles, net

 

815

 

Land improvements

 

533

 

Signage, landscaping and misc. site improvements

 

400

 

Total identifiable net assets

 

$

35,581

 

We are in the process of finalizing our acquisition allocations, which are subject to change until the information is finalized, which will be no later than twelve months from the acquisition date.

Real Estate Asset Dispositions

Interchange Business Center

On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center for a contract sales price of approximately $7.5 million, excluding transaction costs.  On April 12, 2013, we sold the remaining three buildings for a contract sales price of approximately $40.4 million, excluding transaction costs.  A portion of the proceeds from the sale of the asset were used to pay off in full the existing indebtedness of approximately $11.3 million secured by the property.  The remaining three buildings were classified as held for sale on our condensed consolidated balance sheet as of March 31, 2013.

8.Notes Payable

The following table sets forth information on our notes payable as of March 31, 20132014 and December 31, 2012:

 

 

Notes Payable as of

 

Interest

 

Maturity

 

Description

 

March 31, 2013

 

December 31, 2012

 

Rate

 

Date

 

1875 Lawrence

 

$

15,500

 

$

15,500

 

30-day LIBOR + 5.35% (1)

 

01/01/16

 

Interchange Business Center

 

 

9,882

 

30-day LIBOR + 5% (1)(2)(3)

 

12/01/13

 

Holstenplatz

 

10,009

 

10,375

 

3.887%

 

04/30/15

 

Courtyard Kauai at Coconut Beach Hotel

 

38,000

 

38,000

 

30-day LIBOR + .95% (1)

 

11/09/15

 

Florida MOB Portfolio - Palmetto Building

 

6,039

 

6,077

 

4.55%

 

01/01/16

 

Florida MOB Portfolio - Victor Farris Building

 

12,174

 

12,249

 

4.55%

 

01/01/16

 

Florida MOB Portfolio - Gardens Medical Pavilion

 

14,300

 

14,385

 

4.9%

 

01/01/18

 

River Club and the Townhomes at River Club

 

25,200

 

25,200

 

5.26%

 

05/01/18

 

Babcock Self Storage

 

2,214

 

2,225

 

5.80%

 

08/30/18

 

Lakes of Margate

 

15,126

 

15,182

 

5.49% and 5.92%

 

01/01/20

 

Arbors Harbor Town

 

26,000

 

26,000

 

3.985%

 

01/01/19

 

Alte Jakobstraße

 

7,909

 

8,233

 

2.3%

 

12/30/15

 

Wimberly at Deerwood

 

26,685

 

 

30-day LIBOR + 2.28%

 

03/01/23

 

 

 

$

199,156

 

$

183,308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes Payable included with Obligations associated with real estate held for sale:

 

 

 

 

 

 

 

 

 

Interchange Business Center (3)

 

$

11,286

 

 

 

30-day LIBOR + 5% (1)(2)(3)

 

12/01/13

 

2013:

  Notes Payable as of    
Description March 31, 2014 December 31, 2013 Interest Rate Maturity Date
1875 Lawrence $15,621
 $15,621
 30-day LIBOR + 5.35%
(1)(2) 
1/1/2016
Holstenplatz 10,494
 10,581
 3.887% 4/30/2015
Courtyard Kauai at Coconut Beach Hotel 38,000
 38,000
 30-day LIBOR + .95%
(1) 
11/9/2015
Florida MOB Portfolio - Gardens Medical Pavilion 13,951
 14,040
 4.9% 1/1/2018
River Club and the Townhomes at River Club 24,921
 25,010
 5.26% 5/1/2018
Babcock Self Storage 2,171
 2,182
 5.80% 8/30/2018
Lakes of Margate 14,907
 14,966
 5.49% and 5.92% 1/1/2020
Arbors Harbor Town 25,922
 26,000
 3.985% 1/1/2019
Alte Jakobstraße 8,184
 8,275
 2.3% 12/30/2015
Wimberly 26,685
 26,685
 30-day LIBOR + 2.28%
(1) 
3/1/2023
22 Exchange 19,500
 19,500
 3.93% 5/5/2023
Parkside(3)
 11,090
 11,177
 5% 6/1/2018
  $211,446
 $212,037
    

(1)30-day London Interbank Offer Rate ("LIBOR") was 0.15% at March 31, 2014.
(2)
Maximum borrowing up to $20.1 million.
(3)Includes approximately $0.7 million of unamortized premium related to debt we assumed at acquisition.
(1)30-day LIBOR was 0.20% at March 31, 2013.

(2)The 30-day LIBOR rate is set at a minimum value of 2.5%.

(3)On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center to an unaffiliated third party.  On April 12, 2013, we sold the remaining three buildings to an unaffiliated third party (classified as obligations associated with real estate held for sale on our condensed consolidated balance sheet as of March 31, 2013).  A portion of the proceeds from the sale of the remaining three buildings were used to pay off in full the existing indebtedness associated with the property.

At March 31, 2013,2014, our notes payable balance including the loan classified as obligations associated with real estate held for sale secured by the remaining three industrial buildings at Interchange Business Center, was $210.4$211.4 million and consisted of the notes payable related to our consolidated properties.  We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai at Coconut Beach Hotel, Wimberly, 22 Exchange and WimberlyParkside notes payable. For the three months ended March 31, 2013,2014 we capitalized interest of $0.1 million in connection with our equity method investment in Prospect Park. We did not capitalize any interest during the acquisition of Wimberly, we entered into a loan for approximately $26.7 million with an unaffiliated third party.  On April 12, 2013, we sold the remaining three industrial buildings at Interchange Business Center to an unaffiliated third party and used a portion of the proceeds from the sale to pay off in full

15months ended March 31, 2013.




Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

the existing indebtedness of $11.3 million (classified as obligations associated with real estate held for sale).  See footnote 15, Discontinued Operations and Real Estate Held for Sale for further details.

We are subject to customary affirmative, negative, and financial covenants and representations, warranties and borrowing conditions, all as set forth in our loan agreements.agreements, including, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. As of March 31, 2013,2014, we believe we were in compliance with the covenants under our loan agreements.

Our debt secured by Courtyard Kauai at Coconut Beach Hotel, with a balance of $38 million at March 31, 2014, matures on November 9, 2015. The loan has an 18-month renewal option to extend the term to May 9, 2017. Our debt secured by Holstenplatz and Alte Jakobstraße, with balances of $10.5 million and $8.2 million at March 31, 2014, respectively, also mature in 2015. We currently expect to pay-off or refinance these two loans by their respective maturity dates of April 30, 2015 and December 30, 2015.


17

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes our contractual obligations for principal payments excluding obligations associated with real estate held for sale as of March 31, 2013:

Year

 

Amount Due

 

April 1, 2013 - December 31, 2013

 

$

1,427

 

2014

 

2,360

 

2015

 

57,382

 

2016

 

34,507

 

2017

 

2,176

 

Thereafter

 

101,304

 

 

 

 

 

 

 

$

199,156

 

2014:  

YearAmount Due
April 1, 2014 - December 31, 2014$1,657
201558,322
201618,117
20172,723
201849,402
Thereafter80,525
Total contractual obligations for principal payments$210,746
Unamortized premium700
Total notes payable$211,446

9.10.Leasing Activity

Future minimum base rental payments of our office and industrial properties due to us under non-cancelable leases in effect as of March 31, 20132014 for our consolidated properties are as follows:

April 1, 2013 - December 31, 2013

 

$

15,107

 

2014

 

12,483

 

2015

 

9,639

 

2016

 

6,922

 

2017

 

3,257

 

Thereafter

 

4,510

 

 

 

 

 

Total

 

$

51,918

 

Year Amount Due
April 1, 2014 - December 31, 2014 $5,041
2015 4,464
2016 3,796
2017 2,407
2018 1,717
Thereafter 3,152
Total $20,577
The schedule above does not include rental payments due to us from our multifamily, hotel, student housing, and self-storage properties, as leases associated with these properties typically are for periods of one year or less.  As of March 31, 2013, none of our tenants accounted for 10% or more of our aggregate annual rental revenues from our consolidated properties.


10.11.Derivative Instruments and Hedging Activities

We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.  As of March 31, 2013, all2014, none of our derivative instruments were not designated as hedging instruments.

We have three interest rate caps as of March 31, 2014.


Derivative instruments classified as assets were reported at their combined fair values of $0.1 million and less than $0.1$0.2 million in prepaid expenses and other assets at March 31, 20132014 and December 31, 2012,2013, respectively.  During the three months ended March 31, 20132014 and 2012,2013, we recorded a reclassificationreclassifications of unrealized loss to interest expense of less than $0.1 million and unrealized loss of less than $0.1$0.1 million to other comprehensive income (loss) (“OCI”) in our statement of equityinterest expense to adjust the carrying amount of the interest rate caps atcaps. The reclassification out of OCI in our statement of equity for the three months ended March 31, 2014 and 2013 and 2012, respectively.

16was due to all derivatives being designated as non-hedging instruments as of January 1, 2013 compared to being designated as hedging instruments as of December 31, 2012.



