UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2017~~March 31, 2018



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-55424

KBS STRATEGIC OPPORTUNITY REIT II, INC.

(Exact Name of Registrant as Specified in Its Charter)



Maryland		46-2822978
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
800 Newport Center Drive, Suite 700 Newport Beach, California		92660
(Address of Principal Executive Offices)		(Zip Code)

(949) 417-6500

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________________________

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

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

As of ~~November 9, 2017,~~May 4, 2018, there were ~~16,542,777~~17,399,679 and ~~10,839,223~~11,553,875 outstanding shares of Class A and Class T common stock, respectively, of KBS Strategic Opportunity REIT II, Inc.

Table of Contents

KBS Strategic Opportunity REIT II, Inc.

FORM 10-Q

~~September 30, 2017~~March 31, 2018

INDEX



PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2018 (unaudited) and December 31, ~~2016~~2017	2
		Consolidated Statements of Operations (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	3
		Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	4
		Consolidated Statements of Equity for the Year Ended December 31, ~~2016~~2017 and the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018 (unaudited)	5
		Consolidated Statement of Cash Flows (unaudited) for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~	6
		Condensed Notes to Consolidated Financial Statements as of ~~September 30, 2017~~March 31, 2018 (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3230
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4945
	Item 4.	Controls and Procedures	5046
PART II.	OTHER INFORMATION		5147
	Item 1.	Legal Proceedings	5147
	Item 1A.	Risk Factors	5147
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5248
	Item 3.	Defaults upon Senior Securities	5651
	Item 4.	Mine Safety Disclosures	5651
	Item 5.	Other Information	5651
	Item 6.	Exhibits	5752
SIGNATURES			5953

Table of Contents


PART I.	FINANCIAL INFORMATION


Item 1.	Financial Statements

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	(unaudited)						(unaudited)
Assets
Real estate, net	$	498,708		$	317,323		$	529,641		$	530,440
Real estate equity securities							3,068			—
Real estate loan receivable, net	3,500			3,442			—			3,500
Total real estate and real estate-related investments, net	502,208			320,765			532,709			533,940
Cash and cash equivalents	36,867			43,741			27,329			29,031
Restricted cash	10,740			3,385			5,752			6,022
Investment in unconsolidated entity	2,658			2,385			2,765			2,698
Rents and other receivables	2,184			2,388			5,069			3,265
Above-market leases, net	16			21			79			83
Prepaid expenses and other assets	5,589			10,529			10,305			7,476
Total assets	$	560,262		$	383,214		$	584,008		$	582,515
Liabilities and equity
Notes payable, net	$	305,878		$	208,581		$	327,778		$	328,351
Accounts payable and accrued liabilities	8,257			7,101			6,511			6,845
Due to affiliates	5,963			812			1,706			1,862
Distributions payable	341			274			376			366
Below-market leases, net	11,842			949			9,836			10,783
Other liabilities	11,426			3,408			14,598			12,399
Total liabilities	343,707			221,125			360,805			360,606
Commitments and contingencies (Note 12)
Redeemable common stock	3,208			2,121			2,455			2,611
Equity
KBS Strategic Opportunity REIT II, Inc. stockholders’ equity
Preferred stock, $.01 par value per share; 10,000,000 shares authorized, no shares issued and outstanding	—			—			—			—
Class A common stock, $.01 par value per share; 500,000,000 shares authorized, 16,296,767 and 14,074,793 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively	163			140
Class T common stock, $.01 par value per share; 500,000,000 shares authorized, 10,624,216 and 6,046,591 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively	106			61
Class A common stock, $.01 par value per share; 500,000,000 shares authorized, 17,207,118 and 16,888,940 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively							172			169
Class T common stock, $.01 par value per share; 500,000,000 shares authorized, 11,408,402 and 11,031,895 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively							114			110
Additional paid-in capital	235,498			176,021			251,525			245,077
Cumulative distributions and net losses	(34,913		)	(27,817		)	(44,880		)	(39,657		)
Accumulated other comprehensive income (loss)	162			(111		)
Accumulated other comprehensive income							269			202
Total KBS Strategic Opportunity REIT II, Inc. stockholders’ equity	201,016			148,294			207,200			205,901
Noncontrolling interests	12,331			11,674			13,548			13,397
Total equity	213,347			159,968			220,748			219,298
Total liabilities and equity	$	560,262		$	383,214		$	584,008		$	582,515

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Revenues:
Office revenues													$	7,599		$	1,824
Hotel revenues	$	12,160		$	8,599		$	23,473		$	20,563		5,510			4,843
Office revenues	4,218			1,892			7,824			3,289
Apartment revenues	1,746			—			5,184			—			1,716			1,739
Interest income from real estate loans receivable	103			101			303			298
Interest income from real estate loan receivable													10			99
Total revenues	18,227			10,592			36,784			24,150			14,835			8,505
Expenses:
Office expenses													2,671			580
Hotel expenses	5,807			5,157			14,839			13,466			4,790			4,244
Office expenses	1,536			521			2,713			860
Apartment expenses	1,026			—			2,724			—			917			836
Asset management fees to affiliate	739			359			1,820			908			935			504
Real estate acquisition fees and expenses to affiliate	—			—			—			1,341
Real estate acquisition fees and expenses	—			—			—			123
General and administrative expenses	1,146			646			2,492			2,073			639			575
Depreciation and amortization	3,709			2,314			9,176			5,299			5,103			2,853
Interest expense	2,255			931			5,798			2,379			2,897			1,709
Total expenses	16,218			9,928			39,562			26,449			17,952			11,301
Other income:
Other (loss) income:
Other interest income	178			75			467			132			60			96
Equity in income of unconsolidated entity	14			58			40			58			15			13
Casualty-related income	1,614			—			1,614			—
Total other income	1,806			133			2,121			190
Net income (loss) before income taxes	3,815			797			(657		)	(2,109		)
Income tax (expense) benefit	(431		)	(48		)	5			(33		)
Net income (loss)	3,384			749			(652		)	(2,142		)
Net income attributable to noncontrolling interests	(491		)	(148		)	(182		)	(160		)
Net income (loss) attributable to common stockholders	$	2,893		$	601		$	(834	)	$	(2,302	)
Unrealized loss on real estate equity securities													(86		)	—
Total other (loss) income, net													(11		)	109
Net loss before income taxes													(3,128		)	(2,687		)
Income tax benefit													9			9
Net loss													(3,119		)	(2,678		)
Net loss attributable to noncontrolling interests													252			230
Net loss attributable to common stockholders													$	(2,867	)	$	(2,448	)

Class A Common Stock:
Net income (loss) attributable to common stockholders	$	1,905		$	499		$	(126	)	$	(2,188	)
Net income (loss) per common share, basic and diluted	$	0.12		$	0.04		$	(0.01	)	$	(0.18	)
Net loss attributable to common stockholders													$	(1,573	)	$	(1,529	)
Net loss per common share, basic and diluted													$	(0.09	)	$	(0.10	)
Weighted-average number of common shares outstanding, basic and diluted	16,166,468			13,219,633			15,410,820			12,357,932			17,142,848			14,846,406

Class T Common Stock:
Net income (loss) attributable to common stockholders	$	988		$	102		$	(708	)	$	(114	)
Net income (loss) per common share, basic and diluted	$	0.09		$	0.04		$	(0.08	)	$	(0.10	)
Net loss attributable to common stockholders													$	(1,294	)	$	(919	)
Net loss per common share, basic and diluted													$	(0.11	)	$	(0.13	)
Weighted-average number of common shares outstanding, basic and diluted	10,482,688			2,538,705			9,107,916			1,109,835			11,303,926			7,311,607

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Net income (loss) $ 3,384
$ 749
$ (652 ) $ (2,142 )
Other comprehensive income:
Foreign currency translation gain 82
27
273
40
Total other comprehensive income 82
27
273
40
Total comprehensive income (loss) 3,466
776
(379 ) (2,102 )
Total comprehensive income attributable to noncontrolling interests (491 ) (148 ) (182 ) (160 )
Total comprehensive income (loss) attributable to common stockholders $ 2,975
$ 628
$ (561 ) $ (2,262 )



	Three Months Ended March 31,
	2018			2017
Net loss	$	(3,119	)	$	(2,678	)
Other comprehensive income:
Foreign currency translation gain	67			29
Total other comprehensive income	67			29
Total comprehensive loss	(3,052		)	(2,649		)
Total comprehensive loss attributable to noncontrolling interests	252			230
Total comprehensive loss attributable to common stockholders	$	(2,800	)	$	(2,419	)

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Year Ended December 31, ~~2016~~2017 and the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018

(unaudited)

(dollars in thousands)


	Common Stock										Additional Paid-in Capital			Cumulative Distributions and Net Losses			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity			Common Stock										Additional Paid-in Capital			Cumulative Distributions and Net Losses			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Class A					Class T																							Class A					Class T
	Shares		Amounts			Shares		Amounts																					Shares		Amounts			Shares		Amounts
Balance, December 31, 2015	9,619,143		$	96		—		$	—		$	79,622		$	(13,266	)	$	—		$	66,452		$	4,290		$	70,742
Balance, December 31, 2016																													14,074,793		$	140		6,046,591		$	61		$	176,021		$	(27,817	)	$	(111	)	$	148,294		$	11,674		$	159,968
Net loss	—		—			—		—			—			(6,490		)	—			(6,490		)	(5		)	(6,495		)	—		—			—		—			—			(3,272		)	—			(3,272		)	(26		)	(3,298		)
Other comprehensive loss	—		—			—		—			—			—			(111		)	(111		)	—			(111		)
Issuance of common stock	4,104,345		41			5,955,697		60			97,308			—			—			97,409			—			97,409
Stock distribution declared	422,829		4			90,894		1			5,095			(5,100		)	—			—			—			—
Redemptions of common stock	(71,524	)	(1		)	—		—			(590		)	—			—			(591		)	—			(591		)
Transfers to redeemable common stock	—		—			—		—			(1,029		)	—			—			(1,029		)	—			(1,029		)
Distributions declared	—		—			—		—			—			(2,961		)	—			(2,961		)	—			(2,961		)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate	—		—			—		—			(6,213		)	—			—			(6,213		)	—			(6,213		)
Reduction of other offering costs	—		—			—		—			1,828			—			—			1,828			—			1,828
Noncontrolling interests contributions	—		—			—		—			—			—			—			—			7,389			7,389
Balance, December 31, 2016	14,074,793		$	140		6,046,591		$	61		$	176,021		$	(27,817	)	$	(111	)	$	148,294		$	11,674		$	159,968
Net (loss) income	—		—			—		—			—			(834		)	—			(834		)	182			(652		)
Other comprehensive income	—		—			—		—			—			—			273			273			—			273			—		—			—		—			—			—			313			313			—			313
Issuance of common stock	2,062,259		21			4,452,107		45			62,617			—			—			62,683			—			62,683			2,641,090		27			4,822,456		48			71,841			—			—			71,916			—			71,916
Stock distribution declared	226,399		3			130,816		1			3,411			(3,415		)	—			—			—			—
Stock dividends issued																													308,857		3			184,606		2			4,643			(4,648		)	—			—			—			—
Redemptions of common stock	(66,684	)	(1		)	(5,298	)	(1		)	(632		)	—			—			(634		)	—			(634		)	(135,800	)	(1		)	(21,758	)	(1		)	(1,357		)	—			—			(1,359		)	—			(1,359		)
Transfers to redeemable common stock	—		—			—		—			(1,087		)	—			—			(1,087		)	—			(1,087		)	—		—			—		—			(490		)	—			—			(490		)	—			(490		)
Distributions declared	—		—			—		—			—			(2,847		)	—			(2,847		)	—			(2,847		)	—		—			—		—			—			(3,920		)	—			(3,920		)	—			(3,920		)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate	—		—			—		—			(4,249		)	—			—			(4,249		)	—			(4,249		)	—		—			—		—			(4,913		)	—			—			(4,913		)	—			(4,913		)
Other offering costs	—		—			—		—			(583		)	—			—			(583		)	—			(583		)	—		—			—		—			(668		)	—			—			(668		)	—			(668		)
Noncontrolling interests contributions	—		—			—		—			—			—			—			—			500			500			—		—			—		—			—			—			—			—			1,774			1,774
Distributions to noncontrolling interests	—		—			—		—			—			—			—			—			(25		)	(25		)	—		—			—		—			—			—			—			—			(25		)	(25		)
Balance, September 30, 2017	16,296,767		$	163		10,624,216		$	106		$	235,498		$	(34,913	)	$	162		$	201,016		$	12,331		$	213,347
Balance, December 31, 2017																													16,888,940		$	169		11,031,895		$	110		$	245,077		$	(39,657	)	$	202		$	205,901		$	13,397		$	219,298
Net loss																													—		—			—		—			—			(2,867		)	—			(2,867		)	(252		)	(3,119		)
Other comprehensive income																													—		—			—		—			—			—			67			67			—			67
Issuance of common stock																													313,416		3			334,373		3			6,224			—			—			6,230			—			6,230
Stock dividends issued																													84,889		1			55,896		1			1,272			(1,274		)	—			—			—			—
Redemptions of common stock																													(80,127	)	(1		)	(13,762	)	—			(820		)	—			—			(821		)	—			(821		)
Transfers from redeemable common stock																													—		—			—		—			156			—			—			156			—			156
Distributions declared																													—		—			—		—			—			(1,082		)	—			(1,082		)	—			(1,082		)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate																													—		—			—		—			(323		)	—			—			(323		)	—			(323		)
Other offering costs																													—		—			—		—			(61		)	—			—			(61		)	—			(61		)
Noncontrolling interests contributions																													—		—			—		—			—			—			—			—			403			403
Balance, March 31, 2018																													17,207,118		$	172		11,408,402		$	114		$	251,525		$	(44,880	)	$	269		$	207,200		$	13,548		$	220,748

See accompanying condensed notes to consolidated financial statements.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~For the Nine Months Ended September 30, 2017 and 2016~~

(unaudited)

(in thousands)


	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2017			2016			2018			2017
Cash Flows from Operating Activities:
Net loss	$	(652	)	$	(2,142	)	$	(3,119	)	$	(2,678	)
Adjustment to reconcile net loss to net cash provided by operating activities
Adjustment to reconcile net loss to net cash (used in) provided by operating activities
Equity in income of unconsolidated entity	(40		)	(58		)	(15		)	(13		)
Distribution of earnings from unconsolidated joint venture	40			—			15			13
Casualty-related income	(1,614		)	—
Depreciation and amortization	9,176			5,299			5,103			2,853
Unrealized loss on real estate equity securities							86			—
Insurance proceeds received for repair and cleanup costs							—			2,000
Noncash interest income on real estate-related investment	(58		)	(52		)	—			(19		)
Deferred rents	(319		)	(172		)	(642		)	(11		)
Bad debt expense	425			—			89			98
Amortization of above- and below-market leases, net	(974		)	(285		)	(943		)	(172		)
Amortization of deferred financing costs	612			384			264			194
Unrealized loss on derivative instruments	117			43			53			50
Changes in operating assets and liabilities:
Rents and other receivables	(499		)	(1,737		)	(1,346		)	539
Prepaid expenses and other assets	2,444			(845		)	(3,087		)	(916		)
Accounts payable and accrued liabilities	509			1,594			(464		)	(2,020		)
Due to affiliates	23			(10		)	(4		)	(15		)
Due from affiliate							—			(21		)
Other liabilities	1,176			2,213			2,082			575
Net cash provided by operating activities	10,366			4,232
Net cash (used in) provided by operating activities							(1,928		)	457
Cash Flows from Investing Activities:
Acquisition of real estate	(154,719		)	(51,341		)
Improvements to real estate	(7,830		)	(14,298		)	(1,967		)	(1,333		)
Investment in unconsolidated entity	—			(2,486		)
Investment in real estate securities							(3,154		)	—
Payments for construction in progress	(4,103		)	—			(1,796		)	(1,153		)
Escrow deposits for future real estate purchases	(1,000		)	(3,000		)
Payoff of real estate loan receivable							3,500			—
Purchase of interest rate cap agreement							(8		)	—
Proceeds from insurance claim	5,080			—			100			—
Net cash used in investing activities	(162,572		)	(71,125		)	(3,325		)	(2,486		)
Cash Flows from Financing Activities:
Proceeds from notes payable	97,374			45,500			931			493
Principal payments on notes payable							(1,822		)	—
Payments of deferred financing costs	(1,225		)	(492		)	(100		)	(6		)
Proceeds from issuance of common stock	61,559			69,735			5,660			30,466
Payments to redeem common stock	(634		)	(40		)	(821		)	(216		)
Payments of commissions on stock sales, dealer manager fees and stockholder servicing fees	(3,803		)	(4,303		)	(563		)	(1,756		)
Payments of other offering costs	—			(20		)
Distributions paid	(1,059		)	(434		)	(407		)	(320		)
Noncontrolling interest contributions	500			515			403			80
Distributions to noncontrolling interest	(25		)	—
Net cash provided by financing activities	152,687			110,461			3,281			28,741
Net increase in cash, cash equivalents and restricted cash	481			43,568
Net (decrease) increase in cash, cash equivalents and restricted cash							(1,972		)	26,712
Cash, cash equivalents and restricted cash, beginning of period	47,126			25,366			35,053			47,126
Cash, cash equivalents and restricted cash, end of period	$	47,607		$	68,934		$	33,081		$	73,838
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $2,985 and $126 for the nine months ended September 30, 2017 and 2016, respectively	$	4,062		$	1,788
Interest paid, net of capitalized interest of $1,353 and $822 for the three months ended March 31, 2018 and 2017, respectively							$	2,331		$	1,363
Supplemental Disclosure of Noncash Investing and Financing Activities:
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	1,721		$	664		$	665		$	501
Increase in accrued improvements to real estate	$	134		$	—		$	238		$	710
Increase in other offering costs due to affiliates	$	583		$	157		$	61		$	311
Increase in acquisition fees due to affiliates	$	4,099		$	166
Reversal of accrued organization and offering expenses due to affiliates	$	—		$	(2,222	)
Increase in stockholder servicing fees due to affiliate	$	—		$	1,474
Stock dividends issued	$	3,415		$	1,685		$	1,274		$	1,032
Increase in distributions payable	$	67		$	1,078
Foreign currency translation gain on investment in unconsolidated entity	$	273		$	40
Increase in construction in progress payable	$	403		$	—		$	15		$	176

See accompanying condensed notes to consolidated financial statements.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2017~~March 31, 2018

(unaudited)


1.	ORGANIZATION

KBS Strategic Opportunity REIT II, Inc. (the “Company”) was formed on February 6, 2013 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2014 and intends to continue to operate in such a manner. The Company’s business is conducted through KBS Strategic Opportunity Limited Partnership II (the “Operating Partnership”), a Delaware limited partnership formed on February 7, 2013. The Company is the sole general partner of, and owns a 0.1% partnership interest in, the Operating Partnership. KBS Strategic Opportunity Holdings II LLC (“REIT Holdings”), a Delaware limited liability company formed on February 7, 2013, owns the remaining 99.9% partnership interest in the Operating Partnership and is the sole limited partner. The Company is the sole member and manager of REIT Holdings. The Company has three wholly owned taxable REIT subsidiaries (“TRS”), two of which lease the Company’s hotel properties and in turn contract with independent hotel management companies that manage the day-to-day operations of the Company’s hotels; the third consolidates the Company’s wholly owned TRSs. The Company’s TRSs are subject to federal and state income tax at regular corporate tax rates.