18

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(unaudited)


The following table summarizes the notional values of our derivative financial instruments.  The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate, or market risks:

Type / Description

 

Notional
Value

 

Interest Rate /
Strike Rate

 

Index

 

Maturity

 

Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

Interest rate cap - Courtyard Kauai Coconut Beach Hotel

 

$

38,000

 

3.00% - 6.00%

 

30-day LIBOR

 

October 15, 2014

 

Interest rate cap - Interchange Business Center (1)

 

$

5,000

 

2.50%

 

30-day LIBOR

 

December 1, 2013

 

Interest rate cap - 1875 Lawrence

 

$

20,100

 

2.75%

 

30-day LIBOR

 

January 1, 2016

 

Interest rate cap - Wimberly

 

$

26,685

 

4.56%

 

30-day LIBOR

 

March 1, 2018

 


(1)On April 12, 2013, the debt secured by Interchange Business Center was fully repaid.

Type / Description 
Notional
Value
 
Interest Rate /
Strike Rate
 Index Maturity
Not Designated as Hedging Instruments  
      
Interest rate cap - Courtyard Kauai Coconut Beach Hotel $38,000
 6.00% 30-day LIBOR October 15, 2014
Interest rate cap - 1875 Lawrence 20,100
 2.75% 30-day LIBOR January 1, 2016
Interest rate cap - Wimberly 26,685
 4.56% 30-day LIBOR March 1, 2018
The table below presents the fair value of our derivative financial instruments, as well as their classification on the consolidated balance sheets as of March 31, 20132014 and December 31, 2012:

 

 

Balance

 

Asset Derivatives

 

Derivatives designated as 

 

Sheet

 

March 31, 2013

 

December 31, 2012

 

hedging instruments:

 

Location

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Interest rate derivative contracts

 

Prepaid expenses and other assets

 

$

 

$

13

 

 

 

Balance

 

Asset Derivatives

 

Derivatives not designated as

 

Sheet

 

March 31, 2013

 

December 31, 2012

 

hedging instruments:

 

Location

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Interest rate derivative contracts

 

Prepaid expenses and other assets

 

$

106

 

$

 

2013: 

    Asset Derivatives
Derivatives not designated as hedging instruments: Balance Sheet Location March 31, 2014 December 31, 2013
       
Interest rate derivative contracts Prepaid expenses and other assets $137
 $174
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 20132014 and 2012:

Derivatives Not Designated as Hedging Instruments

 

Amount of Gain or (Loss) (1)

 

Three Months Ended March 31,

 

2013

 

2012

 

$

(71

)

$

 

2013: 

Derivatives Not Designated as Hedging Instruments
Amount of Gain or (Loss) (1)
Three months ended March 31,
20142013
$(56)$(71)
 _______________________________
(1)Amounts included in interest expense.  For the three months ending March 31, 2014 and 2013, reclassification out of OCI for $17,000 and $32,000 respectively, was due to all derivatives being designated as non-hedging instruments.

(1)12.                              Amounts included in interest expense.  For the three months ending March 31, 2013, reclassification out of OCI for $32 thousand was due to all derivatives being designated as non-hedging instruments as of March 31, 2013 compared to being designated as hedging instruments as of December 31, 2012.

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

11.Commitments and Contingencies

Operating Leases

Our operating leases consistconsisted of ground leases on each of the original eight buildings acquired in connection with the purchase of the Original Florida MOB Portfolio.  Each ground lease iswas for a term of 50 years, with a 25-year25-year extension option.  The annual payment for each ground lease increasesincreased by 10% every five years.5 years.  On September 20, 2013, we sold the Original Florida MOB Portfolio. As of March 31, 2014, we do not have operating leases. For each of the three months ended March 31, 2013, and 2012, we incurred $0.1 million in lease expense related to our ground leases.  Future minimum lease payments for all operating leases from March 31, 2013 are as follows:

April 1, 2013 - December 31, 2013

 

$

220

 

2014

 

293

 

2015

 

301

 

2016

 

301

 

2017

 

301

 

Therafter

 

21,227

 

Total

 

$

22,643

 

which is included in discontinued operations.  


12.13.Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periodperiods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions and other factors that our board deems relevant. The board’sboard's decision will be substantially influenced in substantial part, by its obligation to ensure that we maintain our status as a REIT. In light of the continued uncertainty in the global financial and real estate markets, we cannot provide assurance that we will be able to achieve expected cash flows necessary to pay distributions at any particular level, or at all.

On We did not pay any distributions to stockholders during the three months ended March 20, 2012, our board31, 2014 and 2013.



19

Behringer Harvard Opportunity REIT II, Inc.
Notes to our stockholders of record as of April 3, 2012 and determined to cease regular, monthly distributions in favor of payment of periodic distributions from excess proceeds from asset dispositions or from other sources as necessary to maintain our REIT tax status.  The special distribution payment was made on May 10, 2012.

Condensed Consolidated Financial Statements

(unaudited)


We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay distributions from financing activities, components of which may include proceeds from ourthe initial public offering and the follow-on public offerings of shares of our common stock(collectively, the "Offerings") and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancingsrefinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns in order to increase the amount of cash that we have available to pay distributions to our stockholders.

We paid no distributions to stockholders during the three months ended March 31, 2013.  Total regular distributions paid to stockholders during the three months ended March 31, 2012 were $3.2 million including DRP of $2.1 million.  A special cash distribution of $13 million was declared during the three months ending March 31, 2012 and was paid in the second quarter of 2012 based upon the number of stockholders as of April 3, 2012.  Cash distributions were funded from proceeds from our public offerings of shares of our common stock, proceeds from asset sales, borrowings and cash flow from operations.  Future distributions, if any, declared and paid may exceed cash flow from operating activities until such time as we invest in additional real estate or real estate-related assets at favorable yields and our investments reach stabilization.

Distributions declared per share assume the share was issued and outstanding each day during the period.  Beginning January 2012 through March 2012, the declared daily regular distribution rate was $0.0013699 per share of common stock, which was equivalent to an annualized distribution rate of 5.0% assuming the share was purchased for $10.00.


13.14.Related Party Transactions

The Advisor and certain of its affiliates receive fees and compensation in connection with the acquisition, management, and sale of our assets.

Pursuant to a Dealer Manager Agreement, we engaged Behringer Securities LP (“Behringer Securities”) to act as our dealer manager in connection with our public offerings.  Behringer Securities received commissions of up to 7% of gross primary offering proceeds.  Behringer Securities reallowed 100% of selling commissions earned to participating broker-

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

dealers.  In addition, we paid Behringer Securities a dealer manager fee of up to 2.5% of gross offering proceeds.  Pursuant to separately negotiated agreements, Behringer Securities reallowed a portion of its dealer manager fee in an aggregate amount up to 2% of gross offering proceeds to broker-dealers participating in our public offerings; provided, however, that Behringer Securities reallowed, in the aggregate, no more than 1.5% of gross offering proceeds for marketing fees and expenses, conference fees and non-itemized, non-invoiced due diligence efforts and no more than 0.5% of gross offering proceeds for out-of-pocket and bona fide, separately invoiced due diligence expenses incurred as fees, costs or other expenses from third parties.  Further, in special cases pursuant to separately negotiated agreements and subject to applicable limitations imposed by the Financial Industry Regulatory Authority, Behringer Securities used a portion of its dealer manager fee to reimburse certain broker-dealers participating in our public offerings for technology costs and expenses associated with our public offerings and costs and expenses associated with the facilitation of the marketing and ownership of our shares by such broker-dealers’ customers.  No selling commissions, dealer manager fees or organization and offering expenses were paid for sales under the DRP.  We terminated the primary portion of the follow-on public offering effective March 15, 2012 and the DRP portion of the follow-on offering effective April 3, 2012.  For the three months ended March 31, 2012, Behringer Securities earned selling commissions and dealer manager fees of $0.4 million and $0.2 million, respectively, which were recorded as a reduction to additional paid-in capital.

We reimbursed the Advisor and its affiliates for organization and offering expenses (other than selling commissions and the dealer manager fee) incurred on our behalf in connection with the primary offering component of our public offerings of our common stock.  The total we were required to remit to the Advisor for organization and offering expenses (other than selling commissions and the dealer manager fee) was limited to 1.5% of the gross proceeds raised in the completed primary offering components of the public offerings as determined upon completion of the public offerings.  The Advisor or its affiliates determined the amount of organization and offering expenses owed based on specific invoice identification, as well as an allocation of costs to us and other Behringer Harvardsponsored programs, based on respective equity offering results of those entities in offering.

The Advisor was required to reimburse us to the extent that the total amount spent on organization and offering expenses (other than selling commissions and the dealer manager fee) in the public offerings exceeded 1.5% of the gross proceeds raised in the primary component of the public offerings.  Based on the gross proceeds from our public offerings, we recorded a receivable from the Advisor for approximately $3.8$3.8 million of organization and offering expenses that were previously reimbursed to the Advisor.  The receivable of $3.8 million is presented net of other payables of $0.5 million to the Advisor on our consolidated balance sheet as of December 31, 2012.  We received payment of $3.8$3.8 million from the Advisor for this receivable in March 2013.

The Advisor or its affiliates will also receive acquisition and advisory fees of 2.5% of the amount paid and/or in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets.  The Advisor and its affiliates will also receive acquisition and advisory fees of 2.5% of the funds advanced in respect of a loan investment.  We incurred no acquisition and advisory fees payable to the Advisor for the three months ended March 31, 2014. We incurred acquisition and advisory fees payable to the Advisor of $0.9 million for the three months ended March 31, 2013.  We incurred no acquisition and advisory fees payable to the Advisor for the three months ended March 31, 2012.