Subject to certain restrictions and limitations, the business of the Company has been externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, since July 2013 pursuant to an advisory agreement (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate loans, opportunistic real estate, and other real estate-related investments. The Advisor has entered into a sub-advisory agreement with STAM, a real estate operating company to provide real estate acquisition and portfolio management services to the Advisor in connection with any investments the Company may make in value-added real estate, distressed debt, and real estate-related investments in Europe. On July 3, 2013, the Company issued 21,739 shares of its common stock to the Advisor at a purchase price of $9.20 per share.

The Company expects to invest in and manage a diverse portfolio of opportunistic real estate, real estate-related loans, real estate-related debt securities and other real estate-related investments located in the United States and Europe. Such investments may include the acquisition of distressed debt, the origination and acquisition of mortgage, mezzanine, bridge and other real estate-related loans, investment in opportunistic real estate and investments in real estate-related debt securities such as residential and commercial mortgage-backed securities and collateralized debt obligations. The Company may also invest in entities that make similar investments. As of ~~September 30, 2017,~~March 31, 2018, the Company had invested in two hotel properties, ~~three~~four office properties, one apartment building, an investment in an unconsolidated entity and ~~one first mortgage loan.~~an investment in real estate equity securities. Additionally as of ~~September 30, 2017,~~March 31, 2018, the Company had entered into a joint venture to develop one retail property, which is currently under construction.

From July 3, 2013 to August 11, 2014, the Company conducted a private placement offering (the “Private Offering”) exempt from registration under Regulation D of the Securities Act of 1933, as amended (the “Act”). The Company sold 3,619,851 shares of common stock for gross offering proceeds of $32.2 million in the Private Offering.

On November 14, 2013, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 180,000,000 shares of common stock for sale to the public (the “Public Offering”), of which 100,000,000 shares were registered in a primary offering and 80,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on August 12, 2014. On February 11, 2016, the Company filed an amended registration statement on Form S-11 with the SEC to offer a second class of common stock designated as Class T shares and to designate its initially offered and outstanding common stock as Class A shares. Pursuant to the amended registration statement, the Company is offering to sell any combination of Class A and Class T shares in the Public Offering but in no event may the Company sell more than 180,000,000 of shares of its common stock pursuant to the Public Offering. The Company commenced offering Class T shares of common stock for sale to the public on February 17, 2016. KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Advisor, serves as the dealer manager of the Public Offering pursuant to a dealer manager agreement originally dated August 12, 2014 and amended and restated February 17, 2016 (the “Dealer Manager Agreement”). Previously the Dealer Manager served as dealer manager for the Private Offering. The Dealer Manager is responsible for marketing the Company’s shares.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

The Company’s board of directors has extended the closing date of the primary offering until the earlier of the sale of up to $650.0 million of shares, or the date the registration statement relating to the Company’s proposed follow-on offering (the “Follow-on Offering”) is declared effective by the SEC.

~~On August 10, 2017~~, the Company filed a registration statement on Form S-11 with the SEC to register the Follow-on Offering. Pursuant to the Follow-on Offering registration statement, the Company proposes to register up to $500.0 million of shares of common stock for sale to the public in the primary portion of the Follow-on Offering. The Company also expects to register up to $125.0 million of shares of common stock pursuant to the Company’s dividend reinvestment plan in the Follow-on Offering. The Company can give no assurance that it will commence or complete the Follow-on Offering.

On January 7, 2015, the Company broke escrow in the Public Offering and through ~~September 30, 2017,~~March 31, 2018, the Company had sold ~~10,912,156~~11,793,467 and ~~10,407,804~~11,112,527 shares of Class A and Class T common stock, respectively, in the Public Offering for aggregate gross offering proceeds of ~~$207.1~~$222.5 million, including ~~342,508~~443,593 and ~~78,227~~122,861 shares of Class A and Class T common stock, respectively, under its dividend reinvestment plan for aggregate gross offering proceeds of ~~$3.9~~$5.3 million. Also as of ~~September 30, 2017,~~March 31, 2018, the Company had redeemed ~~138,208~~287,450 and ~~5,298~~35,520 shares of Class A and Class T common stock, respectively, for ~~$1.2~~$2.8 million.

On each of April 2, 2014 and July 31, 2014, the Company issued 120,106 shares of Class A common stock to Willowbrook Capital Group LLC, an entity owned and controlled by Keith D. Hall, one of the Company’s directors and the Company’s Chief Executive Officer, and Peter McMillan III, also one of the Company’s directors and the Company’s President, for $1.0 million. On July 14, 2017 and February 13, 2018, the Company issued 214,175 shares and 10,935 shares, respectively, of Class A common stock to a business associate of Keith D. Hall and Peter McMillan III for approximately $2.0 ~~million.~~million and $0.1 million, respectively. The Company issued these shares of common stock in a private transaction exempt from the registration requirements of the Act pursuant to Section 4(2) of the Act.

On August 10, 2017, the Company filed a registration statement on Form S-11 with the SEC to register a proposed follow-on offering. Pursuant to the follow-on offering registration statement, the Company proposes to register up to $500.0 million of shares of common stock for sale to the public in a primary offering. The Company also proposes to register up to $125.0 million of shares of common stock pursuant to the dividend reinvestment plan in the follow-on offering. The Company can give no assurance that it will commence or complete the follow-on offering.

On February 20, 2018, the Company’s board of directors approved the termination of the primary offering stage of the Company effective July 31, 2018. Subscriptions must be dated on or before July 31, 2018, and subscriptions and all related documents and funds must be received by the Company in good order no later than September 28, 2018.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, except for the Company’s adoption of ~~ASU No. 2017-01~~the revenue recognition and financial instruments standards issued by the Financial Accounting Standards Board (“FASB”) effective on January 1, ~~2017.~~2018 and the addition of an accounting policy with respect to real estate equity securities. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, ~~2016~~2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the ~~Financial Accounting Standards Board (“FASB”)~~FASB Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2018.

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership and their direct and indirect wholly owned subsidiaries and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

~~Reclassifications~~Revenue Recognition

~~Certain amounts in~~Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s ~~prior period consolidated financial statements have been reclassified~~adoption. Under the modified retrospective approach, an entity may also elect to ~~conform~~apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A completed contract is a contract for which all (or substantially all) of the ~~current period presentation. These reclassifications have not changed~~revenue was recognized under legacy GAAP that was in effect before the ~~results~~date of ~~operations of prior periods. During the year ended December 31, 2016, the~~initial application. The Company elected to ~~early adopt~~apply this standard only to contracts that were not completed as of January 1, 2018.

Based on the Company’s evaluation of contracts within the scope of ASU No. ~~2016-18 (as defined below). As a result,~~2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by other operating income and tenant reimbursements for substantial services earned at the Company’s office properties and hotel revenues. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied.

Hotel Revenue

The Company recognizes revenue for hotels as hotel revenue when earned. Revenues are recorded net of any sales or occupancy tax collected from the Company’s guests. Additionally, some of the Company’s hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is booked by the Company ~~no longer presents~~at the ~~changes within restricted cash~~price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is booked by the Company on a gross basis. The Company participates in frequent guest programs sponsored by the brand owners of the Company’s hotels and the Company expenses the charges associated with those programs, as incurred. Hotel operating revenues are disaggregated in the ~~consolidated statements~~real estate footnote into the categories of ~~cash flows. Instead, restricted cash is included with cash~~rooms revenue, food, beverage and convention services revenue, campground revenue and other revenue to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash ~~equivalents when reconciling~~flows.

Room revenue is generated through contracts with customers whereby the ~~beginning of period and~~customer agrees to pay a daily rate for right to use a hotel room. The Company’s contract performance obligations are fulfilled at the end of ~~period total amounts shown~~the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from the Company’s hotel. The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future stay at the Company’s hotels. Advanced deposits for room revenue are included in the balance of other liabilities on the consolidated ~~statements~~balance sheet. Advanced deposits are recognized as revenue at the time of ~~cash flows.~~the guest’s stay. The Company notes no significant judgements regarding the recognition of rooms revenue.

Food, beverage and convention revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate for restaurant dining services or convention services. The Company’s contract performance obligations are fulfilled at the time that the meal is provided to the customer or when the convention facilities and related dining amenities are provided to the customer. The Company recognizes food and beverage revenue upon the fulfillment of the contract with the customer. The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future banquet event at the Company’s hotels. Advanced deposits for food and beverage revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits for banquet services are recognized as revenue following the completion of the banquet services. The Company notes no significant judgements regarding the recognition of food and beverage revenue.

Campground revenue is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Real Estate Equity Securities

The Company’s real estate equity securities are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Upon adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings.

Dividend income from real estate equity securities is recognized on an accrual basis based on eligible shares as of the ex-dividend date.

Segments

The Company has invested in opportunistic real estate investments, real estate equity securities and originated a loan secured by a non-stabilized real estate ~~asset.~~asset, which was repaid on January 12, 2018. In general, the Company intends to hold its investments in opportunistic real estate, real estate equity securities and other real estate-related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment. In addition, the Company has invested in a participating loan facility secured by a portfolio of light industrial properties located in Europe. However, based on the ~~Company's~~Company’s investment portfolio and future investment focus, the Company does not believe that its investment in the European asset is a reportable segment.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding for each class of share outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017. For the purpose of determining the weighted-average number of shares outstanding, stock dividends issued are adjusted retroactively and treated as if they were issued and outstanding for all periods presented.

The Company’s board of directors has declared and issued stock dividends on shares of the Company’s common stock during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ as follows:

Three Months Ended September 30,
Amount Declared per Share Outstanding ⁽¹⁾
Total Shares Issued
2016 0.005001 shares 71,656
2017 0.005001 shares 131,477

Nine Months Ended September 30,
Amount Declared per Share Outstanding ⁽¹⁾
Total Shares Issued
2016 0.015002 shares 168,866
2017 0.015003 shares 357,215



Three Months Ended March 31,	Amount Declared per Share Outstanding ⁽¹⁾	Total Shares Issued
2017	0.005001 shares	104,525
2018	0.005001 shares	140,785

_____________________

⁽¹⁾Amount declared per share outstanding includes one-time stock dividends, quarterly dividends and monthly dividends and assumes each share was issued and outstanding for the entire periods presented. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend.

Until the Company established an estimated net asset value per share of common stock on June 6, 2017, for the purpose of calculating the dollar amount of the Class A and Class T stock dividends issued, the Company used the Class A and Class T primary offering price at the time of issuance.

910

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

Until the Company established an estimated net asset value, on June 6, 2017, per share of common stock, for the purpose of calculating the dollar amount of the Class A and Class T stock dividends issued, the Company used the current Class A and Class T primary offering price.

Cash distributions declared per share of Class A common stock were ~~$0.048 and $0.143~~$0.047 for the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~March 31, 2018. Cash distributions declared per share of Class T common stock were ~~$0.025 and $0.073~~$0.024 for the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~March 31, 2018. The declared rate of cash distributions for Class T Shares is different than the rate declared for the Class A Shares by an amount equivalent to any applicable daily stockholder servicing fees. Distributions declared per share of common stock assumes each share was issued and outstanding each day that was a record date during the three ~~and nine~~ months ended ~~September 30, 2017.~~March 31, 2018. Each day during the period from January 1, ~~2017~~2018 through ~~September 30, 2017~~March 31, 2018 was a record date for distributions. Distributions for this period were calculated based on stockholders of record each day during this period at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

Cash distributions declared per share of Class A common stock were ~~$0.098 and $0.154~~$0.047 for the three ~~and nine~~ months ended ~~September 30, 2016, respectively.~~March 31, 2017. Cash distributions declared per share of Class T common stock were ~~$0.074 and $0.098~~$0.024 for the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017. The declared rate of cash distributions for Class T Shares is different than the rate declared for the Class A Shares by an amount equivalent to any applicable daily stockholder servicing fees. Distributions declared per share of common stock assumes each share was issued and outstanding each day that was a record date during the three ~~and nine~~ months ended ~~September 30, 2016.~~March 31, 2017. Each day during the period from ~~March~~January 1, ~~2016~~2017 through March 31, ~~2016~~2017 was a record date for distributions. Distributions for this period were calculated based on stockholders of record each day during this period at a rate of (i) ~~$0.00026202~~$0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date. Each day during the period from April 1, 2016 through September 30, 2016 was a record date for distributions. Distributions for this period were calculated based on stockholders of record each day during this period at a rate of (i) $0.00052404 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date. Given the distribution rate declared for the period and the applicable stockholder servicing fee for Class T shares of common stock, the Company did not pay cash distributions on shares of Class T common stock for record dates from March 1, 2016 to March 31, 2016. On September 27, 2016, the Company’s board of directors declared a one-time cash distribution in the amount of $0.05 per share on the outstanding shares of all classes of common stock to stockholders of record as of the close of business on September 27, 2016.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

~~In accordance with FASB ASC Topic 260-10-45,~~ ~~Earnings Per Share, the~~The Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. The Company does not have any participating securities outstanding other than Class A Common Stock and Class T Common stock during the periods presented.

The Company’s calculated earnings per share for the three months ended March 31, 2018 and 2017 were as follows (in

thousands, except share and per share amounts):


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
	2017		2016			2017			2016			2018			2017

Net income (loss) attributable to common stockholders	$	2,893	$	601		$	(834	)	$	(2,302	)
Net loss attributable to common stockholders												$	(2,867	)	$	(2,448	)
Less: Class A Common Stock cash distributions declared	777		1,264			2,187			1,922			807			682
Less: Class T Common Stock cash distributions declared	258		249			660			254			275			170
Undistributed net income (loss) attributable to common stockholders	$	1,858	$	(912	)	$	(3,681	)	$	(4,478	)

Undistributed net loss attributable to common stockholders												$	(3,949	)	$	(3,300	)
Class A Common Stock:
Undistributed net income (loss) attributable to common stockholders	$	1,128	$	(765	)	$	(2,313	)	$	(4,110	)
Undistributed net loss attributable to common stockholders												$	(2,380	)	$	(2,211	)
Class A Common Stock cash distributions declared	777		1,264			2,187			1,922			807			682
Net income (loss) attributable to Class A common stockholders	$	1,905	$	499		$	(126	)	$	(2,188	)
Net income (loss) per common share, basic and diluted	$	0.12	$	0.04		$	(0.01	)	$	(0.18	)
Net loss attributable to Class A common stockholders												$	(1,573	)	$	(1,529	)
Net loss per common share, basic and diluted												$	(0.09	)	$	(0.10	)
Weighted-average number of common shares outstanding, basic and diluted	16,166,468		13,219,633			15,410,820			12,357,932			17,142,848			14,846,406

Class T Common Stock:
Undistributed net income (loss) attributable to common stockholders	$	730	$	(147	)	$	(1,368	)	$	(368	)
Undistributed net loss attributable to common stockholders												$	(1,569	)	$	(1,089	)
Class T Common Stock cash distributions declared	258		249			660			254			275			170
Net income (loss) attributable to Class T common stockholders	$	988	$	102		$	(708	)	$	(114	)
Net income (loss) per common share, basic and diluted	$	0.09	$	0.04		$	(0.08	)	$	(0.10	)
Net loss attributable to Class T common stockholders												$	(1,294	)	$	(919	)
Net loss per common share, basic and diluted												$	(0.11	)	$	(0.13	)
Weighted-average number of common shares outstanding, basic and diluted	10,482,688		2,538,705			9,107,916			1,109,835			11,303,926			7,311,607

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Square Footage, Occupancy and Other Measures

Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

Recently Issued Accounting Standards Updates

~~In May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in ~~Revenue Recognition (Topic 605)~~ and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 was to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. In August 2015, the FASB issued ASU No. 2015-14, ~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~ (“ASU No. 2015-14”), which defers the effective date of ASU No. 2014-09 by one year. Early adoption is permitted but not before the original effective date. The Company is in the process of identifying the Company’s revenue streams that are impacted by the adoption of ASC 606. The Company has preliminarily identified revenues that may be impacted by this standard, which includes hotel revenues (comprised of room, food, beverage, convention services, and miscellaneous revenues), and other ancillary income earned at its properties. The Company’s revenues generated through leasing arrangements are excluded from this standard. The Company continues to evaluate the impact that the standard will have on its consolidated financial statements. The Company expects to adopt the standard using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the adoption.

~~In January 2016, the FASB issued ASU No. 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~ (“ASU No. 2016-01”). The amendments in ASU No. 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 primarily affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU No. 2016-01 also requires entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the balance sheet or in the accompanying notes to the financial statements. ASU No. 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application of certain provisions of the standard is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU No. 2016-01 to have a significant impact on its financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The standard requires lessors to identify lease and non-lease components under their leasing arrangements and allocate the total consideration in the lease agreement to these lease and non-lease components based on their relative standalone selling prices. Non-lease components will be subject to the new revenue recognition standard upon the Company’s adoption of the new leasing standard on January 1, 2019. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In March 2018, the FASB affirmed a proposed amendment to the leases ASU, which would add a transition option to the new leases standard that would allow entities to apply the transition provisions of the new standard at its adoption date instead of the earliest comparative periods presented in its financial statements. The FASB also tentatively approved a practical expedient that would permit lessors to not separate lease and non-lease components if certain conditions are met. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial ~~statements.~~statements and if adopted by the FASB, applying the transition option and electing the practical expedient of the proposed amendment.


3.	REAL ESTATE

As of March 31, 2018, the Company’s real estate portfolio was composed of two hotel properties, four office properties and one apartment building. In addition, the Company has entered into a joint venture to develop one retail property, which is currently under construction. The following table summarizes the Company’s real estate as of March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018			December 31, 2017
Land	$	104,138		$	104,138
Buildings and improvements	364,324			362,210
Construction in progress	65,609			63,732
Tenant origination and absorption costs	18,753			19,006
Total real estate, cost	552,824			549,086
Accumulated depreciation and amortization	(23,183		)	(18,646		)
Total real estate, net	$	529,641		$	530,440

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

~~In June 2016,~~The following table provides summary information regarding the ~~FASB issued~~Company’s real estate as of March 31, 2018 (in thousands):



Property	Date Acquired	City	State	Property Type	Land		Building and Improvements ⁽¹⁾		Tenant Origination and Absorption		Total Real Estate, at Cost		Accumulated Depreciation and Amortization			Total Real Estate, Net		Ownership %
Springmaid Beach Resort	12/30/2014	Myrtle Beach	SC	Hotel	$	27,438	$	32,636	$	—	$	60,074	$	(5,030	)	$	55,044	90.0%
Q&C Hotel	12/17/2015	New Orleans	LA	Hotel	1,232		52,975		—		54,207		(4,401		)	49,806		90.0%
2200 Paseo Verde	12/23/2015	Henderson	NV	Office	1,850		11,634		603		14,087		(1,273		)	12,814		100.0%
Lincoln Court	05/20/2016	Campbell	CA	Office	14,706		33,836		3,736		52,278		(4,169		)	48,109		100.0%
Lofts at NoHo Commons	11/16/2016	North Hollywood	CA	Apartment	26,222		75,986		—		102,208		(2,593		)	99,615		90.0%
210 West 31st Street ⁽²⁾	12/01/2016	New York	NY	Retail	—		65,609		—		65,609		—			65,609		80.0%
Oakland City Center	08/18/2017	Oakland	CA	Office	22,150		137,356		11,614		171,120		(4,993		)	166,127		100.0%
Grace Court ⁽³⁾	10/03/2017	Phoenix	AZ	Office	10,540		19,901		2,800		33,241		(724		)	32,517		90.0%
					$	104,138	$	429,933	$	18,753	$	552,824	$	(23,183	)	$	529,641

_____________________

⁽¹⁾ Building and improvements includes construction in progress.

⁽²⁾ The Company acquired the rights to a leasehold interest with respect to this property. The leasehold interest expires January 31, 2114. As of March 31, 2018, the capital lease asset had a carrying value of $6.8 million included in construction in progress.

⁽³⁾ The Company acquired the rights to a leasehold interest with respect to the land at this property.

Office Properties

As of March 31, 2018, the Company owned four office properties encompassing in the aggregate 862,266 rentable square feet which were 73% occupied. The following table provides detailed information regarding the Company’s office revenues and expenses for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018		2017
Office revenues:
Rental income	$	6,844	$	1,750
Tenant reimbursements and other income ⁽¹⁾	755		74
Office revenues	$	7,599	$	1,824

Office expenses:
Operating, maintenance, and management	$	1,719	$	391
Real estate taxes and insurance	952		189
Office expenses	$	2,671	$	580

_____________________

⁽¹⁾For the three months ended March 31, 2018, included in tenant reimbursements and other income for office properties is $0.2 million of other operating income and tenant reimbursements for substantial services accounted for under ASU No. ~~2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments~~ (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale securities. An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures. For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.

~~In August 2016, the FASB issued ASU No. 2016-15,~~ ~~Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments~~ (“ASU No. 2016-15”). ASU No. 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on eight specific cash flow issues, including the following that are or may be relevant to the Company: (a) Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; (b) Cash payments relating to contingent consideration made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities; (c) Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement); and (d) Relating to distributions received from equity method investments, ASU No. 2016-15 provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can be classified using a (1) cumulative earnings approach, or (2) nature of distribution approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities. Alternatively, an investor can choose to classify the distributions based on the nature of activities of the investee that generated the distribution. If the necessary information is subsequently not available for an investee to determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and report a change in accounting principle on a retrospective basis; (e) In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the impact of adopting ASU No. 2016-15 on its financial statements, but does not expect the adoption of ASU No. 2016-15 to have a material impact on its financial statements.2014-09.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~ (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Therefore, amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company elected to early adopt ASU No. 2016-18 for the reporting period ending December 31, 2016 and was applied retrospectively. As a result of adoption of ASU No. 2016-18, the Company no longer presents the changes within restricted cash in the consolidated statements of cash flows.

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business~~ (“ASU No. 2017-01”) to add guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU No. 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, ASU No. 2017-01 (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. ASU No. 2017-01 provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The amendments can be applied to transactions occurring before the guidance was issued (January 5, 2017) as long as the applicable financial statements have not been issued. The Company elected to early adopt ASU No. 2017-01 for the reporting period beginning January 1, 2017. As a result of adoption of ASU No. 2017-01, the Company’s acquisitions of investment properties beginning January 1, 2017 could qualify as asset acquisitions (as opposed to business combinations). Transaction costs associated with asset acquisitions are capitalized, while transaction costs associated with business combinations will continue to be expensed as incurred.


3.	~~RECENT ACQUISITION OF REAL ESTATE~~

~~During the nine months ended September 30, 2017, the Company acquired the following property (in thousands):~~

Intangibles
Property Name City State Acquisition Date Land Building and Improvements
Tenant Origination
and Absorption Costs

Above-Market
Lease Assets

Below-Market
Lease Liabilities
Total Purchase Price
Oakland City Center Oakland CA 08/18/2017 $ 22,150
$ 136,544
$ 11,951
$ —
$ (11,872 ) $ 158,773

~~The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition as follows (in years):~~

Tenant Origination and
Absorption Costs

Above-Market
Lease Assets
Below-Market
Lease Liabilities
Oakland City Center 4.8 — 4.7

The Company recorded this acquisition as an asset acquisition. Included in the total purchase price above was $5.5 million of capitalized acquisition costs. For the nine months ended September 30, 2017, the Company recognized $2.4 million of total revenues and $1.2 million of operating expenses from this property.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~


4.	~~REAL ESTATE~~

As of September 30, 2017, the Company’s real estate portfolio was composed of two hotel properties, three office properties and one apartment building. In addition, the Company has entered into a joint venture to develop one retail property, which is currently under construction. The following table summarizes the Company’s real estate as of September 30, 2017 and December 31, 2016 (in thousands):

September 30, 2017 December 31, 2016
Land $ 93,598
$ 71,448
Buildings and improvements 340,391
196,050
Construction in progress 62,246
50,452
Tenant origination and absorption costs 16,471
6,226
Total real estate, cost 512,706
324,176
Accumulated depreciation and amortization (13,998 ) (6,853 )
Total real estate, net $ 498,708
$ 317,323

~~The following table provides summary information regarding the Company’s real estate as of September 30, 2017 (in thousands):~~

Property Date
Acquired City State Property Type Land
Building
and Improvements ⁽¹⁾
Tenant Origination and Absorption Total
Real Estate, at Cost Accumulated Depreciation and Amortization Total
Real Estate,
Net Ownership %
Springmaid Beach Resort 12/30/2014 Myrtle Beach SC Hotel $ 27,438
$ 30,821
$ —
$ 58,259
$ (3,617 ) $ 54,642
90.0%
Q&C Hotel 12/17/2015 New Orleans LA Hotel 1,232
52,921
—
54,153
(3,301 ) 50,852
90.0%
2200 Paseo Verde 12/23/2015 Henderson NV Office 1,850
11,412
603
13,865
(957 ) 12,908
100.0%
Lincoln Court 05/20/2016 Campbell CA Office 14,706
33,711
3,917
52,334
(3,221 ) 49,113
100.0%
Lofts at NoHo Commons 11/16/2016 North Hollywood CA Apartment 26,222
74,902
—
101,124
(1,648 ) 99,476
90.0%
210 West 31st Street ⁽²⁾
12/01/2016 New York NY Retail —
62,246
—
62,246
—
62,246
80.0%
Oakland City Center 08/18/2017 Oakland CA Office 22,150
136,624
11,951
170,725
(1,254 ) 169,471
100.0%
$ 93,598
$ 402,637
$ 16,471
$ 512,706
$ (13,998 ) $ 498,708

~~_____________________~~

⁽¹⁾ ~~Building and improvements includes construction in progress.~~

⁽²⁾ The Company acquired the rights to a leasehold interest with respect to this property. The leasehold interest expires January 31, 2114. As of September 30, 2017, the capital lease had a carrying value of $7.1 million included in construction in progress.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

~~Hotel Properties~~

As of September 30, 2017, the Company owned two hotel properties. The following table provides detail information regarding the Company's hotel revenues and expenses for the three and nine months ended September 30, 2017 and 2016 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Hotel revenues:
Room $ 4,973
6,499
$ 13,304
15,180
Food, beverage and convention services 1,031
883
2,785
2,436
Campground 288
275
838
806
Other ⁽¹⁾
5,868
942
6,546
2,141
Hotel revenues $ 12,160
$ 8,599
$ 23,473
$ 20,563

Hotel expenses:
Room $ 1,391
1,500
$ 3,604
3,787
Food, beverage and convention services 868
842
2,381
2,188
General and administrative 601
590
1,748
1,696
Sales and marketing 690
453
2,058
1,236
Repairs and maintenance 454
485
1,350
1,345
Utilities 325
324
777
767
Property taxes and insurance 867
348
1,650
1,050
Other 611
615
1,271
1,397
Hotel expenses $ 5,807
$ 5,157
$ 14,839
$ 13,466

~~_____________________~~

⁽¹⁾ ~~Hotel revenues - other includes $5.5 million and $5.8 million of business interruption insurance recovery for the three and nine months ended September 30, 2017, respectively.~~

~~Springmaid Beach Resort~~

Springmaid Beach Resort sustained significant damage from Hurricane Matthew in October 2016, which resulted in a number of rooms being offline through September 30, 2017. The pier was destroyed and certain restaurants and stores have been closed. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to 3% of replacement cost per incident. Based on management’s estimates, the Company recognized an estimated aggregate loss for the damaged assets' net book value of $3.7 million during the year ended December 31, 2016, which was reduced by $3.7 million of estimated insurance recovery since the Company determined that it was probable of receipt. While the Company's insurance recovery is subject to a deductible, the Company did not recognize a loss as the estimated insurance recovery based on fair value (or replacement cost) exceeds the net book value of the damaged assets plus the deductible amount, which is estimated to be approximately $2.5 million.

As of December 31, 2016, the Company recorded a receivable of $6.2 million for estimated insurance recoveries as prepaid expenses and other assets on the accompanying consolidated balance sheets related to the damages mentioned above. In September 2017, the Company reached a final settlement with the insurance company. The Company received $8.2 million for the property damages sustained as a result of Hurricane Matthew during the nine months ended September 30, 2017. During the three and nine months ended September 30, 2017, the Company received $5.5 million and $5.8 million of business interruption insurance recovery, respectively, which is included in hotel revenues on the accompanying consolidated statements of operations. As a result of the settlement, the Company recorded a $1.6 million gain for casualty-related income, net on the accompanying consolidated statements of operations.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

To the extent that insurance proceeds ultimately exceeded the difference between replacement cost and net book value of the impaired assets, the post-hurricane costs incurred, and/or business interruption losses recognized, the excess was reflected as income in the period those amounts were received or when receipt was deemed probable to occur.

~~Office Properties~~

As of September 30, 2017, the Company owned three office properties encompassing in the aggregate 551,380 rentable square feet which were 90% occupied. The following table provides detailed information regarding the Company's office revenues and expenses for the three and nine months ended September 30, 2017 and 2016 (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Office revenues:
Rental income $ 3,983
$ 1,817
$ 7,406
$ 3,165
Tenant reimbursements and other income 235
75
418
124
Office revenues $ 4,218
$ 1,892
$ 7,824
$ 3,289

Office expenses:
Operating, maintenance, and management $ 1,094
$ 328
$ 1,890
$ 552
Real estate taxes and insurance 442
193
823
308
Office expenses $ 1,536
$ 521
$ 2,713
$ 860

Operating Leases

The Company’s office properties are leased to tenants under operating leases for which the terms and expirations vary. As of ~~September 30, 2017,~~March 31, 2018, the leases had remaining terms, excluding options to extend, of up to ~~10.9~~10.4 years with a weighted-average remaining term of ~~3.5~~4.0 years. Some of the leases may have provisions to extend the term of the lease, options for early termination for all or a part of the leased premises after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to office tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled ~~$1.0~~$1.2 million and ~~$0.7~~$1.1 million as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively.

During the three months ended March 31, 2018 and 2017, the Company recognized deferred rent from tenants of $0.6 million and $11,000, respectively, net of lease incentive amortization. As of March 31, 2018 and December 31, 2017, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $2.0 million and $1.3 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $0.2 million of unamortized lease incentives as of March 31, 2018 and December 31, 2017.

As of ~~September 30, 2017,~~March 31, 2018, the future minimum rental income from the Company’s office properties under its non-cancelable operating leases was as follows (in thousands):


October 1, 2017 through December 31, 2017	$	4,607
2018	17,512
April 1, 2018 through December 31, 2018			$	15,913
2019	15,577		19,966
2020	12,193		16,461
2021	9,383		13,582
2022			10,419
Thereafter	19,912		17,998
	$	79,184	$	94,339

As of March 31, 2018, the Company’s commercial real estate properties were leased to approximately 100 tenants over a diverse range of industries and geographic areas. As of March 31, 2018, the highest tenant industry concentrations (greater than 10% of annualized base rent) in the Company’s portfolio were as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Legal Services	11	$	3,482	14.9	%
Public Administration (Government)	6	3,168		13.5	%
Professional, Scientific and Legal	12	2,970		12.7	%
Finance	13	2,505		10.7	%
		$	12,125	51.8	%

_____________________

⁽¹⁾Annualized base rent represents annualized contractual base rental income as of March 31, 2018, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

Hotel Properties

As of March 31, 2018, the Company owned two hotel properties. The following table provides detailed information regarding the Company’s hotel revenues and expenses for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018		2017
Hotel revenues:
Room	$	4,110	3,594
Food, beverage and convention services	816		753
Campground	289		272
Other	295		224
Hotel revenues	$	5,510	$	4,843

Hotel expenses:
Room	$	1,250	1,031
Food, beverage and convention services	724		677
General and administrative	636		566
Sales and marketing	652		604
Repairs and maintenance	486		442
Utilities	276		220
Property taxes and insurance	443		383
Other	323		321
Hotel expenses	$	4,790	$	4,244

Contract liabilities

The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future stay or a deposit for a future banquet event at the Company’s hotels. Advanced deposits are recognized as revenue at the time of the guest’s stay or completion of the banquet services. The following table summarizes the Company’s contract liabilities, which are included in other liabilities in the accompanying consolidated balance sheets, as of March 31, 2018 and December 31, 2017 (in thousands):



	March 31, 2018		December 31, 2017
Contract liability	$	1,493	$	358
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period	$	98	⁽¹⁾

_____________________

⁽¹⁾The amount of revenue recognized in the period from amounts included in contract liability at the beginning of the period is not relevant for the year ended December 31, 2017, as the Company adopted ASU No. 2014-09 effective January 1, 2018.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Apartment Property

As of March 31, 2018, the Company owned one apartment property with 292 units which was 90% occupied. The following table provides detailed information regarding the Company’s apartment revenues and expenses for the three months ended March 31, 2018 and 2017 (in thousands):



	Three Months Ended March 31,
	2018		2017
Apartment revenues:
Rental income	$	1,584	$	1,615
Tenant reimbursements and other income	132		124
Apartment revenues	$	1,716	$	1,739

Apartment expenses:
Operating, maintenance, and management	$	569	$	487
Real estate taxes and insurance	348		349
Apartment expenses	$	917	$	836

Geographic Concentration Risk

As of March 31, 2018, the Company’s real estate investments in California and New York represented 53.7% and 11.2%, respectively, of the Company’s total assets. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California and New York real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.


4.	TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of March 31, 2018 and December 31, 2017, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	March 31, 2018			December 31, 2017			March 31, 2018			December 31, 2017			March 31, 2018			December 31, 2017
Cost	$	18,753		$	19,006		$	99		$	99		$	(12,670	)	$	(12,869	)
Accumulated Amortization	(4,434		)	(3,473		)	(20		)	(16		)	2,834			2,086
Net Amount	$	14,319		$	15,533		$	79		$	83		$	(9,836	)	$	(10,783	)

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three months ended March 31, 2018 and 2017 were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2018			2017			2018			2017			2018		2017
Amortization	$	(1,214	)	$	(997	)	$	(4	)	$	(2	)	$	947	$	174

As of March 31, 2018 and December 31, 2017, the Company had recorded a housing subsidy intangible asset, net of amortization, which is included in prepaid expenses and other assets in the accompanying balance sheets, of $2.4 million, which is amortized on a straight line basis over 31.8 years. During each of the three months ended March 31, 2018 and 2017, the Company recorded amortization expense of $20,000 related to the housing subsidy intangible asset.

Additionally, as of March 31, 2018 and December 31, 2017, the Company had recorded property tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $2.7 million and $2.8 million, respectively, which are amortized on a straight line basis over a range of 0.7 to 6.6 years. During the three months ended March 31, 2018, the Company recorded amortization expense of $0.1 million related to the property tax abatement intangible assets.


5.	REAL ESTATE LOAN RECEIVABLE

As of December 31, 2017, the Company had originated one real estate loan receivable. On January 12, 2018, the real estate loan receivable was repaid in full. Information for the real estate loan receivable was as follows (in thousands):

Loan Name

Location of Related Property or Collateral

Date Originated

Property Type

Loan Type

Outstanding Principal Balance as of
March 31, 2018

Book Value as of March 31, 2018 ⁽¹⁾

Book Value as of December 31, 2017 ⁽¹⁾

Contractual Interest Rate

Annualized Effective Interest Rate

Maturity Date

655 Summer Street First Mortgage

Boston, Massachusetts

09/04/2014

Office

Mortgage

—

3,500

9.25%

⁽²⁾

_____________________

⁽¹⁾ Book value of the real estate loan receivable represents outstanding principal balance adjusted for unamortized origination fees and direct origination and acquisition costs.

⁽²⁾On January 12, 2018, the real estate loan receivable was repaid in full.

The following summarizes the activity related to the real estate loan receivable for the three months ended March 31, 2018 (in thousands):



Real estate loan receivable - December 31, 2017	$	3,500
Principal repayment	(3,500		)
Real estate loan receivable - March 31, 2018	$	—

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

~~Apartment Property~~

As of September 30, 2017, the Company owned one apartment property with 292 units which was 94% occupied. The following table provides detailed information regarding the Company's apartment revenues and expenses for the three and nine months ended September 30, 2017 (in thousands):

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
Apartment revenues:
Rental income $ 1,638
$ 4,856
Tenant reimbursements and other income 108
328
Apartment revenues $ 1,746
$ 5,184

Apartment expenses:
Operating, maintenance, and management $ 683
$ 1,704
Real estate taxes and insurance 343
1,020
Apartment expenses $ 1,026
$ 2,724


5.	~~TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES~~

As of September 30, 2017 and December 31, 2016, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):

Tenant Origination and Absorption Costs Above-Market Lease Assets Below-Market Lease Liabilities
September 30,
2017 December 31,
2016 September 30,
2017 December 31,
2016 September 30,
2017 December 31,
2016
Cost $ 16,471
$ 6,226
$ 27
$ 27
$ (13,081 ) $ (1,445 )
Accumulated Amortization (2,424 ) (1,553 ) (11 ) (6 ) 1,239
496
Net Amount $ 14,047
$ 4,673
$ 16
$ 21
$ (11,842 ) $ (949 )

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):

Tenant Origination and Absorption Costs Above-Market Lease Assets Below-Market Lease Liabilities
For the Three Months Ended September 30, For the Three Months Ended September 30, For the Three Months Ended September 30,
2017 2016 2017 2016 2017 2016
Amortization $ (865 ) $ (627 ) $ (2 ) $ (3 ) $ 647
$ 200

Tenant Origination and Absorption Costs Above-Market Lease Assets Below-Market Lease Liabilities
For the Nine Months Ended September 30, For the Nine Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016 2017 2016
Amortization $ (2,578 ) $ (1,055 ) $ (5 ) $ (15 ) $ 979
$ 300

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

Additionally, as of September 30, 2017 and December 31, 2016, the Company had recorded unamortized housing subsidy intangible asset which is included in prepaid expenses and other assets in the accompanying balance sheets, of $2.5 million, which is amortized on a straight line basis over 31.8 years. During the three and nine months ended September 30, 2017, the Company recorded amortization expense of $20,000 and $60,000, respectively, related to the housing subsidy intangible asset.