The Advisor or its affiliates also receive an acquisition expense reimbursement in the amount of 0.25% of (i) the funds paid for purchasing an asset, including any debt attributable to the asset, (ii) the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve and (iii) the funds advanced in respect of a loan investment. In addition, to the extent the Advisor or its affiliates directly provide services formerly provided or usually provided by third parties, including, without limitation, accounting services related to the preparation of audits required by the SEC,Securities Exchange Commission, property condition reports, title services, title insurance, insurance brokerage or environmental services related to the preparation of environmental assessments in connection with a completed investment, the direct employee costs and burden to the Advisor of providing these services will be acquisition expenses for which we will reimburse the Advisor. We also pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder’sfinder's fees, title insurance, premium expenses, and other closing costs. In addition, acquisition expenses for which we will reimburse the Advisor, include any payments made to (i) a prospective seller of an asset, (ii) an agent of a prospective seller of an asset, or (iii) a party that has the right to control the sale of an asset intended for investment by us that are not refundable and that are not ultimately applied against the purchase price for such asset. Except as described above with respect to services customarily or previously provided by third parties, the Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they are dedicated to making investments for us, such as wages and benefits of the investment personnel. The Advisor and its affiliates are also responsible for paying all of the

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Table of Contents

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

investment-related expenses that we or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor


20

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the three months ended March 31, 2014 we incurred no acquisition expense reimbursements. For the three months ended March 31, 2013, we incurred acquisition expense reimbursements of $0.1 million.  We incurred no acquisition expense reimbursements for the three months ended March 31, 2012.

$0.1 million.

We pay the Advisor or its affiliates a debt financing fee of 1% of the amount available under any loan or line of credit made available to us.  It is anticipated that the Advisor will pay some or all of these fees to third parties with whom it subcontracts to coordinate financing for us.  We incurred no debt financing fees for the three months ended March 31, 2014. We incurred debt financing fees of $0.3 million for the three months ended March 31, 2013.  We incurred no debt financing fees for the three months ended March 31, 2012.

We pay the Advisor or its affiliates a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable and on terms and conditions not less favorable than those available from unaffiliated third parties.to us.  We incurred no such fees for the three months ended March 31, 20132014 and 2012.

2013.

We will pay the Advisor or its affiliates a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred less than $0.1 million of construction management fees for the three months ended March 31, 2014 and 2013.

We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates, fees for the management, leasing, and construction supervision of our properties.  Property management fees are 4.5% of the gross revenues of the properties managed by BHO II Management or its affiliates, plus leasing commissions based upon the customary leasing commission applicable to the same geographic location of the respective property.  In the event that we contract directly with a third-party property manager in respect of a property, BHO II Management or its affiliates receives an oversight fee equal to 0.5% of the gross revenues of the property managed.  In no event will BHO II Management or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay BHO II Management directly for its services, we will pay BHO II Management a management fee or oversight fee, as applicable, based only on our economic interest in the property.  We incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.3$0.1 million and $0.1$0.3 million for the three months ended March 31, 2014 and 2013, and 2012, respectively.

We pay the Advisor or its affiliates a monthly asset management fee of one-twelfth of 1.0% of the sum of the higher of the cost or value of each asset.  For the three months ended March 31, 20132014 and 2012,2013, we expensed $0.9 million and $0.7 million, and $0.8 millionrespectively, of asset management fees, respectively.fees. Amounts include asset management fees which were classified to discontinued operations for our held for sale property and our disposed properties.

We reimburse the Advisor or its affiliates for all expenses paid or incurred by the Advisor in connection with the services provided to us, subject to the limitation that we will not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of:  (A) (i) 2% of our average invested assets, or (B) (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period.  Notwithstanding the above, we may reimburse the Advisor for expenses in excess of this limitation if a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the three months ended March 31, 20132014 and 2012,2013, we incurred and expensed such costs for administrative services of $0.4totaling $0.4 million and $0.3 million, respectively.

.

We are dependent on the Advisor and BHO II Management for certain services that are essential to us, including asset acquisition and disposition decisions, property management and leasing services, and other general administrative responsibilities.  In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

20



21

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)




(Unaudited)15.

14.Supplemental Cash Flow Information

Supplemental cash flow information is summarized below:

 

 

Three months ended March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Interest paid

 

$

1,915

 

$

2,406

 

 

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Capital expenditures for real estate in accounts payable

 

$

 

$

879

 

Capital expenditures for real estate in accrued liabilities

 

$

571

 

$

339

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Common stock issued in distribution reinvestment plan

 

$

 

$

2,074

 

Accrued dividends payable

 

$

 

$

14,152

 

  Three months ended March 31,
Description 2014 2013
Interest paid, net of amounts capitalized $1,920
 $1,915
Income tax paid 183
 
Non-cash investing and financing activities:    
Capital expenditures for real estate in accrued liabilities 421
 571
Accrued distributions to noncontrolling interest holder 36
 

15.16. Discontinued Operations and Real Estate Held for Sale

During

There were no property sales during the three months ended March 31, 2012, we sold the Palms of Monterrey.  There was no property sold during the three months ended March 31,2014 and 2013. On April 12, 2013, we sold the remaining three buildings at Interchange Business Center for a contract sales price of approximately $40.4$40.4 million, excluding transaction costs.  A portion of the proceeds from the sale were used to pay off in full the existing indebtedness associated with the buildings. The remaining three buildings at Interchange Business Center were classified as held for sale on our condensed consolidated balance sheet as of March 31, 2013.

On September 20, 2013, we sold the Original Florida MOB Portfolio for an aggregate contract sales price of approximately $63 million, which was paid in cash and through the assumption by the buyer of approximately $18 million of existing indebtedness.

The following table summarizes the disposition of our properties during 2012 and 2013.

Property NameDate of DispositionContract Sales Price
Interchange Business Center(1)
April 12, 2013$40,400
Original Florida MOB Portfolio(2)
September 20, 2013$63,000

Property Name

 

Date of Disposition

 

Contract Sales Price

 

Palms of Monterrey

 

January 5, 2012

 

$

39,300

 

Parrot’s Landing

 

October 31, 2012

 

$

56,300

 

Interchange Business Center(1)

 

October 18, 2012

 

$

7,500

 

Interchange Business Center(1)

 

April 12, 2013

 

$

40,400

 


(1)On October 18, 2012, we sold one of the four industrial buildings at Interchange Business Center to an unaffiliated third party.  On April 12, 2013, we sold the remaining three buildings to an unaffiliated third party (classified as real estate held for sale on our condensed consolidated balance sheet asparty.

(2) On September 20, 2013, we sold the original eight medical office buildings. We continue to own approximately 79.8% of March 31, 2013).the ninth building, Gardens Medical Pavilion.

We have classified the results of operations for the properties above into discontinued operations in the accompanying condensed consolidated statements of operations.

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Rental revenue

 

$

384

 

$

2,002

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

Property operating expenses

 

59

 

699

 

Interest expense

 

247

 

786

 

Real estate taxes

 

82

 

395

 

Property management fees

 

8

 

80

 

Asset management fees

 

38

 

48

 

Depreciation and amortization

 

233

 

623

 

Total expenses

 

667

 

2,631

 

Interest income, net

 

(2

)

1

 

Loss on early extinguishment of debt (1)

 

 

(1,236

)

Gain on sale of real estate property

 

 

9,264

 

Income (loss) from discontinued operations

 

$

(285

)

$

7,400

 


(1)Loss on early extinguishment of debtoperations for the three months ended March 31, 2012 was approximately $1.2 million and was comprised of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.8 million.

21

2013.



22

Behringer Harvard Opportunity REIT II, Inc.

Notes to Condensed Consolidated Financial Statements
(unaudited)



(Unaudited)

The major classes of assets and liabilities associated withfollowing table summarizes the real estate heldloss from discontinued operations for sale as ofthe three months ended March 31, 2013 were as follows:

 

 

March 31, 2013

 

Land and improvements, net

 

$

12,877

 

Buildings and improvements, net

 

11,038

 

Lease intangibles, net

 

605

 

Assets associated with real estate held for sale

 

$

24,520

 

 

 

 

 

Notes payable

 

$

11,286

 

Accrued and other liabilities

 

36

 

Obligations associated with real estate held for sale

 

$

11,322

 

2013:

  Three Months Ended March 31, 2013
Rental revenue $3,197
Expenses  
Property operating expenses 1,246
Interest expense 480
Real estate taxes 367
Property management fees 129
Asset management fees 37
Depreciation and amortization 1,046
Total expenses 3,305
Interest income, net (1)
Loss from discontinued operations $(109)

16.17. Subsequent EventEvents

We acquired a 90% interest in 22 Exchange, a student housing complex in Akron, Ohio on April 16, 2013 from an unaffiliated third party.  The contract purchase price for the property was approximately $28.1 million.  In connection with the purchase,


On May 1, 2014, we entered into a loanpurchase and sale agreement to sell 1875 Lawrence to an unaffiliated third party for a contract sales price of approximately $19.5$47.1 million.

*****

22

The unaffiliated third party has made a refundable earnest money deposit in the amount of $0.5 million. A second earnest money deposit of $0.5 million is expected to be made on or about May 16, 2014. We acquired the 1875 Lawrence property on October 28, 2008. At the time of filing this report on Form 10-Q, we cannot give any assurances that the closing of this sale is probable.