6.	~~REAL ESTATE LOAN RECEIVABLE~~

~~As of September 30, 2017 and December 31, 2016, the Company had originated one real estate loan receivable as follows (in thousands):~~

Loan Name
Location of Related Property or Collateral
Date Originated Property Type Loan Type Outstanding Principal Balance as of September 30, 2017
Book Value as of September 30, 2017 ⁽¹⁾

Book Value as of December 31, 2016 ⁽¹⁾

Contractual Interest Rate ⁽²⁾

Annualized Effective Interest Rate ⁽²⁾
Maturity Date
655 Summer Street First Mortgage
Boston, Massachusetts 09/04/2014 Office Mortgage $ 3,500
$ 3,500
$ 3,442
9.25% 11.68%
10/01/2017 ⁽³⁾

~~_____________________~~

⁽¹⁾ ~~Book value of the real estate loan receivable represents outstanding principal balance adjusted for unamortized origination fees and direct origination and acquisition costs.~~

⁽²⁾Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2017, using the interest method annualized (if applicable) and divided by the average amortized cost basis of the investment. The annualized effective interest rate and contractual interest rate presented are as of September 30, 2017.

⁽³⁾~~Subsequent to September 30, 2017, the maturity date of the 655 Summer Street First Mortgage was extended to January 1, 2018.~~

~~The following summarizes the activity related to the real estate loan receivable for the nine months ended September 30, 2017 (in thousands):~~

Real estate loan receivable - December 31, 2016 $ 3,442
Amortization of closing costs and origination fees on real estate loan receivable 58
Real estate loan receivable - September 30, 2017 $ 3,500

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ interest income from the real estate loan receivable consisted of the following (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
Contractual interest income	$	83	$	83	$	245	$	246	$	10	$	80
Amortization of closing costs and origination fees, net	20		18		58		52		—		19
Interest income from real estate loan receivable	$	103	$	101	$	303	$	298	$	10	$	99

~~Table of Contents~~


~~PART I.~~6.	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~REAL ESTATE EQUITY SECURITIES

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~During the three months ended March 31, 2018, the Company purchased 364,792 shares of common stock of Franklin Street Properties Corp. (NYSE Ticker: FSP) for an aggregate purchase price of $3.2 million. The Company’s real estate equity securities are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Unrealized gains and losses on real estate equity securities are recognized in earnings.

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~The following summarizes the activity related to real estate equity securities for the three months ended March 31, 2018 (in thousands):

~~September 30, 2017~~

~~(unaudited)~~



	Amortized Cost Basis		Unrealized Losses			Total
Real estate equity securities - December 31, 2017	$	—	$	—		$	—
Acquisition of real estate equity securities	3,071		—			3,071
Acquisition fee to affiliate and purchase commission	83		—			83
Unrealized change in market value of real estate equity securities	—		(86		)	(86		)
Real estate equity securities - March 31, 2018	$	3,154	$	(86	)	$	3,068


7.	INVESTMENT IN UNCONSOLIDATED ENTITY

On June 28, 2016, the Company originated a participating loan facility in an amount up to €2.6 million ($2.9 million at closing). The Company funded approximately €2.1 million ($2.3 million at closing). The proceeds were used by STAM to fund a 5% general partner interest in a joint venture acquiring a portfolio of light industrial properties located throughout France. The total acquisition cost of the portfolio was approximately €95.5 million ($105.6 million at closing). Under the terms of the participating loan facility, the Company participates in the expected residual profits of the portfolio and the terms are structured in a manner such that the risks and rewards of the arrangement are similar to those associated with an investment in a real estate joint venture. Accordingly, the participating loan facility is accounted for under the equity method of accounting. In addition to the amount funded at closing, the Company also capitalized an additional $0.2 million of acquisition costs and fees. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, the Company recognized ~~$14,000~~$15,000 and ~~$40,000,~~$13,000, respectively, of income with respect to this investment. ~~During the three and nine months ended September 30, 2016, the Company recognized $58,000~~

Table of ~~income with respect to this investment.~~Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)


8.	NOTES PAYABLE

As of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, the Company’s notes payable consisted of the following (in thousands):


	Book Value as of September 30, 2017			Book Value as of December 31, 2016			Contractual Interest Rate ⁽¹⁾	Effective Interest Rate ⁽¹⁾	Payment Type	Maturity Date	Book Value as of March 31, 2018			Book Value as of December 31, 2017			Contractual Interest Rate ⁽¹⁾	Effective Interest Rate ⁽¹⁾	Payment Type	Maturity Date
Springmaid Beach Resort Mortgage Loan	$	38,000		$	38,000		One-month LIBOR + 3.00%	4.24%	Interest Only	12/30/2017	$	37,820		$	38,000		One-month LIBOR + 3.00%	4.66%	Principal & Interest	12/30/2018
Q&C Hotel Mortgage Loan	28,330			28,330			One-month LIBOR + 3.25%	4.49%	Interest Only ⁽²⁾	12/17/2018	26,688			28,330			One-month LIBOR + 3.25%	4.91%	Principal & Interest	12/17/2018
2200 Paseo Verde Mortgage Loan ⁽³⁾⁽²⁾	7,947			7,430			One-month LIBOR + 2.25%	3.49%	Interest Only ⁽³⁾	07/01/2020	7,947			7,947			One-month LIBOR + 2.25%	3.91%	Interest Only ⁽²⁾	07/01/2020
Lincoln Court Mortgage Loan	33,500			33,500			One-month LIBOR + 1.75%	2.99%	Interest Only	06/01/2020	33,500			33,500			One-month LIBOR + 1.75%	3.63%	Interest Only	06/01/2020
Lofts at NoHo Commons Mortgage Loan	72,100			72,100			One-month LIBOR + 2.66%	3.89%	Interest Only	12/01/2019	72,100			72,100			One-month LIBOR + 2.66%	4.33%	Interest Only	12/01/2019
210 West 31st Street Mortgage Loan ⁽⁴⁾⁽³⁾	35,007			32,650			One-month LIBOR + 5.50%	6.74%	Interest Only	12/01/2019	36,694			35,763			One-month LIBOR + 5.50%	7.16%	Interest Only	12/01/2019
Oakland City Center Mortgage Loan ⁽⁵⁾⁽⁴⁾	94,500			—			One-month LIBOR + 1.75%	2.99%	Interest Only ⁽⁵⁾	09/01/2022	94,500			94,500			One-month LIBOR + 1.75%	3.41%	Interest Only ⁽⁴⁾	09/01/2022
Grace Court Mortgage Loan ⁽⁵⁾											21,895			21,895			One-month LIBOR + 4.05% ⁽⁵⁾	5.83%	Interest Only	10/09/2020
Total notes payable principal outstanding	309,384			212,010							331,144			332,035
Deferred financing costs, net	(3,506		)	(3,429		)					(3,366		)	(3,684		)
Total notes payable, net	$	305,878		$	208,581						$	327,778		$	328,351

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of ~~September 30, 2017.~~March 31, 2018. Effective interest rate is calculated as the actual interest rate in effect as of ~~September 30, 2017~~March 31, 2018 (consisting of the contractual interest rate, contractual floor rates and the effects of interest rate caps, if applicable), using interest rate indices at ~~September 30, 2017,~~March 31, 2018, where applicable.

⁽²⁾ ~~Beginning February 1, 2018, monthly payments also include principal amortization payments of $55,000 per month, unless certain conditions described in the loan documents are satisfied.~~

⁽³⁾As of ~~September 30, 2017,~~March 31, 2018, $7.9 million had been disbursed to the Company and up to $1.6 million is available for future disbursements to be used for tenant improvement costs, capital improvements costs and leasing commissions, subject to certain terms and conditions contained in the loan documents. Beginning August 1, 2019, monthly payments include principal amortization payments of $10,000 per month.

⁽⁴⁾⁽³⁾As of ~~September 30, 2017, $35.0~~March 31, 2018, $36.7 million had been disbursed to the Company and up to ~~$12.1~~$10.4 million is available for future disbursements to be used for capital improvement costs, tenant improvement costs, leasing commissions and operating/interest shortfall, subject to certain terms and conditions contained in the loan documents.

⁽⁵⁾⁽⁴⁾~~See “Recent Financing Transaction – Oakland City Center~~As of March 31, 2018, $94.5 million had been disbursed to the Company and up to $8.9 million is available for future disbursements to be used for tenant improvements and leasing commissions, subject to certain terms and conditions contained in the loan documents. Beginning October 1, 2020, monthly payments will include principal and interest with principal payments of $110,000 or, in the event the Company repays any principal of the loan amount, with principal payments calculated using an amortization schedule of 30 years and an annual interest rate of 6.0%, subject to certain terms and conditions contained in the loan documents.

⁽⁵⁾ As of March 31, 2018, $21.9 million had been disbursed to the Company and up to $12.2 million is available for future disbursements to be used for tenant improvements and leasing expenses, subject to certain terms and conditions contained in the loan documents. The Grace Court Mortgage ~~Loan.”~~Loan bears interest at a floating rate of 405 basis points over one-month LIBOR, but at no point shall the interest rate be less than 5.05%.

2019

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, the Company incurred ~~$2.3~~$2.9 million and ~~$5.8~~$1.7 million ~~respectively,~~ of interest expense. Included in interest expense for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 was $0.4 million and ~~$1.1~~$0.3 million, respectively, of amortization of deferred financing costs. As a result of the Company’s interest rate cap agreements, interest expense was offset by an unrealized gain of $30,000 for the three months ended March 31, 2018. Interest expense incurred as a result of the Company’s interest rate cap ~~agreement~~agreements was ~~$12,000 and $84,000~~$50,000 for the three ~~and nine~~ months ended ~~September 30, 2017, respectively.~~March 31, 2017. Additionally, during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, the Company capitalized ~~$1.3~~$1.4 million and ~~$3.0~~$0.8 million, respectively, of interest related to its redevelopment project at 210 West 31st Street. During the three and nine months ended September 30, 2016, the Company incurred $0.9 million and $2.4 million, respectively, of interest expense. Included in interest expense for the three and nine months ended September 30, 2016 was $0.1 million and $0.4 million, respectively, of amortization of deferred financing costs. Interest expense incurred as a result of the Company’s interest rate cap agreement was $1,000 and $43,000 for the three and nine months ended September 30, 2016, respectively. Additionally, during the three and nine months ended September 30, 2016, the Company capitalized $54,000 and $126,000, respectively, of interest related to its redevelopment projects at Springmaid Beach Resort. As of September 30, 2017 the Company’s deferred financing costs were $3.6 million, of which $3.5 million, net of amortization, was included in notes payable, net and $0.1 million was included in prepaid and other assets on the accompanying balance sheets. As of DecemberMarch 31, ~~2016, the Company’s deferred financing costs were $3.4 million, net of amortization, and are included in notes payable, net on the accompanying consolidated balance sheets. As of September 30, 2017~~2018 and December 31, ~~2016,~~2017, the Company’s interest payable was ~~$1.0~~$1.2 million and ~~$0.7~~$1.1 million, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of ~~September 30, 2017~~March 31, 2018 (in thousands):


October 1, 2017 through December 31, 2017	$	38,000
2018	28,330
April 1, 2018 through December 31, 2018			$	64,508
2019	107,157		108,844
2020	41,727		63,622
2021	1,320		1,320
2022			92,850
Thereafter	92,850		—
	$	309,384	$	331,144

The Company’s notes payable contain financial and non-financial debt covenants. As of ~~September 30, 2017,~~March 31, 2018, the Company was in compliance with all debt covenants.

The Company’s note payable with respect to the Springmaid Beach Resort Mortgage Loan requires the Company to maintain a minimum working capital reserve in an amount sufficient to fund the working capital requirements of the Springmaid Beach Resort through the off-peak season, which amount shall be reduced by any amounts for working capital reserved by the third-party hotel operator. In addition, until certain renovations are complete, the loan documents impose a “cash trap” which restricts the use of accumulated cash from the Springmaid Beach Resort to the payment of working capital shortfalls, renovation expenditures and distributions required to satisfy the Company’s REIT requirements. The working capital reserve was included in restricted cash on the accompanying consolidated balance sheets.

~~Recent Financing Transaction~~

~~Oakland City Center Mortgage Loan~~

On August 18, 2017, in connection with the acquisition of Oakland City Center, the Company, through an indirect wholly owned subsidiary (the “Oakland City Center Owner”), entered into a loan agreement with Bank of America, N.A., an unaffiliated lender, for borrowings of up to $103.4 million (the “Oakland City Center Mortgage Loan”). At closing, $94.5 million had been disbursed to the Oakland City Center Owner with the remaining $8.9 million available for future disbursements to be used for tenant improvements and leasing commissions, subject to certain terms and conditions contained in the loan documents.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

The Oakland City Center Mortgage Loan matures on September 1, 2022. The Oakland City Center Mortgage Loan bears interest at a floating rate of 175 basis points over one-month LIBOR. Monthly payments are initially interest only. Beginning October 1, 2020, monthly payments will include principal and interest with principal payments of $110,000 or, in the event the Oakland City Center Owner repays any principal of the loan amount, with principal payments calculated using an amortization schedule of 30 years and an annual interest rate of 6.0%, subject to certain terms and conditions contained in the loan documents. The Oakland City Center Owner has the right to prepay the loan in full or in part without fee, premium or penalty subject to certain terms and conditions as described in the loan documents.

KBS SOR US Properties II LLC (“SOR US Properties II”), the Company's indirect wholly owned subsidiary, provided a guaranty of (i) the principal balance and any interest or other sums outstanding under the Oakland City Center Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the Oakland City Center Owner, SOR US Properties II or any affiliate thereof, and (ii) the payment of certain liabilities, losses or damages incurred by the lender as a result of certain intentional acts committed by Oakland City Center Owner, the fraud or intentional misrepresentation by Oakland City Center Owner or KBS SOR US Properties II in connection with the loan or the loan documents, the transfer of Oakland City Center Owner’s interest in the property in violation of the loan documents , and in the event of certain bankruptcy or insolvency proceedings involving Oakland City Center Owner, KBS SOR US Properties II or any affiliate thereof.


9.	DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into the derivatives for speculative purposes.

The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.

As of September 30, 2017 and December 31, 2016, the Company had three interest rate caps outstanding, which were not designated as hedging instruments. The following table summarizes the notional amount and other information related to the Company’s derivative instruments as of September 30, 2017 and December 31, 2016. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):

Fair Value of Asset
Derivative Instruments Effective Date Maturity Date Notional Value Reference Rate September 30, 2017 December 31, 2016 Balance Sheet Location
Interest Rate Cap 12/29/2014 01/01/2018 $ 26,000
One-month LIBOR at 3.00% $ —
$ —
Prepaid expenses and other assets
Interest Rate Cap 12/15/2015 12/23/2018 $ 28,330
One-month LIBOR at 3.00% —
6
Prepaid expenses and other assets
Interest Rate Cap 12/01/2016 12/01/2019 $ 47,110
One-month LIBOR at 3.00% 11
89
Prepaid expenses and other assets
Total Derivative Instruments not designated as hedging instruments $ 11
$ 95

During the three and nine months ended September 30, 2017, the Company recorded an unrealized loss of $12,000 and $84,000, respectively, on derivative instruments, which is included in interest expense on the accompanying consolidated statements of operations. During the three and nine months ended September 30, 2016, the Company recorded an unrealized loss of $1,000 and $43,000, respectively, on derivative instruments, which is included in interest expense on the accompanying consolidated statements of operations.

2220

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

As of March 31, 2018, the Company had four interest rate caps outstanding, which were not designated as hedging instruments. The following table summarizes the notional amount and other information related to the Company’s derivative instruments as of March 31, 2018 and December 31, 2017. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):



						Fair Value of Asset
Derivative Instruments	Effective Date	Maturity Date	Notional Value		Reference Rate	March 31, 2018		December 31, 2017		Balance Sheet Location
Interest Rate Cap	12/29/2014	01/01/2018	$	26,000	One-month LIBOR at 3.00%	$	—	$	—	Prepaid expenses and other assets
Interest Rate Cap	12/15/2015	12/23/2018	$	28,330	One-month LIBOR at 3.00%	1		—		Prepaid expenses and other assets
Interest Rate Cap	12/01/2016	12/01/2019	$	47,110	One-month LIBOR at 3.00%	32		9		Prepaid expenses and other assets
Interest Rate Cap	10/03/2017	10/15/2019	$	34,125	One-month LIBOR at 3.00%	17		4		Prepaid expenses and other assets
Interest Rate Cap	02/02/2018	12/30/2018	$	26,000	One-month LIBOR at 3.00%	1		—		Prepaid expenses and other assets
Total Derivative Instruments not designated as hedging instruments						$	51	$	13

During the three months ended March 31, 2018, the Company recorded an unrealized gain of $30,000 on interest rate cap agreements, which is included as an offset to interest expense on the accompanying consolidated statements of operations. During the three months ended March 31, 2017, the Company recorded an unrealized loss of $50,000 on interest rate cap agreements, which is included in interest expense on the accompanying consolidated statements of operations.

The Company enters into foreign currency forward contracts to mitigate its exposure to foreign currency exchange rate movements on its investment in unconsolidated entity. The foreign currency forward contract is a commitment to deliver a certain amount of currency at a certain price on a specific date in the future.

The following table summarizes the notional amount and other information related to the Company’s foreign currency forward contract as of ~~September 30, 2017.~~March 31, 2018. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):



Derivative Instrument	Notional Amount		Strike Price	Trade Date	Maturity Date
Derivative instrument not designated as hedging instrument
Foreign currency forward contract	$	2,668	1.2704 USD-EUR	09/05/2017	09/07/2021

During the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2018, the Company recorded a foreign currency loss of ~~$33,000~~$0.1 million on foreign currency forward contract, which is included in general and administrative expenses on the accompanying consolidated statements of operations. The fair value of the foreign currency forward contract was ~~$33,000~~$0.2 million and $0.1 million liability as of ~~September 30,~~March 31, 2018 and December 31, 2017, respectively, included in other liabilities on the accompanying balance sheets.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)


10.	FAIR VALUE DISCLOSURES

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and ~~model‑derived~~model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of assets and liabilities for which it is practicable to estimate the fair value:

Cash and cash equivalents, restricted cash, rent and other receivables and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

~~Table~~Real estate equity securities: The Company’s real estate equity securities are presented at fair value on the accompanying consolidated balance sheet. The fair values of ~~Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

real estate equity securities were based on a quoted price in an active market on a major stock exchange. The Company classifies these inputs as Level 1 inputs.

Real estate loan receivable: The Company’s real estate loan receivable is presented in the accompanying consolidated balance sheets at its amortized cost net of recorded loan loss reserves (if any) and not at fair value. The fair value of real estate loan receivable was estimated using an internal valuation model that considered the expected cash flows for the loan, underlying collateral value (for collateral-dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments are determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair value of interest rate caps (floors) are determined using the market standard methodology of discounting the future expected cash payments (receipts) which would occur if variable interest rates rise above (below) the strike rate of the caps (floors). The variable interest rates used in the calculation of projected payments (receipts) on the cap (floor) are based on an expectation of future interest rates derived from observed market interest rate curves and volatilities. The fair value of foreign currency forward contract are valued by comparing the contracted forward exchange rate to the current market exchange rate.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Notes payable: The fair value of the Company’s notes payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.

The following were the face value, carrying amount and fair value of the Company’s financial instruments as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, which carrying amounts do not approximate the fair values (in thousands):


	September 30, 2017						December 31, 2016						March 31, 2018						December 31, 2017
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial asset:
Real estate loan receivable	$	3,500	$	3,500	$	3,500	$	3,500	$	3,442	$	3,401	$	—	$	—	$	—	$	3,500	$	3,500	$	3,500
Financial liability:
Notes payable	$	309,384	$	305,878	$	309,398	$	212,010	$	208,581	$	211,565	$	331,144	$	327,778	$	332,953	$	332,035	$	328,351	$	333,336

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

As of ~~September 30, 2017,~~March 31, 2018, the Company measured the following assets at fair value (in thousands):


			Fair Value Measurements Using								Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Real estate equity securities									$	3,068	$	3,068	$	—	$	—
Asset derivatives - interest rate caps	$	11	$	—	$	11	$	—	$	51	$	—	$	51	$	—
Liability derivative - foreign currency forward contract	$	33	$	—	$	33	$	—	$	162	$	—	$	162	$	—

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)


11.	RELATED PARTY TRANSACTIONS

The Company has entered into the Advisory Agreement with the Advisor and dealer manager agreements with the Dealer Manager, with respect to the Private Offering and the Public Offering. These agreements entitle the Advisor and the Dealer Manager to specified fees upon the provision of certain offering-related services and the investment of funds in real estate-related investments, among other services, as well as reimbursement of organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company and certain costs incurred by the Advisor in providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as described in the Advisory Agreement. The Advisor also serves as the advisor for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT, Inc. (“KBS Strategic Opportunity REIT”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”). The Dealer Manager also serves as the dealer manager for the KBS dividend reinvestment plan offerings for KBS Strategic Opportunity REIT, KBS ~~Legacy Partners Apartment REIT, KBS~~ REIT III and KBS Growth & Income REIT.

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. In June 2017, the Company renewed its participation in the program, and the program is effective through June 30, 2018. As KBS REIT I iswas implementing its plan of liquidation, at renewal in June 2017, KBS REIT I elected to cease participation in the program and obtain separate insurance coverage.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ no other business transactions occurred between the Company and these other KBS-sponsored programs.

The Advisory Agreement has a one-year term that expires August 12, 2018. The Company may terminate the Advisory Agreement on 60 days’ written notice. The Advisor in its sole discretion may defer any fee payable to it under the Advisory Agreement. All or any portion of such fee not taken may be deferred without interest and paid when the Advisor determines.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016,~~2017, respectively, and any related amounts payable as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 (in thousands):


	Incurred								Payable as of					Incurred					Payable as of
	Three Months Ended September 30,				Nine Months Ended September 30,				September 30, 2017		December 31, 2016			Three Months Ended March 31,					March 31, 2018		December 31, 2017
	2017		2016		2017		2016						2018			2017
Expensed
Asset management fees	739		359		1,820		908		21		—			935			504		22		22
Reimbursable operating expenses ⁽¹⁾	65		75		239		337		39		37			92			103		38		42
Real estate acquisition fee ⁽²⁾	—		—		—		1,341		—		—
Capitalized
Acquisition fees ⁽²⁾	4,126		25		4,151		228		4,126		27
Acquisition fees														107			16		103		76
Asset management fees	—		—		67		—		—		—			—			67		—		—
Additional Paid-in Capital
Sales commissions	267		1,074		2,028		2,808		—		—			201			1,002		—		—
Dealer manager fees	133		678		1,180		1,460		—		—			109			610		—		—
Stockholder servicing fees ⁽³⁾	505		1,509		1,041		1,509		820		374
Reimbursable other offering costs ⁽⁴⁾	87		157		583		177		957		374
Stockholder servicing fees ⁽²⁾														13			104		440		680
Reimbursable other offering costs ⁽³⁾														61			311		1,103		1,042
	$	5,922	$	3,877	$	11,109	$	8,768	$	5,963	$	812		$	1,518		$	2,717	$	1,706	$	1,862

_____________________

⁽¹⁾Reimbursable operating expenses primarily consists of internal audit personnel costs, accounting software and cyber-security related expenses incurred by the Advisor under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. ~~The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement.~~ These amounts totaled ~~$65,000~~$92,000 and ~~$235,000~~$99,000 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~respectively, and $75,000 and $333,000 for the three and nine months ended September 30, 2016,~~ respectively, and were the only employee costs reimbursed under the Advisory Agreement for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017. The Advisor may seek reimbursement for certain other employee costs under the Advisory Agreement. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition or origination fees or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company's direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company.

⁽²⁾Prior to the adoption of ASU No. 2017-01 on January 1, 2017, acquisition fees related to investment properties were expensed at the time of acquisition. Acquisition fees on investment in unconsolidated entities are capitalized into the cost basis of the investment. Acquisition fees on significant capital expenditures related to the development, construction or improvement of the investment budgeted as of the date of acquisition are capitalized.

⁽³⁾Reflects the estimated amount of the stockholder servicing fee payable based on the terms of the Class T Shares.

⁽⁴⁾⁽³⁾See “Other Offering Costs” below.

During the three months ended March 31, 2017, the Company recorded $21,000 due from the Advisor related to a property insurance rebate.

Other Offering Costs

Organization and offering costs (other than selling commissions, dealer manager fees and the stockholder servicing fee) of the Company may be paid by the Advisor, the Dealer Manager or their affiliates on behalf of the Company or may be paid directly by the Company. These offering costs include all expenses incurred by the Company in connection with the Private Offering and the Public Offering. Organization costs include all expenses incurred by the Company in connection with the formation of the Company, including but not limited to legal fees and other costs to incorporate the Company.

The Company recorded $1.0 million of offering costs (other than selling commissions and dealer manager fees) related to the Private Offering, all of which was initially paid by the Advisor or its affiliates on behalf of the Company and subsequently reimbursed by the Company. In addition, the Company paid $1.9 million in selling commissions and dealer manager fees related to the Private Offering.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

During the Public Offering, pursuant to the Advisory Agreement and the Dealer Manager Agreement, the Company is obligated to reimburse the Advisor, the Dealer Manager or their affiliates, as applicable, for organization and other offering costs paid by them on behalf of the Company, provided that no reimbursements made by the Company to the Advisor or the Dealer Manager may cause total organization and offering expenses incurred by the Company in connection with the Public Offering (including selling commissions, dealer manager fees and the stockholder servicing fee) to exceed 15% of the aggregate gross proceeds from the Public Offering as of the date of reimbursement. In addition, the Advisor and its affiliates will reimburse the Company to the extent that the organization and other offering expenses (which exclude selling commissions, dealer manager fees and stockholder servicing fees) paid directly or reimbursed by the Company in connection with the primary portion of the Public Offering, regardless of when incurred, exceed 1.0% of gross offering proceeds from the primary portion of the Public Offering. The Advisor and its affiliates will be responsible for any organization and other offering expenses related to the primary portion of the Public Offering to the extent they exceed 1.0% of gross proceeds from the primary portion of the Public Offering.

Through ~~September 30, 2017,~~March 31, 2018, the Advisor and its affiliates had incurred organization and other offering costs (which exclude selling commissions dealer manager fees and stockholder servicing fees) on the Company’s behalf in connection with the Public Offering of approximately ~~$10.2~~$10.5 million. As of ~~September 30, 2017,~~March 31, 2018, the Company had recorded ~~$13.0~~$13.8 million in selling commissions and dealer manager fees and ~~$1.5~~$1.7 million of stockholder servicing fees. As of ~~September 30, 2017,~~March 31, 2018, the Company had recorded ~~$2.0~~$2.2 million of other organization and offering expenses, which amounts represent the Company’s maximum liability for organization and other offering costs as of ~~September 30, 2017~~March 31, 2018 based on the 1.0% limitation described above.

In addition, as of March 31, 2018, the Advisor had incurred $31,000 in organization and offering costs on behalf of the Company in connection with a proposed follow-on offering the Company filed with the SEC on August 10, 2017. As of March 31, 2018, the Company had not commenced the follow-on offering and therefore had not recorded any of these organization and offering expenses as they are subject to the 1.0% limitation described above.


12.	COMMITMENTS AND CONTINGENCIES

Management Agreement

Springmaid Beach Resort

The consolidated joint venture entity through which the Company leases the operations for Springmaid Beach Resort has entered into a management agreement with Doubletree Management LLC, an independent third-party hotel operator (the “Operator”) pursuant to which the Operator will manage and operate the Springmaid Beach Resort. The hotel was branded a DoubleTree by Hilton in September 2016 (the “Brand Commencement Date”).

The management agreement expires on December 31 of the 20th full year following the Brand Commencement Date. Upon mutual agreement, the parties may extend the term of the agreement for two successive periods of five years each. If an event of default occurs and continues beyond any applicable notice and cure periods set forth in the management agreement, the non-defaulting party generally has, among other remedies, the option of terminating the management agreement upon written notice to the defaulting party with no termination fee payable to Doubletree. In addition, the Company has the right to terminate the management agreement without the payment of a termination fee if Doubletree fails to achieve certain criteria relating to the performance of the hotel for any two consecutive years following the Brand Commencement Date. Under certain circumstances following a casualty or condemnation event, either party may terminate the management agreement provided Doubletree receives a termination fee an amount equal to two years of the base fee. The Company is permitted to terminate the management agreement upon a sale, lease or other transfer of the Springmaid Beach Resort any time so long as the buyer is approved for, and enters into a DoubleTree by Hilton franchise agreement for the balance of the agreement’s term. Finally, the Company is restricted in its ability to assign the management agreement upon a sale, lease or other transfer the Springmaid Beach Resort unless the transferee is approved by Doubletree to assume the management agreement.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)

Pursuant to the management agreement the Operator ~~will receive~~receives the following fees:

a base fee, which is a percentage of total operating revenue that starts at 2.5% and increases to 2.75% in the second year following the Brand Commencement Date and further increases in the third year following the Brand Commencement Date and thereafter to 3.0%;

a campground area management fee, which is 2% of any campground revenue;

an incentive fee, which is 15% of operating cash flow (after deduction for capital renewals reserve and the joint venture owner’s priority, which is 12% of the joint venture owner’s total investment);

an additional services fee in the amount reasonably determined by the Operator from time to time; and

a brand services fee in the amount of 4% of total rooms revenue, and an other brand services fee in an amount determined by the Operator from time to time.

The management agreement contains specific standards for the operation and maintenance of the hotel, which allows the Operator to maintain uniformity in the system created by the Operator’s franchise. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage and protection of trademarks. Compliance with the management agreement will require the Company to make significant expenditures for capital improvements.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, the Company incurred ~~$125,000~~$69,000 and ~~$268,000~~$51,000, respectively, of fees ~~respectively,~~ related to the management agreement, and are included in hotel expenses on the accompanying consolidated statements of operations. During the three and nine months ended September 30, 2016, the Company incurred $489,000 and $679,000 of fees, respectively, related to the management agreement, andwhich are included in hotel expenses on the accompanying consolidated statements of operations.

Q&C Hotel

A wholly owned subsidiary of the joint venture through which the Company leases the operations of the Q&C Hotel (“Q&C Hotel Operations”) has entered into a management agreement with Encore Hospitality, LLC (“Encore Hospitality”), an affiliate of the joint venture partner, pursuant to which Encore Hospitality will manage and operate the Q&C Hotel. The management agreement expires on December 17, 2035. Subject to certain conditions, Encore Hospitality may extend the term of the agreement for a period of five years. Pursuant to the management agreement Encore Hospitality will receive a base fee, which is 4.0% of gross revenue (as defined in the management agreement). During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, the Company incurred ~~$63,000~~$117,000 and ~~$273,000~~$110,000, respectively, of fees ~~respectively,~~ related to the management agreement, and are included in hotel expenses on the accompanying consolidated statements of operations. During the three and nine months ended September 30, 2016, the Company incurred $57,000 and $227,000 fees, respectively, related to the management agreement, andwhich are included in hotel expenses on the accompanying consolidated statements of operations.

Q&C Hotel Operations has also entered into a franchise agreement with Marriott International (“Marriott”) pursuant to which Marriott has granted Q&C Hotel Operations a limited, non-exclusive license to establish and operate the Q&C Hotel using certain of Marriott’s proprietary marks and systems and the hotel was branded as a Marriott Autograph Collection hotel on May 25, 2016. The franchise agreement will expire on May 25, 2041. Pursuant to the franchise agreement, Q&C Hotel Operations pays Marriott a monthly franchise fee equal to a percent of gross room sales on a sliding scale that is initially 2% and increases to 5% on May 25, 2019 and a monthly marketing fund contribution fee equal to 1.5% of the Q&C Hotel’s gross room sales. In addition, the franchise agreement requires the maintenance of a reserve account to fund all renovations at the hotel based on a percentage of gross revenues which starts at 2% of gross revenues and increases to 5% of gross revenues on May 25, 2019. Q&C Hotel Operations is also responsible for the payment of certain other fees, charges and costs as set forth in the agreement. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, the Company incurred ~~$211,000~~$305,000 and ~~$658,000~~$177,000, respectively, of fees ~~respectively, related to the Marriott franchise agreement. During the three and nine months ended September 30, 2016, the Company incurred $115,000 and $157,000 of fees, respectively,~~ related to the Marriott franchise agreement.

In addition, in connection with the execution of the franchise agreement, SOR US Properties II is providing an unconditional guarantee that all Q&C Hotel Operations’ obligations under the franchise agreement will be punctually paid and performed. Finally, certain transfers of the Q&C Hotel or an ownership interest therein are subject to a notice and consent requirement, and the franchise agreement further provides Marriott with a right of first refusal with respect to a sale of the hotel to a competitor of Marriott.

~~Lease Obligations~~

On December 1, 2016, the 210 West 31st Street Joint Venture acquired a leasehold interest in 210 West 31st Street. The leasehold interest for 210 West 31st Street expires on January 31, 2114. Future minimum lease payments owed by the 210 West 31st Street Joint Venture under the capital lease as of September 30, 2017 is as follows (in thousands):

October 1, 2017 through December 31, 2017 $ 90
2018 360
2019 360
2020 360
2021 360
Thereafter 54,036
Total expected minimum lease obligations 55,566
Less: Amount representing interest ⁽¹⁾
(48,816 )
Present value of net minimum lease payments ⁽²⁾
$ 6,750

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2017~~March 31, 2018

(unaudited)

Lease Obligations

As of March 31, 2018, the Company had leasehold interests expiring on various expiration dates between 2018 and 2114. Future minimum lease payments owed by the Company under the capital leases as of March 31, 2018 are as follows (in thousands):



April 1, 2018 through December 31, 2018	$	560
2019	635
2020	680
2021	735
2022	935
Thereafter	53,841
Total expected minimum lease obligations	57,386
Less: Amount representing interest ⁽¹⁾	(48,911		)
Present value of net minimum lease payments ⁽²⁾	$	8,475

_____________________

⁽¹⁾ Interest includes the amount necessary to reduce the total expected minimum lease obligations to present value calculated at the Company's incremental borrowing rate at acquisition.

⁽²⁾ The present value of net minimum lease payments are presented in other liabilities in the accompanying consolidated balance sheets.

Economic Dependency

The Company is dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common stock; the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other sources.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations as of ~~September 30, 2017.~~March 31, 2018. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is a party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and the possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 1.	Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2018

(unaudited)


13.	SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Status of the Offering

The Company commenced the Public Offering on August 12, 2014 and broke escrow on January 7, 2015. As of ~~November 9, 2017,~~May 4, 2018, the Company had sold ~~11,132,941~~11,930,285 and ~~10,587,211~~11,245,934 shares of Class A and Class T common stock, respectively, in the Public Offering for aggregate gross offering proceeds of ~~$211.0~~$225.1 million. Included in these amounts were ~~376,084~~478,578 and ~~92,926~~138,454 shares of Class A and Class T common stock, respectively, sold under the Company's dividend reinvestment plan for aggregate gross offering proceeds of ~~$4.4~~$5.7 million.

Cash Distributions Paid

On ~~October~~April 3, 2017, the Company paid distributions of $0.3 million related to cash distributions on the outstanding shares of the common stock based on daily record dates for the period from September 1, 2017 through September 30, 2017. On November 1, 2017,2018, the Company paid distributions of $0.4 million related to cash distributions on the outstanding shares of the common stock based on daily record dates for the period from ~~October~~March 1, ~~2017~~2018 through ~~October~~March 31, ~~2017.~~2018. On May 1, 2018, the Company paid distributions of $0.4 million related to cash distributions on the outstanding shares of the common stock based on daily record dates for the period from April 1, 2018 through April 30, 2018. Distributions for the period from ~~September~~March 1, ~~2017~~2018 through ~~October 31, 2017~~April 30, 2018 were calculated based on stockholders of record each day during ~~the period~~these periods at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

Stock Dividends Issued

On ~~August 10, 2017,~~January 25, 2018, the Company’s board of directors authorized stock dividends for the month of ~~September 2017,~~March 2018, in the amount of 0.001667 shares of each class of the Company’s common stock on each outstanding share of common stock issuable to all common stockholders of record as of the close of business on ~~September 30, 2017.~~March 31, 2018. The Company issued the ~~September 2017~~March 2018 stock dividend, consisting of ~~44,877~~47,702 shares, on ~~October~~April 4, ~~2017.~~2018.

On ~~August 10, 2017,~~March 8, 2018, the Company’s board of directors authorized stock dividends for the month of ~~October 2017,~~April 2018, in the amount of 0.001667 shares of each class of the Company’s common stock on each outstanding share of common stock issuable to all common stockholders of record as of the close of business on ~~October 31, 2017.~~April 30, 2018. The Company issued the ~~October 2017~~April 2018 stock dividends, consisting of ~~45,366~~48,101 shares, on ~~November~~May 2, ~~2017.~~2018.