23


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 our accompanying condensed consolidated financial statements and the notes thereto.


Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT II, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, the value of our assets, our anticipated capital expenditures, the amount and timing of anticipated future cash distributions to our stockholders, and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.

These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 201326, 2014 and the factors described below:

·

market and economic challenges experienced by the U.S. economyand global economies or real estate industry as a whole and the local economic conditions in the markets in which our properties are located;

·


our ability to make accretive investments in a diversified portfolio of assets;

·

future changes in market factors that could affect the ultimate performance of our development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs;

·


the availability of cash flow from operating activities for distributions, if any;

·


our level of debt and the terms and limitations imposed on us by our debt agreements;

·


the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;

·


our ability to secure resident leases at favorable rental rates;

·


our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates;

·


conflicts of interest arising out of our relationships with our Advisor and its affiliates;

·


unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and

·


factors that could affect our ability to qualify as a real estate investment trust.

Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  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, except as required by applicable law.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

23



24



Cautionary Note

The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties.  Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs.


Executive Overview

We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we focus generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  In addition, our opportunistic and value-add investment strategy may also includeincludes investments in loans secured by or related to real estate at more attractive rates of current return than have been available for some time.estate.  These loan investments may have capital gain characteristics, whether as a result of a discount purchase or related equity participations.  We may acquire a wide variety of commercial properties, including office, industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily, and other real properties.  These properties may be existing, income-producing properties, newly constructed properties or properties under development or construction and may include multifamily properties purchased for conversion into condominiums or single-tenant properties that may be converted for multi-tenant use.  Further, we may invest in real estate-related securities, including securities issued by other real estate companies, either for investment or in change of control transactions completed on a negotiated basis or otherwise.  We also may originate or invest in collateralized mortgage-backed securities and mortgage, bridge or mezzanine loans, or in entities that make investments similar to the foregoing.  We expect to make our investments in or in respect of real estate assets located in the United States and other countries based on current market conditions.


We commenced an initial public offering of up to 125,000,000 shares of our common stock on January 21, 2008 of which 25,000,000 shares were offered pursuant to DRP.2008.  On July 3, 2011, our initial public offering terminated in accordance with its terms.  On July 5, 2011, we commenced a follow-on public offering of up to 75,000,000 shares of our common stock of which 25,000,000 shares were offered pursuant to the DRP.offering.  We terminated the primary portioncomponent of the follow-on public offering effective March 15, 2012 and the DRP component effective April 3, 2012.  We raised gross offering proceeds of approximately $265.3 million from the sale of approximately 26.7 million shares under the Offerings, including shares sold under the DRP.

Market Outlook

While the first quarter of 2013 started with good economic momentum, by the end of the quarter the effects of increased payroll taxes and across the board government budget cuts began to take a toll.  GDP growth for the first quarter was a respectable 2.5%, especially in light of the 0.4% from the fourth quarter report, but given it was driven by increased consumer service spending, including energy costs, and seasonal inventory restocking by businesses, there is concern over whether the growth can be sustained.

Cut-backs in government spending, mainly related to defense spending, are having a significant effect on sustainable growth.  The last two quarters have marked the largest contraction in government expenditures since the mid-1950’s.  With that headwind, the US economy saw slower job growth and weakness in retail sales and manufacturing activity.  On the positive side, the housing market continues to show improvement with most major markets reporting increased pricing and declining inventories.  Also helping the U.S. economy are improvements, or at least stabilization, of global economic issues.  The European debt crisis, which created uncertainty over sovereign defaults and departures from the Euro and European Union that were recurring drags on the U.S. economy for the last couple of years, is still volatile.

Going into the second quarter, many analysts are concerned the economy is repeating the cycle of the last couple of years, where after a good start to the year, there is a Spring pull-back.  The current concerns are heightened with debates over the U.S. government budget, spending and debt limit, which appear to be continuing for an extended period and risking further disruptions to economic growth.  The federal government has not passed a budget in the last four years and appears to be in a prolonged debate over spending and tax levels.  We believe that businesses and consumers tend to be very conservative when confronted with these kinds of issues, which could disrupt what could otherwise be a stronger recovery. On a net basis, we believe the U.S. economy can overcome a certain degree of these issues, and along with most analysts, we expect moderate, but uneven U.S. growth for the near term.  However, these issues have the potential to significantly affect the economy.

A portion of our portfolio is currently invested in nine medical office buildings.  The demand for health care services, and consequently health care properties, is projected to increase in the near future.  The Centers for Medicare and

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Table of Contents

Medicaid Services project that national health care expenditures will rise to $3.3 trillion in 2015, or 18.2% of gross domestic product.  The annual growth in national health expenditures for 2013 through 2021 is expected to be 5.9%.  While demographics are the primary driver of demand, economic conditions and availability of services contribute to health care service utilization rates.  We believe the health care property market may be less susceptible to fluctuations and economic downturns relative to other property sectors.

The total U.S. population is projected to increase by 18.6% through 2030.  The population aged 65 and over is projected to increase by 78.3% through 2030.  This population is an important component of health care utilization.  Most health care services are provided within a health care facility such as a hospital, a physician’s office, or a senior housing facility.

We own an interest in one hotel property.  Smith Travel Research indicates that during the first quarter of 2013 national overall occupancy rate for hospitality properties in the United States increased 1.8%  in year-over-year measurement to 57.7% and the national overall Average Daily Rate (“ADR”) increased 4.5% to $108.31.  The hotel industry is expected to see continued modest growth in 2013.  If the economy continues to improve, we expect room rates for hotels to increase since increased demand for hotel rooms generally correlates with growth in the U.S. gross domestic product (GDP).  Compared to the prior year, Courtyard Kauai at Coconut Beach Hotel experienced a double digit increase in occupancy rate and an approximately 15% increase in ADR.

Although a slower U.S. economy may provide some resistance, primarily with respect to overall job growth and personal disposable income, the multifamily sector demonstrated strong growth in 2012 and favorable demand/supply fundamentals should still support reasonable growth in the near term.  The recent multifamily performance appears consistent with historical trends where multifamily tends to be a better performer than other real estate investments during periods of economic recovery.  Further from a demand perspective, the demographics for the targeted multifamily renter, the age group from 20 to 34 years old, are still positive in the sector.  This group is growing in size, and while the other age segments have experienced employment declines, the 20 to 34 year old segment’s aggregate employment has increased.  Further, while this age group in previous economic cycles experienced increasing single family home ownership, higher credit standards for single family mortgages and more reluctance to commit to home ownership are currently leading to more rental demand.  At the same time on the supply side, developments of new multifamily communities decreased substantially since 2008, such that supply has not been keeping up with demand.  We believe that this demand will lead to increased development activity; however, since high quality multifamily developments can take 18 to 36 months to entitle, permit and construct, we believe there is, even in the most aggressive outlook, a continued window of limited supply.  Accordingly, many analysts are still projecting continued multifamily rental growth, albeit at a slower pace.  However, multifamily performance is highly correlated with job and income growth.  Some analysts’ reports are already starting to indicate for certain markets that renting is starting to lose its cost advantage over home ownership and that rental increases will eventually hit limits in relation to disposable income.  While the overall factors noted above should still position the multifamily sector to perform better in a slow growth environment, eventually the multifamily sector will need stronger employment and disposable consumer income and household formation to maintain rental growth.  As of March 31, 2013, a portion of our portfolio is invested in three multifamily properties.

Current interest rates and the availability of financing are also favorable factors in the multifamily sector.  In addition to favorable, general interest rates, government sponsored entities have been a core source for multifamily financing, providing a base level of support for the sector.  However, lender competition for multifamily financing, particularly high quality communities such as ours, has also added to the favorable financing environment.  In addition to government sponsored entities (“GSE”) like Fannie Mae and Freddie Mac, insurance companies, and commercial banks have been aggressive lenders in this sector.

In student housing, unlike traditional multifamily housing, all leases typically commence and terminate on the same dates.  In the case of our typical student housing leases, this date coincides with the commencement of the fall academic term with the leases typically terminating at the completion of the last summer school session of the academic year.  As such, we must re-lease each property in its entirety each year during a highly compressed time period, resulting in significant turnover in our tenant population from year to year.  As a result, we are highly dependent upon the effectiveness of our marketing and leasing efforts during the short annual leasing season that typically begins in January and ends in August of each year.  Our properties’ occupancy rates are therefore typically relatively stable during the August to July academic year, but are susceptible to fluctuation at the commencement of each new academic year, which may be greater than the fluctuation in occupancy rates experienced by traditional multifamily properties.  At March 31, 2013, a portion of our portfolio is invested in two student housing complexes.  On April 16, 2013, we made our second investment in a student housing complex located in Akron, Ohio.

Although the current outlook on these trends is favorable, there are risks.  As discussed above, the U.S. political deadlock over the debt ceiling, tax policy and government spending levels could jeopardize the U.S. credit rating and the

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level of domestic interest rates.  Although the European debt crisis has moderated, there is a risk that the higher-risk European countries, such as Italy, Greece and Spain, could face new pressures over proposed austerity measures or levels of sovereign borrowings or that new problem countries could surface, the latest being Cyprus.  Any of these domestic or global issues could slow growth or push the U.S. into a recession, which could affect the amount of capital available or the costs charged for financings.  Specifically related to the multifamily sector, changes related to GSE’s ability to lend and other regulatory restrictions could result in less multifamily debt capital and potentially higher borrowing costs.

Liquidity and Capital Resources

Our principal demands for funds will be for the (a) acquisition of real estate and real estate-related assets, (b) payment of operating expenses, and (c) payment of interest and principal on our outstanding indebtedness.  Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash flow from operations.  To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, redemptions or distributions, we expect to use borrowings and asset sales to fund such needs.

We continually evaluate our liquidity and ability to fund future operations and debt obligations.  As part of those analyses, we consider lease expirations and other factors.  Excluding assets held for sale, leasesLeases at our consolidated office and industrial properties representing 14.7%29% of our annualized base rent and 26% of our rentable square footage (effective monthly rent per square foot of $1.93) will expire by the end of 2013.2014.  As a normal course of business, we are pursuing renewals, extensions and new leases.  If we are unable to renew or extend the expiring leases under similar terms or are unable to negotiate new leases, it would negatively impact our liquidity and adversely affect our ability to fund our ongoing operations.

We had cash and cash equivalents of $93.2 million at March 31, 2014. We expect to fund our short-term liquidity requirements by using cash on hand, cash flow from the operations of our investments and asset sales. Operating cash flows are expected to increase as additional stabilized real estate assets are added to the portfolio and our existing portfolio stabilizes. Although we intend to diversify our real estate portfolio, to the extent our portfolio is concentrated in certain geographic regions, types of assets, industries or business sectors, downturns relating generally to such regions, assets, industry or business sectors may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.



25


We may, but are not required to, establish capital reserves from cash flow generated by operating properties and other investments, or net sale proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may establish its own criteria for escrow of capital reserves.


We intend to borrow money to acquire properties and make other investments.  There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets.


Commercial real estate debt markets have experiencedmay experience volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies, and global financial issues arising from the European debt crisis and recessionary implications.  Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our acquisitions, developments and investments.  This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make distributions to our stockholders.  In addition, the dislocationsdisruptions in the debt markets have reduced the amount of capital that is available to finance real estate, which in turn: (a)(i) leads to a decline in real estate values generally; (b)(ii) slows real estate transaction activity; (c)(iii) reduces the loan to value ratio upon which lenders are willing to extend debt; and (d)(iv) results in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans.  In addition, the current state of the debt markets has negatively impacted our ability to raise equity capital.

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Table of Contents

Debt Financings

We may, from time to time, obtain mortgage, bridge or mezzanine loans for acquisitions and investments, as well as property development.  We may obtain financing at the time an asset is acquired or an investment is made or at such later time as determined to be necessary, depending on multiple factors.

At March 31, 2013,2014, our notes payable balance was $210.4$211.4 million including the loans secured by the remaining three industrial buildings at Interchange Business Center classified as obligations associated with real estate held for sale.  The notes payable balance hasand had a weighted average interest rate of 3.9%.3.7% compared to a balance of $212 million and weighted average interest rate of 3.7% at December 31, 2013.  We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the notes payable related to the Courtyard Kauai at Coconut Beach Hotel, Wimberly, 22 Exchange and Wimberly.  OnParkside notes payable.
Our debt secured by Courtyard Kauai at Coconut Beach Hotel with a balance of $38 million at March 31, 2014, matures on November 9, 2015. The loan has an 18-month renewal option to extend the term to May 9, 2017. Our debt secured by Holstenplatz and Alte Jakobstraße, with balances of $10.5 million and $8.2 million at March 31, 2014, respectively, also mature in 2015. We currently expect to pay-off or refinance these two loans by their respective maturity dates of April 12, 2013, we sold the remaining three industrial buildings at Interchange Business Center to an unaffiliated third party30, 2015 and used a portion of the proceeds from the sale to pay off in full the existing indebtedness of $11.3 million associated with the property which was scheduled to mature on December 1, 2013.  See footnote 15, Discontinued Operations and Real Estate Held for Sale for further details.  As of December 31, 2012, our outstanding note payable balance was $183.3 million.

30, 2015.


Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity.  As of March 31, 2013,2014, we believe we were in compliance with the debt covenants under our loan agreements.




26


One of our principal long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the maturities and scheduled principal repayments of our indebtedness excluding obligations associated with real estate held for sale as of March 31, 2013.  The table does not represent any extension options ($ in2014 (in thousands).

 

 

Payments Due by Period

 

 

 

April 1, 2013 -
December 31, 2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Principal payments - variable rate debt

 

$

 

$

 

$

38,000

 

$

15,500

 

$

 

$

 

$

53,500

 

Principal payments - fixed rate debt

 

1,427

 

2,360

 

19,382

 

19,007

 

2,176

 

101,304

 

145,656

 

Interest payments - variable rate debt (based on rates in effect as of March 31, 2013)

 

992

 

1,341

 

1,290

 

74

 

 

 

3,697

 

Interest payments - fixed rate debt

 

4,632

 

6,041

 

5,730

 

4,603

 

4,434

 

6,785

 

32,225

 

Operating leases (1)

 

220

 

293

 

301

 

301

 

301

 

21,227

 

22,643

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total (2)

 

$

7,271

 

$

10,035

 

$

64,703

 

$

39,485

 

$

6,911

 

$

129,316

 

$

257,721

 


  
Payments Due by Period(1)
  April 1, 2014 -December 31, 2014 2015 2016 2017 2018 Thereafter Total
Principal payments - variable rate debt $
 $38,447
 $16,156
 $535
 $536
 $24,632
 $80,306
Principal payments - fixed rate debt 1,657
 19,875
 1,961
 2,188
 48,866
 55,893
 130,440
Interest payments - variable rate debt (based on rates in effect as of March 31, 2014) 1,476
 1,927
 718
 629
 615
 2,465
 7,830
Interest payments - fixed rate debt 4,462
 5,595
 5,175
 5,060
 3,394
 4,029
 27,715
Total(2)
 $7,595
 $65,844
 $24,010
 $8,412
 $53,411
 $87,019
 $246,291

(1)   Our operating leases consist of ground leases on each of eight buildings acquired in connection with the purchase of the Original Florida MOB Portfolio.  Each ground lease is for a term of 50 years, with a 25-year extension option.  The annual payment for each ground lease increases by 10% every five years.

(2)   Does not include the loan secured by the remaining three industrial buildings at Interchange Business Center which are classified as obligations associated with real estate held for sale on our condensed consolidated balance sheet totaling $11.3 million.

(1) Does not include approximately $0.7 million of unamortized premium related to debt we assumed on our acquisition of Parkside.
(2)Does not include assumptions for any available extension options.


Results of Operations


Three months ended March 31, 20132014 as compared to the three months ended March 31, 2012.

2013

As of March 31, 2014, we had 13 real estate investments, 12 of which were consolidated (two wholly owned and ten properties consolidated through investments in joint ventures). As of March 31, 2013, we had 11 real estate investments, ten of which were consolidated in our continuing operations.consolidated. The three remaining buildings at Interchange Business Center were classified as held for sale as of March 31, 2013 and we sold them on April 12, 2013. On September 20, 2013, we sold the Original Florida MOB Portfolio. We made no acquisitions during the quarter ended March 31, 2014, completed one acquisition during the quarter ended March 31, 2013 and three additional acquisitions during the year ended December 31, 2013.
The following table provides summary information about our results of operations for the three months ended March 31, 2013.  As of March 31, 2012, we had ten real estate investments which were consolidated2014 and 2013 ($ in our continuing operations.  We sold one property during the three months ended March 31, 2012.

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thousands):

 Three Months Ended March 31,        
 2014 2013 Increase (Decrease) Percentage Change 
$ Change due to Acquisitions(1)
 
$ Change due to Same Store (2)
Rental revenue$7,881
 $5,852
 $2,029
 34.7 % $2,105
 $(76)
Hotel revenue4,364
 3,617
 747
 20.7 % 
 747
Property operating expenses2,724
 1,875
 849
 45.3 % 777
 72
Hotel operating expenses3,022
 2,753
 269
 9.8 % 
 269
Interest expense, net2,063
 1,811
 252
 13.9 % 266
 (14)
Real estate taxes1,413
 904
 509
 56.3 % 406
 103
Property management fees427
 324
 103
 31.8 % 81
 22
Asset management fees970
 681
 289
 42.4 % 195
 243
General and Administrative859
 801
 58
 7.2 % n/a
 n/a
Acquisition expense
 1,871
 (1,871) (100.0)% (1,871) n/a
Depreciation and amortization3,662
 2,871
 791
 27.6 % 780
 11
_____________
(1)Represents the dollar amount increase for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 related to real estate and real estate-related investments acquired on or after January 1, 2013.
(2)Represents the dollar amount increase (decrease) for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 with respect to real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store for the periods ended March 31, 2014 and 2013 include 1875 Lawrence, Holstenplatz, Gardens Medical Pavilion, River Club and the Townhomes at River Club, Babcock Self Storage, Lakes of Margate, Arbors Harbor Town, Courtyard Kauai Coconut Beach Hotel, and Alte Jakobstraße.