Distributions Declared

On ~~October 11, 2017,~~May 10, 2018, the Company's board of directors declared cash distributions on the outstanding shares of all classes of its common stock based on daily record dates for the period from ~~November~~June 1, ~~2017~~2018 through ~~November~~June 30, ~~2017,~~2018 and July 1, 2018 through July 31, 2018, which the Company expects to pay in ~~December 2017.~~July 2018 and August 2018, respectively. Investors may choose to receive cash distributions or purchase additional shares through the Company's dividend reinvestment plan. Distributions for ~~this period~~these periods will be calculated based on stockholders of record each day during this period at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

Also on October 11, 2017, the Company's board of directors authorized a stock dividend for the month of November 2017 in the amount of 0.001667 shares of common stock on each outstanding share of common stock, issuable to all common stockholders of record as of the close of business on November 30, 2017. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend. The Company expects to issue this stock dividend in December 2017.

On November 13, 2017, the Company's board of directors declared cash distributions on the outstanding shares of all classes of its common stock based on daily record dates for the period from December 1, 2017 through December 31, 2017 and January 1,May 10, 2018, through January 31, 2018, which the Company expects to pay in January 2018 and February 2018, respectively. Investors may choose to receive cash distributions or purchase additional shares through the Company's dividend reinvestment plan. Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

~~Also on November 13, 2017,~~ the Company's board of directors authorized a stock dividend for the months of ~~December 2017~~June 2018 and ~~January~~July 2018 in the amount of 0.001667 shares of common stock on each outstanding share of common stock, issuable to all common stockholders of record as of the close of business on ~~December~~June 30, 2018 and July 31, ~~2017 and January 31, 2018, respectively.~~2018. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend. The Company expects to issue these stock dividends in ~~January~~July 2018 and ~~February 2018, respectively.~~

~~Acquisition and Related Financing of Real Estate~~

~~Grace Court~~

On October 3, 2017, the Company, through a joint venture (the “Grace Court Joint Venture”) (together, the “Grace Court Purchaser”) between the Company's indirect wholly owned subsidiary and Verus Grace Court, LLC and Verus Partners, LLC (collectively, the “JV Partner”), acquired a portfolio containing three office buildings (“Grace Court II, III and IV”) and one schoolhouse (“Grace Court School”) with an aggregate of 310,886 rentable square feet in Phoenix, Arizona (collectively, “Grace Court”). Neither the JV Partner nor the seller is affiliated with the Company or the Advisor.August 2018.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 1.~~	~~Financial Statements (continued)~~

~~KBS STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)~~

~~September 30, 2017~~

~~(unaudited)~~

The Company owns a 90% equity interest in the Grace Court Joint Venture. The JV Partner is the managing member of the joint venture; however, its authority is limited, as the Company must give approval of major decisions involving the business of the joint venture and Grace Court and its operations, in the manner set forth in the joint venture agreement. Income, losses and distributions are generally allocated based on the members’ respective equity interests, subject to adjustments based on certain performance thresholds set forth in the joint venture agreement. Additionally, in certain circumstances described in the joint venture agreement, the Company and the JV Partner may be required to make additional capital contributions to the Grace Court Joint Venture, in proportion to the members’ respective equity interests.

~~The purchase price of Grace Court was $33.3 million plus closing costs.~~

~~Grace Court II, III and IV were developed in 2003, 2008 and 2007, respectively, and Grace Court School was developed in 1911 and remodeled in 2006. At acquisition, Grace Court was 41% leased.~~

~~Grace Court Mortgage Loan~~

On October 3, 2017, in connection with the acquisition of Grace Court, the Grace Court Purchaser entered into a loan agreement with an unaffiliated lender for borrowings of up to $34.1 million (the “Grace Court Mortgage Loan”). As of October 3, 2017, $21.9 million had been disbursed with up to $1.3 million available for future disbursements to be used for capital expenditure project expenses and up to $10.9 million available for future disbursements to be used for tenant improvements and leasing expenses, subject to certain terms and conditions contained in the loan documents.

The Grace Court Mortgage Loan matures on October 9, 2020, with three one-year extension options, subject to an extension fee and certain terms and conditions contained in the loan documents. The Grace Court Mortgage Loan bears interest at a floating rate of 405 basis points over one-month LIBOR, but at no point shall the interest rate be less than 5.05%. The Grace Court Joint Venture entered into an interest rate cap that effectively limits one-month LIBOR on the full loan amount at 3.00% effective October 3, 2017 through October 15, 2019. Monthly payments are interest only with the outstanding principal balance, all accrued and unpaid interest and all other amounts due on the maturity date. The Grace Court Purchaser has the right to prepay the loan in full or in part, subject to an exit fee and certain terms and conditions as described in the loan documents.

SOR US Properties II is providing a guaranty of the payment of (i) any losses, damages, costs, claims, fines, suits or other expenses of any kind incurred by the lender (including reasonable attorneys' fees and expenses and court costs) as a result of certain actions or omissions committed by us, the Grace Court Purchaser, SOR US Properties II and/or their affiliates in violation of the loan documents and (ii) the principal balance and any interest or sums outstanding under the Grace Court Mortgage Loan in the event of: the breach of certain covenants in the loan documents by the Grace Court Purchaser; certain prohibited transfers of Grace Court; and certain bankruptcy, insolvency or related proceedings involving the Grace Court Purchaser, the Grace Court Joint Venture, SOR US Properties II and /or their affiliates.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Strategic Opportunity REIT II, Inc. and the notes thereto. As used herein, the terms “we,” ~~��our”~~“our” and “us” refer to KBS Strategic Opportunity REIT II, Inc., a Maryland corporation, and, as required by context, KBS Strategic Opportunity Limited Partnership II, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Strategic Opportunity REIT II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

We have a limited operating history and as of ~~September 30, 2017~~March 31, 2018, our total assets were ~~$560.3~~$584.0 million. You will not have an opportunity to evaluate our investments before we make them, making our future operations speculative.

We depend on our advisor to identify suitable investments and conduct our operations and our dealer manager to conduct our offering.

All of our executive officers, our affiliated directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions.

Based on sales volume to date, we expect to raise substantially less than the maximum offering amount in our initial public offering. Because we expect to raise substantially less than the maximum offering amount, we will not be able to invest in as diverse a portfolio of properties as we otherwise would, which will cause the value of our stockholders' investment to vary more widely with the performance of specific assets, and cause our general and administrative expenses to constitute a greater percentage of our revenue. Raising fewer proceeds in our offering, therefore, increases the risk that our stockholders will lose money in their investment.

Our board of directors has begun to explore strategic alternatives for the company. If we consummate a merger or pursue another exit strategy in the near term, stockholders may not receive an amount per share equal to our current offering prices or our estimated NAV per share.

Our advisor and its affiliates receive fees in connection with transactions involving the origination, acquisition and management of our investments. These fees will be based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us and increase our stockholders’ risk of loss.

Our distribution policy is generally not to use offering proceeds to ~~make~~pay distributions. However, we may pay distributions from any source, including, without limitation, from offering proceeds or borrowings (which may constitute a return of capital). If we pay distributions from sources other than our cash flow from operations, we will have less funds available for investment in properties and other assets, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

If we are unable to find suitable investments, we may not be able to achieve our investment objectives or pay distributions.

Our policies do not limit us from incurring debt until our total liabilities would exceed 75% of the cost of our tangible assets (before deducting depreciation and other non-cash reserves), and we may exceed this limit with the approval of the conflicts committee of our board of directors. During the early stages of our initial public offering, and to the extent financing in excess of this limit is available on attractive terms, our conflicts committee may approve debt such that our total liabilities would exceed this limit. High debt levels could limit the amount of cash we have available to distribute and could result in a decline in the value of an investment in us.

~~Disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to stockholders.~~

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to stockholders.

Except with respect to unimproved or non-incoming producing property, we are not limited in the percentage of net proceeds that we may allocate to a specific real estate asset type. Thus, we may make all of our investments in investments which present an increased risk of loss. In addition, we may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments we initially expect to focus on.

We expect to focus our investments in real estate-related loans and real estate-related debt securities in distressed debt, which involves more risk than in performing debt.

Our opportunistic property-acquisition strategy involves a higher risk of loss than would a strategy of investing in stabilized properties.

We have made foreign investments and will be susceptible to risks associated with such investments, including changes in currency exchange rates, adverse political or economic developments, lack of uniform accounting standards and changes in foreign laws.

All forward-looking statements should be read in light of the risks identified herein in Part II, Item 1A “Risk Factors” and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as filed with the Securities and Exchange Commission (the “SEC”).

Overview

We were formed on February 6, 2013 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2014. On July 3, 2013, we commenced a private placement offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), to offer a maximum of $105,000,000 of shares of common stock for sale to certain accredited investors, of which $5,000,000 of shares were offered pursuant to our dividend reinvestment plan. We ceased offering shares in our private offering on August 11, 2014. KBS Capital Markets Group LLC, an affiliate of our advisor, served as the dealer manager of the offering pursuant to a dealer manager agreement and was responsible for marketing our shares in the offering.

On November 14, 2013, we filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to register for sale to the public a maximum of 180,000,000 shares of common stock, of which 80,000,000 shares were to be offered pursuant to our dividend reinvestment plan. The SEC declared our registration statement effective on August 12, 2014 and we retained KBS Capital Markets Group LLC to serve as the dealer manager of the initial public offering pursuant to a dealer manager agreement. On February 11, 2016, we filed an amended registration statement on Form S-11 with the SEC to offer a second class of common stock designated as Class T shares and to designate our initially offered and outstanding common stock as Class A shares. Pursuant to the amended registration statement, we are offering to sell any combination of Class A and Class T shares in our primary offering and dividend reinvestment plan offering but in no event may we sell more than 180,000,000 of shares of our common stock pursuant to the offering. We commenced offering our Class T shares of our common stock for sale to the public on February 17, 2016. The dealer manager is responsible for marketing our shares in the initial public offering.

Our board of directors has extended the closing date of our ongoing primary initial public offering until the earlier of the sale of up to $650.0 million of shares, or the date the registration statement relating to our proposed follow-on offering (the “Follow-on Offering”) is declared effective by the SEC.

On August 10, 2017, we filed a registration statement on Form S-11 with the SEC to register ~~the Follow-on Offering.~~a proposed follow-on offering. Pursuant to the ~~Follow-on Offering~~follow-on offering registration statement, we propose to register up to $500.0 million of shares of common stock for sale to the public in ~~the~~a primary ~~Follow-on Offering.~~offering. We also ~~expect~~propose to register up to $125.0 million of shares of common stock pursuant to our dividend reinvestment plan in the ~~Follow-on Offering.~~follow-on offering. We can give no assurance that we will commence or complete the ~~Follow-on Offering.~~follow-on offering.

On February 20, 2018, our board of directors approved the termination of our primary public offering stage effective July 31, 2018 (the “Offering Termination Date”). Subscriptions must be dated on or before July 31, 2018, and subscriptions and all related documents and funds must be received by us in good order no later than September 28, 2018.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

We intend to use substantially all of the net proceeds from our offerings to invest in and manage a diverse portfolio of real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments located in the United States and Europe. Such investments will include the acquisition of distressed debt, the origination and acquisition of mortgage, mezzanine, bridge and other real estate-related loans, investment in opportunistic real estate and investments in real estate-related debt securities such as residential and commercial mortgage-backed securities and collateralized debt obligations. We may also invest in entities that make similar investments. Although this is our current target portfolio, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego what we believe to be a good investment because it does not precisely fit our expected portfolio composition. As of ~~September 30, 2017,~~March 31, 2018, we had invested in two hotel properties, ~~three~~four office properties, one apartment building, an investment in an unconsolidated entity and ~~one first mortgage loan.~~an investment in real estate equity securities. Additionally, as of ~~September 30, 2017,~~March 31, 2018, we had entered into a joint venture to develop one retail property, which is currently under construction.

As of ~~September 30, 2017,~~March 31, 2018, we had sold ~~10,912,156~~11,793,467 and ~~10,407,804~~11,112,527 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of ~~$207.1~~$222.5 million in our initial public offering, including ~~342,508~~443,593 and ~~78,227~~122,861 shares of Class A and Class T common stock, respectively, under our dividend reinvestment plan for aggregate gross offering proceeds of ~~$3.9~~$5.3 million. Also as of ~~September 30, 2017,~~March 31, 2018, we had redeemed ~~138,208~~287,450 and ~~5,298~~35,520 shares of Class A and Class T common stock, respectively, for ~~$1.2~~$2.8 million.

~~As of September 30, 2017, we had~~We sold 3,619,851 shares of Class A common stock for gross offering proceeds of $32.2 million in our private offering. Additionally, on each of April 2, 2014 and July 31, 2014, we issued 120,106 shares of Class A common stock to an entity affiliated with two of our officers and affiliated directors for $1.0 million in separate private transactions exempt from the registration requirements of the Securities Act. On July 14, 2017 and February 13, 2018, we issued 214,175 shares and 10,935 shares, respectively, of Class A common stock to a business associate of two of our officers and affiliated director for $2.0 million and $0.1 million, respectively, in a separate private transaction exempt from the registration requirements of the Securities Act.

We have no employees and KBS Capital Advisors LLC (“KBS Capital Advisors”) has served as our external advisor since commencement of the private offering. As our advisor, KBS Capital Advisors manages our day-to-day operations and manages our portfolio of real estate properties and real estate-related investments. KBS Capital Advisors will make recommendations on all investments to our board of directors. All proposed investments must be approved by at least a majority of our board of directors, including a majority of the conflicts committee. Unless otherwise provided by our charter, the conflicts committee may approve a proposed investment without action by the full board of directors if the approving members of the conflicts committee constitute at least a majority of the board of directors. KBS Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf.

We have formed a strategic relationship with STAM, a commercial real estate investment and asset management firm headquartered in Paris, France to support us and our advisor in connection with any investments we may make in Europe. We can give no assurances as to the number, if any, of investments we may make in Europe.

Market Outlook - Real Estate and Real Estate Finance Markets

~~The following discussion is based on management’s beliefs, observations~~Volatility in global financial markets and ~~expectations with respect to the real estate and real estate finance markets.~~

The global economy is broadly improving albeit at an uneven pace. European economic growth has recently picked up, with improving employment data in most of the European Union countries. The U.K. and China remain areas of concern. The U.K. is working through its BREXIT process, whereas the Chinese economy has shown signs of stabilization, but is still struggling with uncertainty in its banking system in relation to bad loans. Against this backdrop, the central banks of the world’s major industrialized economies are beginning to back away from their strong monetary accommodation. Quantitative easing (“QE”) in Japan and Europe is slowing, but the liquidity generated from these programs continues to impact the global capital markets.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

At a duration of 100 months (as of the end of third quarter 2017), the current business cycle, which commenced in June 2009, is the third longest in U.S. history, behind only the periods between 1961 - 1969 and 1991 - 2001. In June 2017, the U.S. Federal Reserve (the “Fed”) increased interest rates for the fourth time in three years. Expectations are that the Fed will increase rates again in December, citing low unemployment and strong economic growth. The Fed is still attempting to normalize the level of interest rateschanging political environments can cause fluctuations in the ~~United States. U.S. interest rates are relatively high when compared to Europe, where the European Central Bank is still engaging in QE. Global inflation is starting to show signs~~performance of life as U.S. inflation has grown to approximately 1.9% versus 2.9% in the U.K. and 1.5% in the Eurozone. Real gross domestic product (“GDP”) in the United States has had two consecutive quarters of 3.0% or greater growth, and the U.S. unemployment rate is currently a relatively low 4.2%. Personal income growth has started to pick up and unemployment statistics indicate that labor market conditions are finally showing real improvements. Political uncertainty surrounding the current administration’s budget, tax reform plans and the continued weakness in retailers, all may adversely impact business and consumer confidence.

~~In 2017~~ the U.S. commercial real estate ~~market has seen a decline~~markets. Possible future declines in ~~transaction volume~~rental rates, slower or potentially negative net absorption of leased space and ~~a slowing~~expectations of ~~price increases. In the aggregate, property level operating income growth has begun~~future rental concessions, including free rent to ~~slow, while lending standards have tightened. The United States continues~~renew tenants early, to ~~benefit from inflows of foreign capital, albeit at a slowing rate. The capital~~retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from ~~China have dropped~~investment properties. Increases in the cost of financing due to higher interest rates may cause difficulty in refinancing debt obligations prior to or at maturity or at terms as favorable as the ~~Chinese government has successfully imposed constraints on capital leaving~~terms of existing indebtedness. Market conditions can change quickly, potentially negatively impacting the ~~country. The industrial property sector is a standout for investors, as internet sales volumes continue to increase the demand for warehouses and logistics-related assets. Traditional sources~~value of ~~capital are favoring a “risk-off” approach, as capital flows have shifted equity towards debt, or secured, investing. Commercial~~ real estate ~~returns are increasingly being driven by property income (yield), as opposed~~investments. Management continuously reviews our investment and debt financing strategies to ~~price appreciation through cap rate compression.~~

~~Lenders with long memories remain disciplined in their underwriting~~optimize our portfolio and the cost of ~~investments. For balance sheet lenders, such as banks and insurance companies, underwriting standards for commercial real estate have tightened. This has resulted in lower loan-to-value and higher~~our debt coverage ratios. CMBS originations rebounded in the third quarter as banks and insurance companies tightened loan terms. CMBS volumes are on pace to beat 2016 issuance volumes. This is a positive for the U.S. commercial real estate markets as it illustrates the virtues of having a diversified set of funding sources.exposure.

Liquidity and Capital Resources

On January 7, 2015, we broke escrow in our initial public offering. We are dependent upon the net proceeds from our ongoing initial public offering to conduct our proposed operations. We expect to obtain the capital required to purchase and originate real estate and real estate-related investments and conduct our operations from the proceeds of our offering, from secured or unsecured financings from banks and other lenders and from any undistributed funds from our operations. As of ~~September 30, 2017,~~March 31, 2018, we had sold ~~10,912,156~~11,793,467 and ~~10,407,804~~11,112,527 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of ~~$207.1~~$222.5 million in our initial public offering. Additionally, we sold 3,619,851 shares of common stock in our private offering for gross offering proceeds of $32.2 million.

~~Regulatory developments related to the reporting~~

Table of our estimated value per share under recently effective FINRA and NASD Conduct Rules, and changes to the definition of fiduciary under ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended may significantly affect our ability to raise substantial additional funds in the public offering. Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

If we are unable to raise substantially more funds in our initial public offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses, including certain expenses as a REIT, regardless of whether we are able to raise substantial funds in the initial public offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Our hotel properties generate cash flow in the form of room, food, beverage and convention services, campground and other revenues, which are reduced by hotel expenses, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our hotel properties are primarily dependent upon the occupancy levels of our hotels, the average daily rates and how well we manage our expenditures. The following table provides summary information regarding our hotel properties as of September 30, 2017:

Property Number of Rooms Percentage Occupied for the Nine Months Ended September 30, 2017 Average Revenue per Available Room Average Daily Rate
Springmaid Beach Resort ⁽¹⁾
452 79.1% $109.47 $138.31
Q&C Hotel 196 67.3% $108.11 $160.64

~~_____________________~~

⁽¹⁾ In October 2016, Springmaid Beach Resort sustained significant damage from Hurricane Matthew, the result of which placed 238 rooms out of service. Certain rooms have been and continue to be offline. As of September 30, 2017, 16 rooms remain out of service as a result of the hurricane damage. Rooms not in service were excluded from the percentage occupied and average revenue per available room.

Our office and apartment properties generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from office and apartment properties is primarily dependent upon the occupancy level of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of ~~September 30, 2017,~~March 31, 2018, we owned ~~three~~four office properties that were ~~90%~~73% occupied and one apartment property that was ~~94%~~90% occupied.

Our ~~real estate-related investment generates~~hotel properties generate cash flow in the form of ~~interest income,~~room, food, beverage and convention services, campground and other revenues, which isare reduced by hotel expenses, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our ~~real estate-related investment is~~hotel properties are primarily dependent onupon the ~~operating performance~~occupancy levels of our hotels, the ~~underlying collateral~~average daily rates and how well we manage our expenditures. The following table provides summary information regarding our hotel properties as of March 31, 2018:



Property	Number of Rooms	Percentage Occupied for the Three Months Ended March 31, 2018	Average Revenue per Available Room	Average Daily Rate
Springmaid Beach Resort	452	35.7%	$39.46	$110.53
Q&C Hotel	196	81.6%	$141.99	$173.97

Investments in real estate equity securities generate cash flow in the ~~borrower’s ability to make its debt service payments.~~form of dividend income, which is reduced by asset management fees. As of ~~September 30, 2017, the borrower under our~~March 31, 2018, we had an investment in real estate ~~loan receivable was current on all contractual debt service payments to us.~~equity securities outstanding with a total book value of $3.1 million.

As of ~~September 30, 2017,~~March 31, 2018, we had mortgage debt obligations in the aggregate principal amount of ~~$309.4~~$331.1 million, with a weighted-average remaining term of ~~2.8~~2.4 years. As of ~~September 30, 2017, $12.1~~March 31, 2018, an aggregate amount of $33.1 million was available under ~~the 210 West 31st Street Mortgage Loan~~our mortgage loans for future disbursements to be used for capital improvement costs, tenant improvement costs, leasing commissions and expenses and operating/interest shortfall, subject to certain terms and conditions contained in the loan documents.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to our advisor and the dealer manager. During our organization and offering stage, these payments include payments to the dealer manager for selling commissions, the dealer manager fee and the stockholder servicing fee and payments to the dealer manager and our advisor for reimbursement of certain commercially reasonable organization and offering expenses, provided that no reimbursements made by us to our advisor or dealer manager may cause total organization and offering expenses incurred by us in connection with our initial public offering (including selling commissions, dealer manager fees, stockholder servicing fees and all other items of organization and offering expenses) to exceed 15% of the aggregate gross proceeds from our public offering as of the date of reimbursement. As of ~~September 30, 2017,~~March 31, 2018, our advisor has incurred organization and offering expenses on our behalf related to our initial public offering of approximately ~~$10.2~~$10.5 million. In addition, our advisor and its affiliates will reimburse us to the extent that the organization and other offering expenses (which exclude selling commissions, dealer manager fees and stockholder servicing fees) paid directly or reimbursed by us in connection with the primary portion of our initial public offering, regardless of when incurred, exceed 1.0% of gross offering proceeds from the primary portion of our initial public offering. ~~The Advisor~~Our advisor and its affiliates will be responsible for any organization and other offering expenses related to the primary portion of our initial public offering to the extent they exceed 1.0% of gross proceeds from the primary portion of the initial public offering. There was no limit on the organization and offering expenses we could incur in connection with our private offering. As of ~~September 30, 2017,~~March 31, 2018, our advisor had incurred offering expenses on our behalf related to our private offering of $1.0 million, all of which have been reimbursed from proceeds from our now terminated private offering. During our acquisition and development stage, we expect to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us. We will also continue to make payments to our dealer manager related to the stockholder servicing fees. Our currently effective advisory agreement expires August 12, 2018 and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of KBS Capital Advisors and our conflicts committee.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Among the fees payable to our advisor is an asset management fee. We pay our advisor a monthly fee equal to the lesser of one-twelfth of (i) 1.0% of the cost of our investments and (ii) 2.0% of the sum of the cost of our investments, less any debt secured by or attributable to the investments. The cost of the real property investments is calculated as the amount paid or allocated to acquire the real property, including the cost of any subsequent development, construction or improvements to the property and including fees and expenses related thereto (but excluding acquisition fees paid or payable our advisor). The cost of the loans and any investments other than real property is calculated as the lesser of (x) the amount actually paid or allocated to acquire or fund the loan or other investment, including fees and expenses related thereto (but excluding acquisition fees paid or payable to our advisor) and (y) the outstanding principal amount of such loan or other investment, including fees and expenses related to the acquisition or funding of such investment (but excluding acquisition fees paid or payable to our advisor) as of the time of calculation. In the case of investments made through joint ventures, the asset management fee is determined based on our proportionate share of the underlying investment.

In addition, an affiliate of our advisor, KBS Management Group, was recently formed to provide property management services with respect to certain properties owned by KBS-advised companies. In the future, we may engage KBS Management Group with respect to one or more of our properties to provide property management services. With respect to any such properties, we would expect to pay KBS Management Group a monthly fee equal to a percentage of the rent (to be determined on a property by property basis, consistent with current market rates).

We elected to be taxed and ~~operating~~to operate as a REIT beginning with our taxable year ended December 31, 2014. ~~We intend to continue to operate as a REIT.~~ To maintain our qualification as a REIT, we will be required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended ~~September 30, 2017~~March 31, 2018 did not exceed the charter imposed limitation.

~~Cash Flows from Operating Activities~~

We commenced operations on September 4, 2014 in connection with our first investment. As of September 30, 2017, we had invested in two hotel properties, three office properties, one apartment building, an investment in an unconsolidated entity and one first mortgage loan. Additionally, as of September 30, 2017, we had entered into a joint venture to develop one retail property, which is currently under construction. During the nine months ended September 30, 2017, net cash provided by operating activities was $10.4 million. We expect that our cash flows from operating activities will generally increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments and the related operations of such real estate investments.

~~Cash Flows from Investing Activities~~

~~Net cash used in investing activities was $162.6 million for the nine months ended September 30, 2017 and primarily consisted of the following:~~

~~Acquisition of an office property for $154.7 million;~~

~~$7.8 million of improvements to real estate;~~

~~$5.1 million of proceeds from insurance claims;~~

~~$4.1 million of payments for construction in progress; and~~

~~$1.0 million escrow deposit for the future acquisition of an office property.~~

3734

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Flows from Operating Activities

We commenced operations on September 4, 2014 in connection with our first investment. As of March 31, 2018, we had invested in two hotel properties, four office properties, one apartment building, an investment in an unconsolidated entity and an investment in real estate equity securities. Additionally, as of March 31, 2018, we had entered into a joint venture to develop one retail property, which is currently under construction. During the three months ended March 31, 2018, net cash used in operating activities was $1.9 million. We expect that our cash flows from operating activities will generally increase in future periods as a result of leasing additional space that is currently unoccupied, the development and subsequent operation of 210 West 31st Street, which is currently under construction, and owning real estate securities acquired during 2018 for an entire period.

Cash Flows from Investing Activities

Net cash used in investing activities was $3.3 million for the three months ended March 31, 2018 and primarily consisted of the following:

$3.5 million of cash received in connection with the real estate loan receivable payoff;

$3.2 million investment in real estate equity securities;

$2.0 million of improvements to real estate;

$1.8 million of payments for construction in progress; and

$0.1 million of proceeds from insurance claims.

Cash Flows from Financing Activities

Net cash provided by financing activities was ~~$152.7~~$3.3 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and primarily consisted of the following:

$~~96.1 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $97.4 million, partially offset by payments of deferred financing costs of $1.2 million;~~

~~$57.8~~5.1 million of net cash provided by offering proceeds related to our initial public offering, net of payments of commissions, dealer manager fees and stockholder servicing fees of $0.6 million;

$1.0 million of net cash used in debt and other ~~organization~~financings as a result of principal payments on notes payable of $1.8 million and ~~offering~~payments of deferred financing costs of ~~$3.8~~$0.1 million, partially offset by proceeds from notes payable of $0.9 million;

$~~1.1~~0.8 million of cash used for redemptions of common stock;

$0.4 million of net cash distributions, after giving effect to distributions reinvested by stockholders of ~~$1.7~~$0.7 million;

~~$0.6 million of cash used for redemptions of common stock;~~ and

$~~0.5~~0.4 million of noncontrolling interest contributions.

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. Once we have fully invested the proceeds from our offering stage, we expect our debt financing will be 60% or less of the cost of our tangible assets (before deducting depreciation or other non-cash reserves). There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets (before deducting depreciation or other non-cash reserves); however, we may exceed that limit if a majority of the Conflicts Committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of ~~September 30, 2017,~~March 31, 2018, our borrowings and other liabilities were approximately ~~60%~~61% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of ~~September 30, 2017~~March 31, 2018 (in thousands):


			Payments Due During the Years Ending December 31,										Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2017		2018-2019		2020-2021		Thereafter		Total		Remainder of 2018		2019-2020		2021-2022		Thereafter
Outstanding debt obligations⁽¹⁾	$	309,384	$	38,000	$	135,487	$	43,047	$	92,850	$	331,144	$	64,508	$	172,466	$	94,170	$	—
Interest payments on outstanding debt obligations ⁽²⁾	30,381		3,042		19,326		6,176		1,837		32,348		10,881		16,184		5,283		—
Stockholder servicing fee liability ⁽³⁾	820		330		490		—		—		440		440		—		—		—
Capital lease obligations	55,566		90		720		720		54,036		57,386		560		1,315		1,670		53,841

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts and interest rates in effect at ~~September 30, 2017.~~March 31, 2018. We incurred interest expense of ~~$7.6~~$3.9 million, excluding amortization of deferred financing costs of ~~$1.1~~$0.4 million and unrealized ~~loss~~gain on interest rate cap of ~~$84,000~~$30,000 and including interest capitalized of ~~$3.0~~$1.4 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

⁽³⁾ Stockholder servicing fee is an annual fee of 1.0% of the purchase price per Class T share sold in our primary public offering for services rendered to Class T stockholders by the broker dealer of record after the initial sale of the Class T share. The stockholder servicing fee will accrue daily and be paid monthly in arrears for up to the fourth anniversary of the issuance of the Class T share. The amount shown is the amount estimated as payable as of ~~September 30, 2017~~March 31, 2018 based on the terms of the Class T shares.

In addition, as of ~~September 30, 2017,~~March 31, 2018, we expect to incur approximately ~~$14.8~~$12.1 million of development costs through 2018 related to 210 West 31st Street.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Results of Operations

Overview

As of ~~September 30, 2016,~~March 31, 2017, we had invested in two hotel properties, two ~~office properties, an investment in an unconsolidated entity and one first mortgage loan. As of September 30, 2017, we had invested in two hotel properties, three~~ office properties, one apartment building, an investment in an unconsolidated entity and one first mortgage loan. Additionally, as of ~~September 30,~~March 31, 2017, we had entered into a joint venture to develop one retail property, which was under construction. As of March 31, 2018, we had invested in two hotel properties, four office properties, one apartment building, an investment in an unconsolidated entity and an investment in real estate equity securities. Additionally, as of March 31, 2018, we had entered into a joint venture to develop one retail property, which is currently under construction. We funded the acquisitions of these investments with proceeds from our terminated private offering, initial public offering and debt financing. Our results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 are not indicative of those in future periods as we commenced operations on September 4, 2014 in connection with our first investment and expect to make future acquisitions of real estate and real estate-related investments. In general, we expect that our revenue and expenses related to our portfolio will increase in future periods as a result of anticipated future acquisitions of real estate and real estate-related investments.

~~Comparison~~ Additionally, our investment objectives include acquiring properties with significant possibilities for short-term capital appreciation, such as non-stabilized properties, properties with moderate vacancies or near-term lease rollovers, poorly managed and positioned properties, properties owned by distressed sellers and built-to-suit properties. As of March 31, 2018, the occupancy in our properties has not been stabilized. However, due to the amount of near-term lease expirations, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the ~~three months ended September 30, 2017 versus~~assets in the ~~three months ended September 30, 2016~~

~~The following table provides summary information about~~portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our ~~results~~assets will increase, or that we will recognize a gain on the sale of ~~operations for the three months ended September 30, 2017~~our assets. In general, we expect that our income and ~~2016 (dollar amounts in thousands):~~

Three Months Ended September 30, Increase (Decrease) Percentage Change
$ Change Due to Acquisitions ⁽¹⁾

$ Change Due to
Investments Held Throughout
Both Periods ⁽²⁾
2017 2016
Hotel revenues $ 12,160
$ 8,599
$ 3,561
41 % —
3,561
Office revenues 4,218
1,892
2,326
123 % 2,400
(74 )
Apartment revenues 1,746
—
1,746
n/a
1,746
—
Interest income from real estate loans receivable 103
101
2
2 % —
2
Hotel expenses 5,807
5,157
650
13 % —
650
Office expenses 1,536
521
1,015
195 % 796
219
Apartment expenses 1,026
—
1,026
n/a
1,026
—
Asset management fees to affiliate 739
359
380
106 % 359
21
General and administrative expenses 1,146
646
500
77 % n/a
n/a
Depreciation and amortization 3,709
2,314
1,395
60 % 1,745
(350 )
Interest expense 2,255
931
1,324
142 % 1,235
89
Casualty-related income 1,614
—
1,614
n/a
—
1,614

~~_____________________~~

⁽¹⁾ ~~Represents the dollar amount increase (decrease) for the three months ended September 30, 2017 compared to the three months ended September 30, 2016~~expenses related to ~~real estate acquired on or after July 1, 2016.~~

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

Hotel revenues increased from $8.6 million for the three months ended September 30, 2016 to $12.2 million for the three months ended September 30, 2017 primarily due to $5.5 million of business interruption insurance recovery, partially offset by the impact of Hurricane Matthew in October 2016, the result of which placed certain rooms at Springmaid Beach Resort out of service during the three months ended September 30, 2017. We expect hotel revenues, excluding the impact of business interruption insurance recoveries, to increase in future periods as the majority of rooms at the Springmaid Beach Resort have been fully restored and as a result of the ongoing improvements in connection with the re-branding strategy of our ~~hotel properties.~~

Office revenues increased from $1.9 million for the three months ended September 30, 2016 to $4.2 million for the three months ended September 30, 2017 primarily as a result of the growth in our real estate portfolio. We expect office revenue toportfolio will increase in future periods as a result of ~~owning the office property acquired in 2017 for an entire period~~leasing additional space, improving our properties and ~~anticipated future acquisitions of office properties.~~

~~Apartment revenues for the three months ended September 30, 2017 were $1.7 million. We expect apartment revenues~~acquiring additional assets but decrease due to ~~vary in future periods depending on occupancy rates and rental rates and whether we acquire any additional apartment properties.~~disposition activity.

3936

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended March 31, 2018 versus the three months ended March 31, 2017

The following table provides summary information about our results of operations for the three months ended March 31, 2018 and 2017 (dollar amounts in thousands):



	Three Months Ended March 31,					Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/Repayments ⁽¹⁾		$ Change Due to Investments Held Throughout Both Periods ⁽²⁾
	2018			2017		Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/Repayments ⁽¹⁾
Office revenues	$	7,599		$	1,824	5,775			317	%	5,682		93
Hotel revenues	5,510			4,843		$	667		14	%	—		667
Apartment revenues	1,716			1,739		(23		)	(1	)%	—		(23	)
Interest income from real estate loan receivable	10			99		(89		)	(90	)%	(89	)	—
Office expenses	2,671			580		2,091			361	%	2,147		(56	)
Hotel expenses	4,790			4,244		546			13	%	—		546
Apartment expenses	917			836		81			10	%	—		81
Asset management fees to affiliate	935			504		431			86	%	337		94
General and administrative expenses	639			575		64			11	%	n/a		n/a
Depreciation and amortization	5,103			2,853		2,250			79	%	2,565		(315	)
Interest expense	2,897			1,709		1,188			70	%	n/a		n/a
Other interest income	60			96		(36		)	(38	)%	n/a		n/a
Equity in income of unconsolidated entity	15			13		2			15	%	—		2
Unrealized loss on real estate equity securities	(86		)	—		(86		)	n/a		(86	)	—
Income tax benefit	9			9		—			—	%	—		—

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 related to real estate and real estate-related investments acquired or repaid on or after January 1, 2017.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

Office revenues increased from $1.8 million for the three months ended March 31, 2017 to $7.6 million for the three months ended March 31, 2018 primarily as a result of the growth in our real estate portfolio. We expect office revenues to vary in future periods based on occupancy rates and rental rates of our office properties.

Hotel revenues increased from $4.8 million for the three months ended March 31, 2017 to $5.5 million for the three months ended March 31, 2018 primarily due to the impact of Hurricane Matthew in October 2016, the result of which placed certain rooms at Springmaid Beach Resort out of service during the three months ended March 31, 2017. We expect hotel revenues to vary in future periods based on occupancy and room rates.

Interest income from our real estate loan receivable, recognized using the interest method, ~~remained consistent at approximately~~decreased from $0.1 million for the three months ended ~~September 30,~~March 31, 2017 ~~and 2016.~~to $10,000 for the three months ended March 31, 2018 as a result of the real estate loan receivable being repaid in full on January 12, 2018.

~~Hotel~~Office expenses increased from ~~$5.2~~$0.6 million for the three months ended ~~September 30, 2016~~March 31, 2017 to ~~$5.8~~$2.7 million for the three months ended September 30, 2017 primarily due to increased property taxes and increased sales and marketing costs in connection with the re-branding strategy of our hotel properties. Office expenses increased from $0.5 million for the three months ended September 30, 2016 to $1.5 million for the three months ended September 30, 2017March 31, 2018 primarily as a result of the growth in our real estate portfolio. ~~Apartment~~Hotel expenses increased from $4.2 million for the three months ended ~~September 30,~~March 31, 2017 ~~were $1.0 million.~~to $4.8 million for the three months ended March 31, 2018 primarily due to an increase in occupancy rates. Apartment expenses increased from $0.8 million for the three months ended March 31, 2017 to $0.9 million for the three months ended March 31, 2018. We expect total expenses to ~~increase~~vary in future periods ~~as a result of anticipated future acquisitions of real estate properties.~~based on occupancy rates.