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The following table provides summary information of the increase (decrease) in rental revenue and property operating expenses with amounts for Same Store operating properties and acquisitions:
  Three Months Ended March 31,  
Description 2014 2013 Change
Rental revenue      
Same Store $5,385
 $5,461
 $(76)
Acquisitions 2,496
 391
 2,105
Total rental revenue $7,881
 $5,852
 $2,029
       
Property operating expenses      
Same Store $1,878
 $1,806
 $72
Acquisitions 846
 69
 777
Total property operating expenses $2,724
 $1,875
 $849

The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and average daily rate ("ADR") for Courtyard Kauai Coconut Beach Hotel:
 Occupancy (%) Effective Monthly Rent per Square Foot/Unit/Bed ($)  
 Three Months Ended March 31, Three Months Ended March 31,  
Property2014 2013 2014 2013  
1875 Lawrence47% 62% $1.84
 $1.93
 per sq ft
Holstenplatz100% 100% 1.34
 1.32
 per sq ft
Gardens Medical Pavilion80% 80% 2.28
 1.79
 per sq ft
River Club and the Townhomes at River Club79% 73% 391.74
 397.16
 per bed
Babcock Self Storage81% 87% 101.13
 94.20
 per unit
Lakes of Margate97% 90% 1,113.73
 1,064.93
 per unit
Arbors Harbor Town94% 93% 1,138.04
 1,081.09
 per unit
Alte Jakobstraße89% 100% 1.23
 1.09
 per sq ft

 
Occupancy (%)(1)
 ADR ($)
 Three Months Ended March 31, Three Months Ended March 31,
Property2014 2013 2014 2013
Courtyard Kauai Coconut Beach Hotel89% 86% $136.42
 $115.12

(1)Represents average occupancy for the three months ended March 31. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire three month period and is based on standard industry metrics, including rooms available for rent.


Continuing Operations

Our results of operations for the respective periods presented primarily reflect increases in most categories due to the growthacquisition of our portfolio in each period presented.three consolidated properties and one equity investment during the year ended December 31, 2013. Management expects increases in most categories in the near future as we purchase additional real estate and real estate-related assets and as we begin to realize the full yearfull-year impact of our acquisitions and continue to improve the performanceacquisitions.

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RevenuesRevenues..  Revenues for the three months ended March 31, 20132014 were $12.3$12.2 million, an increase of $1.9$2.8 million from the three months ended March 31, 2012.2013. Same Store rental revenue for the three months ended March 31, 2014 and 2013 was $5.4 million and $5.5 million, respectively, while rental revenue from acquisitions was $2.5 million and $0.4 million, respectively. The change in revenue is primarily due to:

·


an increase in rental revenue of $0.8$2.1 million as a result of our 2013 acquisitionacquisitions of Wimberly, 22 Exchange, and Parkside, offset by a decrease of $0.1 million for investments we owned during the second quarter 2012 acquisitionentire periods presented. The decline in revenues for Same Stores is primarily due to a change in occupancy as a result of Alte Jakobstraße;ongoing building renovations at 1875 Lawrence which were essentially complete as of March 31, 2014; and

·


an increase ofin hotel revenue of $1.1$0.7 million at the Courtyard Kauai at Coconut Beach Hotel due to increased activity as a 4% increase in occupancy rate and a 19% increase in ADR, resulting in a 23% increase in RevPar year over year. These improvements are primarily the result of the completion of renovationsimproved operating performance and an increase in the first quarter of 2012.

hotel’s group sales.


Property Operating Expenses.    Property operating expenses for the three months ended March 31, 2014 and 2013 and 2012 were $5.8$2.7 million and $5.3$1.9 million, respectively. Annual propertySame Store operating expenses for the three months ended March 31, 2014 and 2013 were $1.9 million and $1.8 million. Operating expenses increased $0.5$0.8 million overas a result of acquisitions while Same Store property operating expenses remained relatively flat.

Hotel Operating Expenses.  Hotel operating expenses for the same periodthree months ended March 31, 2014 and 2013 were $3.0 million and $2.8 million, respectively.  The increase in 2012.  Thehotel operating expenses was due to additional costs as a result of the increased activityoccupancy at Courtyard Kauai at Coconut Beach Hotel accounted for $0.3 million of the change while the acquisitions of Wimberly and Alte Jakobstraße accounted for $0.2 million of the increase.Hotel.


Interest Expense.Expense, net.   Interest expense for the three months ended March 31, 2014 and 2013 and 2012 was $2.0$2.1 million and $1.9$1.8 million, respectively.  The increase was primarily due to $0.2interest expense related to acquisitions of $0.3 million. For the three months ended March 31, 2014 we capitalized interest of $0.1 million in connection with our equity method investment in Prospect Park. We did not capitalize any interest expense for acquisitions and an increase of $0.1 as a result of interest rate caps, partially offset by a $0.1 million decrease at 1875 Lawrence as a result of a lower outstanding loan balance during the period.three months ended March 31, 2013.


Real Estate Taxes.Taxes.  Real estate taxes were $1.2$1.4 million and $1.1$0.9 million for the three months ended March 31, 2014 and 2013, and 2012, respectively. TheAcquisitions accounted for $0.4 million of the increase while Same Store real estate taxes increased $0.1 million.

Property Management Fees.   Property management fees, which are based on revenues, for the three months ended March 31, 2013 was primarily due to the acquisitions of Wimberly2014 and Alte Jakobstraße.

Property Management Fees.  Property management fees for each of the three months ended March 31, 2013 and 2012 were $0.4 million and was$0.3 million, respectively, and were comprised of property management fees paid to unaffiliated third parties and BHO II Management.our Property Manager or its affiliates. Annual property management fees for the first quarter of 2014 increased over the same period in 2013, primarily due to our three acquisitions in 2013.


Asset Management Fees.Fees.   Asset management fees for the three months ended March 31, 2014 and 2013 were $1.0 million and 2012$0.7 million, respectively, and were $0.7comprised of asset management fees paid to our Advisor with respect to our investments. Asset management fees payable to the Advisor are based on the higher of cost or value for each asset. The increase in asset management fees for the first quarter of 2014 was primarily the result of 2013 acquisitions and the increase in value of our assets, offset by 2013 dispositions. We expensed asset management fees associated with sold properties of $0.1 million during the three months ended March 31, 2013. Asset management fees payable to the Advisor are an obligation of the Company, and as such, asset management fees associated with all investments owned during the period, including disposed of assets, are included in continuing operations.

General and Administrative Expenses.   General and administrative expenses for the three months ended March 31, 2014 and 2013 were $0.9 million and $0.8 million, respectively, and waswere comprised of asset managementauditing fees, for our investments.legal fees, board of directors' fees, and other administrative expenses. 


Acquisition Expense.Expense.  Acquisition expense for the three months ended March 31, 2013 of $1.9 million was primarily due to expenses incurred as a result of our acquisition of Wimberly.  There wasWimberly in the first quarter of 2013. We had no acquisition expense forin the three months ended March 31, 2012.

General and Administrative Expenses.  General and administrative expenses for the three months ended March 31, 2013 were $0.8 million, as compared to $0.6 million for the three months ended March 31, 2012, and were comprisedfirst quarter of auditing fees, legal fees, board of directors’ fees, and other administrative expenses.  The increase is primarily a result of certain costs capitalized during our public offerings that are now expensed due to the termination of the offering in 2012.2014.


Depreciation and amortization.Amortization.   Depreciation and amortization for the three months ended March 31, 2014 and 2013 and 2012 waswere approximately $3.7 million and $3.8$2.9 million, respectively. The decrease is a resultAcquisitions in 2013 of lease intangibles becoming fully amortizedWimberly, 22 Exchange and Parkside contributed the approximate $0.8 million increase during 2012, partially offset by depreciation and amortization for our new acquisitions.the three months ended March 31, 2014.



29


See Note 1516 to Condensed Consolidated Financial Statements for further information regarding discontinued operations.

Cash Flow Analysis

Cash used in operating activitiesoperations for the three months ended March 31, 20132013.


Cash Flow Analysis
During the first quarter of 2014, net cash provided by operating activities was $0.7 million compared to net cash used of $0.8 million for the first quarter of 2013. The favorable increase of $1.5 million primarily resulted from a decrease in loss from continuing operations of $1.6 million. This was primarily due to an increase of $2.1 million in rental revenue as a result of our three acquisitions in 2013. We had an increase in hotel revenue of $0.8 million at the Courtyard Kauai at Coconut Beach Hotel due to a 4% increase in occupancy rate and a 19% increase in ADR, resulting in a 23% increase in RevPar year over year. The increases in revenue were partially offset by increases of $0.8 million and was primarily comprised$0.3 million in property operating expenses and hotel operating expenses, respectively, due to the three acquisitions in 2013 and an increase in hotel operating expense as a result of the net loss of $4.5 million, adjusted for depreciation and amortization, including amortization of deferred financing fees of $4.2 million and cash used for working capital and other operating activities of approximately $0.5 million.  Cash used in operating activities forincreased activity.

During the three months ended March 31, 20122014 and 2013, net cash used in investing activities was $0.8$1.5 million and was$38.6 million, respectively. The year over year difference is primarily compriseddue to our acquisition of Wimberly on February 19, 2013 for a purchase price of approximately $35.6 million, excluding closing costs.

During the net incomefirst quarter of $4.1 million, adjusted for depreciation and amortization, including amortization of deferred financing fees of $4.6 million, offset by a gain on sale of the Palms of Monterrey of $9.3 million and2014, net cash used for working capital and other operatingin financing activities of approximately $1.6was $0.9 million.

Cash used by investing activities for the three months ended March 31, 2013 was $38.6 million, and was comprised of purchase of real estate of $35.3 million, additions of property and equipment of $2.8 million, acquisition deposits of $0.3 million and an increase in restricted Net cash of approximately $0.2 million.  Cash provided by investing activities for the three months ended March 31, 2012 was $36.5 million, and was comprised of net proceeds from sale of the Palms of Monterrey of $38.7 million, offset by additions of property and equipment of $1.8 million and an increase in restricted cash of $0.3 million.

Cash provided by financing activities for the three months ended March 31,same period of 2013 was $31.3 million. In connection with the purchase of Wimberly in February 2013, we received loan proceeds of approximately $26.7 million and was comprisedto finance a portion of net proceeds and financing coststhe purchase price of $27.2approximately $35.6 million. In addition, in the first quarter of 2013, we received reimbursement of $3.8 million reimbursement of offering costs of $3.8from an affiliate and $0.7 million netin contributions from non-controllingnoncontrolling interest holders of $0.6 million, purchase of interest rate derivatives of $0.1 million and redemptions of common stock of $0.2 million.  Cash used in financing activities for the three months ended March 31, 2012 was $22.7 million, and was comprised of proceeds from notes payable, net of payments, of $20.2 million, cash distributions to our shareholders of $1.1 million, net contributions from non-controlling interest holders of $5.5 million, redemptions of common stock of $0.7 million, offset by the issuance of common stock, net of offering costs, of $5.6 million.

holders.  


Funds from Operations

Funds from operations (“FFO”("FFO") is a non-GAAP financial measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts (“NAREIT”("NAREIT")

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in the April 2002 “White"White Paper of Funds From Operations”Operations" which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance.

In October 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership). The exclusion of impairment charges is not applicable for our first quarter 2014 and 2013 calculations of FFO as we recorded no impairments during those time periods.


Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate 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 alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance.


We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which is not immediately apparent from net income.


FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.



30


Our calculation of FFO for the three months ended March 31, 20132014 and 20122013 is presented below ($ in thousands except per share amounts):

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Net income (loss) attributable to the Company

 

$

(4,332

)

$

3,693

 

Adjustments for (1):

 

 

 

 

 

Real estate depreciation and amortization(2)

 

3,515

 

3,857

 

Gain on sale of real estate (3)

 

 

(8,338

)

 

 

 

 

 

 

Funds from operations (FFO)

 

$

(817

)

$

(788

)

 

 

 

 

 

 

GAAP weighted average shares:

 

 

 

 

 

Basic and diluted

 

26,054

 

25,728

 

 

 

 

 

 

 

FFO per share

 

$

(0.03

)

$

(0.03

)

 

 

 

 

 

 

Net income (loss) per share

 

$

(0.17

)

$

0.14

 


  Three Months Ended March 31,
  2014 2013
  Amount Per Share Amount Per Share
Net loss attributable to the Company $(2,884) (0.11) $(4,332) (0.17)
Adjustments for(1):
      
  
Real estate depreciation and amortization(2)
 3,567
 0.14
 3,515
 0.14
Funds from operations (FFO) $683
 0.03
 $(817) $(0.03)
         
GAAP weighted average shares:  
    
  
Basic and diluted   26,011
   26,054

(1)Reflects continuing operations, as well as discontinued operations.

(2)Includes our consolidated amount and the noncontrolling interest adjustment for the third-party partners’ share.

(3)For the three months ended March 31, 2012, includes our proportionate share of the gain on sale of real estate related to Palms of Monterrey.

(1)Reflects continuing operations, as well as discontinued operations. There were no discontinued operations for the three months ended March 31, 2014.
(2)Includes our consolidated amount and the noncontrolling interest adjustment for the third-party partners’ share.

Provided below is additional information related to selected items included in net gain (loss) above, which may be helpful in assessing our operating results.

·

Straight-line rental revenue was a charge of less than $0.1 million in the first quarter of 2014. Straight-line rental revenue of $0.2 million and $0.1 million was recognized in the first quarter of 2013.  The noncontrolling interest portion of straight-line rent for the three months ended March 31, 2014 and 2013 and 2012, respectively.  The noncontrolling interest portionwas a charge of straight-line rental revenue for the three months ended March 31, 2013 and 2012 was less than $0.1 million.

·million and revenue of less than $0.1 million, respectively.


Net above/below market lease amortization of less than $0.1 million was recognized as a decrease and an increase to rental revenue for the three months ended March 31, 20132014 and 2012, respectively.2013.  The noncontrolling interest portion of net above/below market lease amortization for the three months ended March 31, 20132014 and 20122013 was less than $0.1 million.

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·Amortization of deferred financing costs of $0.2 million and $0.3 million was recognized as interest expense for our notes payable for the three months ended March 31, 2014 and 2013, and 2012.

·Duringrespectively.


We recognized acquisition expense of $1.9 million for the three months ended March 31, 2012, we recognized loss on early extinguishment2013 primarily due to expenses incurred as a result of debtour acquisition of $1.2 million comprisedWimberly.  We did not have any acquisitions in the first quarter of the write-off of deferred financing fees of $0.4 million and an early termination fee of $0.8 million.

2014.

In addition, cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of principal on debt, each of which may impact the amount of cash available for distribution to our stockholders.


Distributions

Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions and other factors that our board deems relevant. The board’sboard's decision will be substantially influenced by its obligation to ensure that we maintain our status as a REIT. In light of the continued uncertainty in the global financial and real estate markets, we cannot provide assurance that we will be able to achieve expected cash flows necessary to pay distributions at any particular level, or at all.

On March 20, 2012, our board of directors declared a special distribution of $0.50 per share of common stock payable to our stockholders of record as of April 3, 2012 and determined to cease regular, monthly distributions in favor of payment of periodic distributions from excess proceeds from asset dispositions or from other sources as necessary to maintain our REIT tax status.  The special distribution was paid on May 10, 2012.

We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay distributions from financing activities, components of which include proceeds from the Offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition,

31


asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns in order to increase the amount of cash that we have available to pay distributions to our stockholders.

The following summarizes certain information related to the sources of distributions ($ in thousands):

 

 

March 31,

 

 

 

2012

 

Total Distributions Paid

 

$

3,174

 

 

 

 

 

Principal Sources of Funding:

 

 

 

Distribution Reinvestment Plan

 

$

2,074

 

Cash flow provided by (used in) operating activities

 

$

(831

)

Cash available at the beginning of the period (1)

 

$

80,130

 



(1)Represents the cash available at the beginning of the reporting period primarily attributable to excess funds raised from the issuance of common stock and borrowings, after the impact of historical operating activities, other investing and financing activities.

We paid nodid not pay any distributions to stockholders during the three months ended March 31, 2013.  For the three months ended March 31, 2012, cash distributions were funded from proceeds from our public offerings of shares of our common stock, proceeds from asset sales, borrowings2014 and cash flow from operations.2013.  Future distributions declared and paid may exceed cash flow from operating activities or funds from operations until such time as we invest in additional real estate or real estate-related assets at favorable yields and our investments reach stabilization.


Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Critical Accounting Policies and Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.

Below is a discussion of the accounting policies that we consider to be critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Principles of Consolidation and Basis of Presentation

Our condensed consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, and profits have been eliminated in consolidation.
Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities ("VIE") in which we are the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.

For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.

There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.

Real Estate

Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which we obtain control of the real estate property.  The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations.  Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in place leasing commissions and tenant relationships.  Identified intangible liabilities generally consist of below market leases.  Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed

32


in the period incurred.  Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.

The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants.  The value of buildings is depreciated over the estimated useful life of 25 years using the straight-line method.

We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.

We determine the value of above-market and below-market leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the

31



Table of Contents

industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases.  We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.

The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in place tenant improvements, in place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces, considering current market conditions.  In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses, as well as lost rental revenue during the expected lease-up period based on current market conditions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases, including leasing commissions, legal fees and tenant improvements, as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.

We amortize the value of in-place leases, in placein-place tenant improvements and in placein-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.

Investment in Unconsolidated Joint Venture
We provide funding to third party developers for the acquisition, development and construction of real estate.  Under the ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property.  We evaluate these arrangements to determine if they have characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner.  When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangements as an investment in an unconsolidated joint venture under the equity method of accounting (Note 8) or a direct investment (consolidated basis of accounting) instead of applying loan accounting.  The ADC Arrangement is periodically reassessed.

33


Investment Impairments

For all of our real estate and real estate related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s Chief Financial Officer and Chief Accounting Officer review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value. We consider projected future undiscounted cash flows, trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.


In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements.

We also evaluate our investments in unconsolidated joint ventures at each reporting date.  If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations.  We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture.  In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.
We believe the carrying value of our operating real estate is currently recoverable.  Accordingly, there were no impairment charges for the three months ended March 31, 20132014 and 2012.2013.  However, if market conditions worsen beyond our current expectations, or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.


Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

As of March 31, 2013,2014, we maintained approximately $1.9$2.3 million in Euro-denominated accounts at European financial institutions.  We currently have two investments in Europe.  As the cash is held in the same currency as the real estate assets and related loans, we believe that we are not materially exposed to any significant foreign currency fluctuations

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Table of Contents

related to these accounts as it relates to ongoing property operations.  Material movements in the exchange rate of Euros could materially impact distributions from our foreign investments.

Interest Rate Risk

We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert

34


variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  Of our $210.4$211.4 million in notes payable including the loans classified as obligations associated with real estate held for sale at March 31, 2013 secured by the remaining three industrial buildings at Interchange Business Center, $91.52014, $80.3 million represented debt subject to variable interest rates, of which $26.8 million is subject to minimum interest rates.  If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by $0.8 million.

Interest rate caps classified as assets were reported at their combined fair value of $0.1 million within prepaid expenses and other assets at March 31, 2013.2014.  A 100 basis point decrease in interest rates would result in a $0.1 million net decrease in the fair value of our interest rate caps.  A 100 basis point increase in interest rates would result in a $0.4$0.3 million net increase in the fair value of our interest rate caps.


Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated, as of March 31, 2013,2014, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective, as of March 31, 2013,2014, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting that occurred during the quarter ended March 31, 20132014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

33



35


PART II


OTHER INFORMATION


Item 1.Legal Proceedings.

We are not a party to, and none of our properties are subject to, any material pending legal proceedings.


Item 1A.Risk Factors.

There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2012.

2013. 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933.

Share Redemption Program

Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, after they have held them for at least one year, subject to the significant conditions and limitations of the program.  Our board of directors can amend the provisions of our share redemption program at any time without the approval of our stockholders.

The terms on which we redeem shares may differ between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively, “Exceptional Redemptions”) and all other redemptions (“Ordinary Redemptions”).  Our board of directors determined to suspend until further notice accepting Ordinary Redemptions effective April 1, 2012.  Under our
On August 7, 2013, in accordance with the terms of the share redemption program, in effect for the three months ended March 31, 2013, the purchaseper share redemption price for shares redeemed underredemptions was automatically adjusted as a result of the redemption pursuant to an Exceptional Redemption request is set forth below.

In the case of Exceptional Redemptions, prior to the first valuation conductedinitial determination by theour board of directors or a committee thereof (the “Initial Board Valuation”),of the purchase priceestimated per share value of $10.09. Beginning August 7, 2013, the per share redemption price for Exceptional Redemptions equaled the redeemed shares will equallesser of 90% of (a) $10.09 and (b) the difference of (a) average price per share the original purchaser or purchasers of sharesthat investor paid to us for all of his or her shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) (the “Original Share Price”) less (b) the aggregate distributions per share of any net sale proceeds from the sale of one or more of our assets, or other special distributions so designated by the board of directors (the “Special Distributions”), distributed to stockholders prior to the redemption date and declared from the date of first issue of such redeemed Shares.

On or after the Initial Board Valuation, the purchase price per share for the redeemed shares will equal the lesser of 90% of:

·the current estimated value per share (the “Valuation”) as determined in accordance with the Valuation Policy; and

·the Original Share Price less any Special Distributions distributed to stockholders prior to(as defined in the share redemption date and declared from the date of first issue of such redeemed Shares.

program).


Notwithstanding the redemption prices set forth above, our board of directors may determine, whether pursuant to formulas or processes approved or set by our board of directors, the redemption price of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ notice to stockholders before applying this new price determined by our board of directors.

Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemption in any quarterly period will generally be limited to no more than $250,000, and in no event more than $1,000,000 in any twelve-month period.  The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.

During the three months ended March 31, 20132014, our board of directors redeemed all sevennine Exceptional Redemption requests received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 20,03013,632 shares redeemed for $0.2$0.1 million (approximately $8.52$8.55 per share).  All redemptions were funded with cash on hand.

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We have not presented information regarding submitted and unfulfilled Ordinary Redemption requests for the three months ended March 31, 20132014 as our board of directors suspended Ordinary Redemptions effective April 1, 2012 and we believe many stockholders who may otherwise desire to have their shares redeemed have not submitted a request due to the suspension of Ordinary Redemptions.


36


Any Ordinary Redemption requests submitted while Ordinary Redemptions are suspended will be returned to investors and must be resubmitted upon resumption of Ordinary Redemptions. If Ordinary Redemptions are resumed, we will give all stockholders notice that we are resuming Ordinary Redemptions, so that all stockholders will have an equal opportunity to submit shares for redemption.  Upon resumption of Ordinary Redemptions, any redemption requests will be honored pro rata among all requests received based on funds available.  Requests will not be honored on a first come, first served basis.

During the quarter ended March 31, 2013,2014, we redeemed shares as follows:
2014 
Total Number of
Shares Redeemed
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
 
Maximum
Number of Shares
That May Be
Purchased Under
the Plans or
Programs
January 
 $
 
  
February 13,632
 8.55
 13,632
 (1)
March 
 
 
  
  13,632
 $8.55
 13,632
  

2013

 

Total Number of
Shares Redeemed

 

Average Price
Paid Per Share

 

Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs

 

Maximum
Number of
Shares That May
Be Purchased
Under the Plans
or Programs

 

January

 

 

$

 

 

 

 

February

 

20,030

 

$

8.52

 

20,030

 

(1

)

March

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,030

 

$

8.52

 

20,030

 

(1

)

(1) A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.


(1) A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.

Item 3.Defaults Upon Senior Securities.

None.

None.


Item 4.Mine Safety Disclosures.

None.

None.


Item 5.Other Information.

On May 8, 2013, our board of directors determined that our 2013 annual meeting will be held on September 11, 2013 (the “2013 Annual Meeting”), which is more than 30 days from the anniversary of our 2012 annual meeting.  As the 2013 Annual Meeting date has been advanced, as opposed to delayed, the deadline for receipt of stockholder proposals, including stockholder director nominations, pursuant to Rule 14a-8(e) under the Securities Exchange Act of 1934, as amended, will remain as disclosed in our proxy statement for the 2012 annual meeting, or May 2, 2013.  Thus, the deadline by which a stockholder proposal must have been received at our principal executive offices to be considered timely for inclusion in our 2013 proxy materials has passed.

In addition, pursuant to the terms and conditions of our bylaws, nominations by stockholders of candidates for director or proposals of other business by stockholders not intended to be included in our proxy materials must be received at our executive offices no earlier than May 14, 2013 and no later than June 13, 2013.  Proposals should be directed to the attention of the Corporate Secretary.


None. 

Item 6.Exhibits.

The exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.

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SIGNATURE

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.


BEHRINGER HARVARD OPPORTUNITY REIT II, INC.

Dated: May 13, 2013

9, 2014

By:

/s/ Andrew J. Bruce

Andrew J. Bruce

Chief Financial Officer

Principal Financial Officer

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Index to Exhibits

Exhibit Number

Description

Exhibit Number

3.1

Description

3.1Third Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 to Form 10-Q filed on November 14, 2012

3.2

3.2

Second Amended and Restated Bylaws, incorporatedas amended by reference to Exhibit 3.2 to Form 10-Q filed on November 14, 2012

Amendment No. 1.

4.1

4.1

Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated (incorporated by reference to Exhibit 4.1 to Form 10-K filed on March 28, 2013

2013)

10.1

4.2*

Purchase and Sale Agreement by and between CT/BH InterchangeTIAA Realty, LLC, as seller, and Realty Associates Advisors LLC,Behringer Harvard Opportunity OP II LP, as buyer,purchaser, dated February 19,December 10, 2013

4.3*

First Amendment to the Purchase and Sale Agreement between CT/BH Interchange LLC, as seller, and Realty Associates Advisors LLC, as buyer, dated February 19, 2013

4.4*

Second Amendment to the Purchase and Sale Agreement between CT/BH Interchange LLC, as seller, and Realty Associates Advisors LLC, as buyer, dated February 19, 2013

4.5*

Third Amendment to the Purchase and Sale Agreement between CT/BH Interchange LLC, as seller, and Realty Associates Advisors LLC, as buyer, dated February 19, 2013

31.1*

Rule 13a-14(a)/15d-14(a) Certification

31.2*

Rule 13a-14(a)/15d-14(a) Certification

32.1*

Section 1350 Certification**

32.2*

Section 1350 Certification**

99.1

Second Amended and Restated Share Redemption Program (incorporated by reference to Exhibit 4.410.7 to Form 10-K filed on March 28, 2012)

26, 2014)

10.2

101**

Reinstatement and First Amendment to Purchase and Sale Agreement by and between TIAA Realty, LLC, as seller, and Behringer Harvard Opportunity OP II LP, as purchaser, dated January 7, 2014 (incorporated by reference to Exhibit 10.8 to Form 10-K filed on March 26, 2014)

10.3Reinstatement and Second Amendment to Purchase and Sale Agreement by and between TIAA Realty, LLC, as seller, and Behringer Harvard Opportunity OP II LP, as purchaser, dated January 27, 2014 (incorporated by reference to Exhibit 10.9 to Form 10-K filed on March 26, 2014)
31.1*Rule 13a-14(a)/15d-14(a) Certification
31.2*Rule 13a-14(a)/15d-14(a) Certification
32.1*Section 1350 Certification**
32.2*Section 1350 Certification**
101*
The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013,2014, filed on May 13, 2013, formatted9, 2014, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.


* Filed herewith

** In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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*Filed or furnished herewith


**In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.  Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.



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