Asset management fees to affiliate increased from ~~$0.4~~$0.5 million for the three months ended ~~September 30, 2016~~March 31, 2017 to ~~$0.7~~$0.9 million for the three months ended ~~September 30, 2017~~March 31, 2018 primarily as a result of the growth of our real estate portfolio. We expect asset management fees to increase in future periods as a result of ~~anticipated future acquisitions of real estate~~any improvements we make to our properties and as a result of ~~any improvements we make to~~owning our ~~properties.~~investment in real estate equity securities acquired in 2018 for an entire period. Approximately ~~$21,000~~$22,000 of asset management fees incurred were payable as of ~~September 30, 2017.~~March 31, 2018.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Depreciation and amortization expenses increased from ~~$2.3~~$2.9 million for the three months ended ~~September 30, 2016~~March 31, 2017 to ~~$3.7~~$5.1 million for the three months ended ~~September 30, 2017~~March 31, 2018 primarily due to the growth of our real estate portfolio, partially offset by the effect of fully amortized assets related to properties held throughout both periods. We expect depreciation and amortization expenses to ~~increase~~vary in future periods as a result of ~~anticipated future acquisitions~~a decrease in amortization related to fully amortized tenant origination and absorption costs and increase as a result of ~~real estate properties.~~the development and subsequent operation of 210 West 31st Street.

Interest expense increased from ~~$0.9~~$1.7 million for the three months ended ~~September 30, 2016~~March 31, 2017 to ~~$2.3~~$2.9 million for the three months ended ~~September 30, 2017~~March 31, 2018 primarily due to increased borrowings in connection with our acquisition ~~activity.~~activity and increased one-month LIBOR rates during the three months ended March 31, 2018. Excluded from interest expense was $1.4 million and $0.8 million of interest capitalized to our construction in progress during the three months ended March 31, 2018 and 2017, respectively. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the amount of proceeds raised in our ongoing initial public offering, the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

~~Casualty-related income, net for~~Unrealized loss on real estate equity securities was $0.1 million during the three months ended September 30, 2017 was $1.6 million which relates to the insurance claim settlement in connection with the impact of Hurricane Matthew at the Springmaid Beach Resort. To the extent that insurance proceeds ultimately exceeded the difference between replacement cost and net book value of the impaired assets, the post-hurricane costs incurred, and/or business interruption losses recognized, the excess was reflected as income in the period those amounts were received or when receipt was deemed probable to occur.

~~Comparison of the nine months ended September 30, 2017 versus the nine months ended September 30, 2016~~

~~The following table provides summary information about our results of operations for the nine months ended September 30, 2017 and 2016 (dollar amounts in thousands):~~

Nine Months Ended September 30, Increase (Decrease) Percentage Change
$ Change Due to Acquisitions ⁽¹⁾

$ Change Due to
Investments Held Throughout
Both Periods ⁽²⁾
2017 2016
Hotel revenues $ 23,473
$ 20,563
$ 2,910
14 % —
2,910
Office revenues 7,824
3,289
4,535
138 % 4,627
(92 )
Apartment revenues 5,184
—
5,184
n/a
5,184
—
Interest income from real estate loans receivable 303
298
5
2 % —
5
Hotel expenses 14,839
13,466
1,373
10 % —
1,373
Office expenses 2,713
860
1,853
215 % 1,786
67
Apartment expenses 2,724
—
2,724
n/a
2,724
—
Asset management fees to affiliate 1,820
908
912
100 % 876
36
Real estate acquisition fees and expenses to affiliate —
1,341
(1,341 ) (100 )% (1,341 ) —
Real estate acquisition fees and expenses —
123
(123 ) (100 )% (123 ) —
General and administrative expenses 2,492
2,073
419
20 % n/a
n/a
Depreciation and amortization 9,176
5,299
3,877
73 % 4,231
(354 )
Interest expense 5,798
2,379
3,419
144 % 3,335
84
Casualty-related income 1,614
—
1,614
n/a
—
1,614

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

~~_____________________~~

⁽¹⁾ Represents the dollar amount increase (decrease) for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 related to real estate acquired on or after January 1, 2016.

⁽²⁾ Represents the dollar amount increase (decrease) for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

Hotel revenues increased from $20.6 million for the nine months ended September 30, 2016 to $23.5 million for the nine months ended September 30, 2017 primarily due to $5.8 million of business interruption insurance recovery, partially offset by the impact of Hurricane Matthew in October 2016, the result of which placed certain rooms at Springmaid Beach Resort out of service during the nine months ended September 30, 2017. We expect hotel revenues, excluding the impact of business interruption insurance recoveries, to increase in future periods as the majority of rooms at the Springmaid Beach Resort have been fully restored and as a result of the ongoing improvements in connection with the re-branding strategy of our hotel properties.

~~Office revenues increased from $3.3 million for the nine months ended September 30, 2016 to $7.8 million for the nine months ended September 30, 2017~~March 31, 2018, primarily as a result of ~~the growth~~decreases in share price of our investment in real estate portfolio. We expect office revenue to increase in future periods as a result of owning the office property acquired in 2017 for an entire period and anticipated future acquisitions of office properties.equity securities.

Apartment revenues for the nine months ended September 30, 2017 were $5.2 million. We expect apartment revenues to vary in future periods depending on occupancy rates and rental rates and whether we acquire any additional apartment properties.

~~Interest income from our real estate loan receivable, recognized using the interest method, remained consistent at approximately $0.3 million for the nine months ended September 30, 2017 and 2016.~~

Hotel expenses increased from $13.5 million for the nine months ended September 30, 2016 to $14.8 million for the nine months ended September 30, 2017 primarily due to increased property taxes and increased sales and marketing costs in connection with the re-branding strategy of our hotel properties. Office expenses increased from $0.9 million for the nine months ended September 30, 2016 to $2.7 million for the nine months ended September 30, 2017 primarily as a result of the growth in our real estate portfolio. Apartment expenses for the nine months ended September 30, 2017 were $2.7 million. We expect total expenses to increase in future periods as a result of anticipated future acquisitions of real estate properties.

Asset management fees to affiliate increased from $0.9 million for the nine months ended September 30, 2016 to $1.8 million for the nine months ended September 30, 2017 primarily as a result of the growth of our real estate portfolio. We expect asset management fees to increase in future periods as a result of anticipated future acquisitions of real estate properties and as a result of any improvements we make to our properties. Approximately $21,000 of asset management fees incurred were payable as of September 30, 2017.

Real estate acquisition fees and expenses to affiliate and non-affiliates were $1.5 million for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we did not acquire any investments accounted for as a business combination. We adopted ASU No. 2017-01 for the reporting period beginning January 1, 2017. As a result of the adoption of ASU No. 2017-01, our acquisitions of real estate properties beginning January 1, 2017 qualified as asset acquisitions as opposed to business combinations. Transaction costs associated with asset acquisitions are capitalized, while transaction costs associated with business combinations will continue to be expensed. We expect real estate acquisition fees and expenses to vary in future periods based upon acquisition activity.

Depreciation and amortization expenses increased from $5.3 million for the nine months ended September 30, 2016 to $9.2 million for the nine months ended September 30, 2017 primarily due to the growth of our real estate portfolio, partially offset by the effect of fully amortized assets related to properties held throughout both periods. We expect depreciation and amortization expenses to increase in future periods as a result of anticipated future acquisitions of real estate properties.

Interest expense increased from $2.4 million for the nine months ended September 30, 2016 to $5.8 million for the nine months ended September 30, 2017 primarily due to increased borrowings in connection with our acquisition activity. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the amount of proceeds raised in our ongoing initial public offering, the availability and cost of debt financing, and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

Casualty-related income, net for the nine months ended September 30, 2017 was $1.6 million which relates to the insurance claim settlement in connection with the impact of Hurricane Matthew at the Springmaid Beach Resort.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses); adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the ~~Investment Program Association~~Institute for Portfolio Alternatives (“IPA”) in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs (to the extent that such costs have been recorded as operating expenses) from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases and ~~acquisition fees and expenses,~~mark-to-market adjustments included in net income, are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate; and

~~Acquisition fees~~Mark to Market adjustments included in net income. These are fair value adjustments to derivative instruments and ~~expenses.~~ ~~Prior to our early adoption of ASU No. 2017-01 on January 1, 2017, acquisition fees and expenses related to the acquisition of~~ real estate ~~were generally expensed. Although~~equity securities. We have excluded these ~~amounts reduce net income, we exclude them from~~adjustments in our calculation of MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis. Additionally, acquisition fees and expenses have been funded from the proceeds from our offerings and debt financings and not from our operations. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of ourreflect core operating performance.

Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain renovation projects. We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net income (loss), FFO and MFFO.

4339

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ (in thousands). No conclusions or comparisons should be made from the presentation of these periods.

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Net income (loss) attributable to common stockholders $ 2,893
$ 601
$ (834 ) $ (2,302 )
Depreciation of real estate assets 2,416
1,407
5,870
3,642
Amortization of lease-related costs 1,293
907
3,306
1,657
Adjustments for noncontrolling interests ⁽¹⁾
(166 ) (119 ) (534 ) (334 )
Adjustments for investment in unconsolidated entity ⁽²⁾
—
29
—
29
FFO attributable to common stockholders ⁽³⁾
6,436
2,825
7,808
2,692
Straight-line rent and amortization of above- and below-market leases (953 ) (283 ) (1,293 ) (457 )
Amortization of discounts and closing costs (20 ) (18 ) (58 ) (52 )
Unrealized losses on derivative instruments 44
1
117
43
Real estate acquisition fees to affiliate —
—
—
1,341
Real estate acquisition fees and expenses —
—
—
123
Adjustments for noncontrolling interests ⁽¹⁾
(5 ) —
(16 ) —
MFFO attributable to common stockholders ⁽³⁾
5,502
2,525
6,558
3,690
Other capitalized operating expenses ⁽⁴⁾
(159 ) (57 ) (446 ) (150 )
Casualty-related income, net ⁽⁵⁾
(1,614 ) —
(1,614 ) —
Adjustments for noncontrolling interests - consolidated entity ⁽¹⁾
161
6
161
15
Adjusted MFFO attributable to common stockholders ⁽³⁾
$ 3,890
$ 2,474
$ 4,659
$ 3,555



	For the Three Months Ended March 31,
	2018			2017
Net loss attributable to common stockholders	$	(2,867	)	$	(2,448	)
Depreciation of real estate assets	3,187			1,708
Amortization of lease-related costs	1,916			1,145
Adjustments for noncontrolling interests ⁽¹⁾	(224		)	(196		)
FFO attributable to common stockholders	2,012			209
Straight-line rent and amortization of above- and below-market leases	(1,585		)	(183		)
Amortization of discounts and closing costs	—			(19		)
Unrealized loss on real estate equity securities	86			—
Unrealized losses on derivative instruments	53			50
Adjustments for noncontrolling interests ⁽¹⁾	1			(6		)
MFFO attributable to common stockholders	567			51
Other capitalized operating expenses ⁽²⁾	(426		)	(127		)
Adjusted MFFO attributable to common stockholders	$	141		$	(76	)

_____________________

⁽¹⁾ Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net ~~income (loss)~~loss attributable to common stockholders to FFO, MFFO and Adjusted MFFO.

⁽²⁾Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net income (loss) attributable to common stockholders to FFO for our equity investment in an unconsolidated entity.

⁽³⁾~~FFO, MFFO and Adjusted MFFO includes $5.5 million and $5.8 million of business interruption insurance recovery for the three and nine months ended September 30, 2017, respectively.~~

⁽⁴⁾~~Reflects real estate taxes, property insurance and~~ financing costs that are capitalized with respect to certain renovation projects but excluding development projects. During the time in which we are incurring costs necessary to bring these investments to their intended use, certain ~~normal recurring operating~~financing costs are capitalized in accordance with GAAP and not reflected in our net ~~income (loss),~~loss, FFO and MFFO.

⁽⁵⁾Reflects property damages and insurance recoveries related to the impact of Hurricane Matthew at the Springmaid Beach Resort. We exclude them from Adjusted MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance.

FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we continue to lease up vacant space and acquire additional assets. We expect FFO, MFFO and Adjusted MFFO to increase as a result of acquisitions.

Organization and Offering Costs

Our organization and offering costs (other than selling commissions, dealer manager fees and the stockholder servicing fee) may be paid by our advisor, the dealer manager or their affiliates on our behalf or may be paid directly by us. These offering costs include all expenses incurred in connection with our offerings. Organization costs include all expenses incurred in connection with our formation, including but not limited to legal fees and other costs to incorporate.

We recorded $1.0 million of offering costs (other than selling commissions and dealer manager fees) related to our private offering, all of which were initially paid by our advisor or its affiliates on our behalf and subsequently reimbursed by us. In addition, we paid $1.9 million in selling commissions and dealer manager fees related to our private offering.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

During our initial public offering, pursuant to the advisory agreement and dealer manager agreement, we are obligated to reimburse our advisor, the dealer manager or their affiliates, as applicable, for organization and other offering costs paid by them on behalf of us, provided that no reimbursements made by us to our advisor or the dealer manager may cause total organization and offering expenses incurred by us in connection with our initial public offering (including selling commissions, dealer manager fees and the stockholder servicing fees) to exceed 15% of the aggregate gross proceeds from our initial public offering as of the date of reimbursement. In addition, our advisor and its affiliates will reimburse us to the extent that the organization and other offering expenses (which exclude selling commissions, dealer manager fees and stockholder servicing fees) paid directly or reimbursed by us in connection with the primary portion of our initial public offering, regardless of when incurred, exceed 1.0% of gross offering proceeds from the primary portion of our initial public offering. ~~The Advisor~~Our advisor and its affiliates will be responsible for any organization and other offering expenses related to the primary portion of our initial public offering to the extent they exceed 1.0% of gross proceeds from the primary portion of the Public Offering as of the termination of the primary portion of our initial public offering.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Through ~~September 30, 2017, the Advisor~~March 31, 2018, our advisor and its affiliates had incurred organization and other offering costs (which exclude selling commissions dealer manager fees and stockholder servicing fees) on our behalf in connection with ~~the~~our initial public offering of approximately ~~$10.2~~$10.5 million. As of ~~September 30, 2017,~~March 31, 2018, we had recorded ~~$13.0~~$13.8 million in selling commissions and dealer manager fees and ~~$1.5~~$1.7 million of stockholder servicing fees. As of ~~September 30, 2017,~~March 31, 2018, we had recorded ~~$2.0~~$2.2 million of other organization and offering expenses, which ~~amount~~amounts represent our maximum liability for organization and other offering costs as of ~~September 30, 2017~~March 31, 2018 based on the 1.0% limitation described above.

Distributions

To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). If we meet the REIT qualification requirements, we generally will not be subject to federal income tax on the income that we distribute to our stockholders each year. In general, we anticipate making distributions to our stockholders of at least 100% of our REIT taxable income so that none of our income is subject to federal income tax. Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant.

Until we have fully invested the proceeds of our public offering, and from time to time during our operational stage, we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from debt financing. Distributions declared, distributions paid and cash flow provided by operations were as follows for the first ~~second and third quarters~~quarter of ~~2017~~2018 (in thousands, except per share amounts):

Distributions Declared ⁽¹⁾

Distributions Declared Per Class A Share⁽¹⁾⁽²⁾

Distributions Declared Per Class T Share⁽¹⁾⁽²⁾

Distributions Paid ⁽³⁾
Cash Flows Provided by Operations
Period Cash Reinvested Total
First Quarter 2017 $ 852
$ 0.047
$ 0.024
$ 320
$ 501
$ 821
$ 457
Second Quarter 2017 960
0.048
0.024
357
583
940
338
Third Quarter 2017 1,035
0.048
0.025
382
637
1,019
9,571
$ 2,847
$ 0.143
$ 0.073
$ 1,059
$ 1,721
$ 2,780
$ 10,366



	Distributions Declared ⁽¹⁾		Distributions Declared Per Class A Share⁽¹⁾⁽²⁾		Distributions Declared Per Class T Share⁽¹⁾⁽²⁾		Distributions Paid ⁽³⁾						Cash Flows Used in Operations
Period	Distributions Declared ⁽¹⁾		Distributions Declared Per Class A Share⁽¹⁾⁽²⁾		Distributions Declared Per Class T Share⁽¹⁾⁽²⁾		Cash		Reinvested		Total		Cash Flows Used in Operations
First Quarter 2018	$	1,082	$	0.047	$	0.024	$	407	$	665	$	1,072	$	(1,928	)

_____________________

⁽¹⁾Distributions for the period from January 1, ~~2017~~2018 through ~~September 30, 2017~~March 31, 2018 were based on daily record dates and were calculated at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock.

⁽²⁾Assumes share was issued and outstanding each day that was a record date for distributions during the period presented.

⁽³⁾Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid on or about the first business day of the following month.

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we paid aggregate distributions of ~~$2.8~~$1.1 million, including ~~$1.1~~$0.4 million distributions paid in cash and ~~$1.7~~$0.7 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 was ~~$0.8~~$2.9 million and cash flow ~~provided by~~used in operations was ~~$10.4~~$1.9 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with ~~$1.8 million of~~prior period cash flow from operating activities ~~and $1.0 million~~in excess of ~~debt financing.~~distributions paid. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

~~From inception through September 30, 2017, we paid cumulative distributions of $6.5 million and our cumulative net loss during the same period was $11.9 million.~~ To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

In addition, during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, our board of directors declared stock dividends for each month based on a single record date at the end of each month in an amount that would equal a 2% annualized stock dividend per share of common stock if paid each month for a year. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend.

Going forward we expect our board of directors to continue to authorize and declare cash distributions based on daily record dates and to pay these distributions on a monthly basis and during our offering stage to continue to authorize and declare stock dividends based on a single record date as of the end of the month, and to issue these dividends on a monthly basis. Cash distributions and stock dividends will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. Our board of directors has not pre-established a percentage rate of return for stock dividends or cash distributions to stockholders. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends or distributions to our stockholders.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

We expect that we will fund these cash distributions from interest income on our debt investments, dividend income from real estate equity securities, rental and other income on our real property investments and to the extent we acquire investments with short maturities or investments that are close to maturity, we may fund distributions with the proceeds received at the maturity, payoff or settlement of those investments. We may also utilize strategic refinancings to fund cash distributions for investments that have appreciated in value after our acquisition. Generally, our distribution policy is not to pay cash distributions from sources other than cash flow from operations, investment activities and strategic financings. However, we may fund cash distributions from any source and there are no limits to the amount of distributions that we may pay from any source, including proceeds from our public offering or the proceeds from the issuance of securities in the future, other third party borrowings, advances from our advisor or sponsors or from our advisor’s deferral of its fees under the advisory agreement. Distributions paid from sources other than current or accumulated earnings and profits may constitute a return of capital. From time to time, we may generate taxable income greater than our net income for financial reporting purposes, or our taxable income may be greater than our cash flow available for distribution to stockholders. In these situations we may make distributions in excess of our cash flow from operations, investment activities and strategic financings to satisfy the REIT distribution requirement. In such an event, we would look first to other third party borrowings to fund these distributions.

During the early stages of our operations and until our cash flows stabilize, our board of directors believes the declaration of stock dividends is in our best interest because it will allow us to focus on our investment strategy of investing in opportunistic real estate investments that may generate limited cash flow but have the potential for appreciation. These stock dividends may reflect in part an increase or anticipated increase in portfolio value to the extent our board of directors believes assets in our portfolio have appreciated or will appreciate in value after acquisition or after we have taken control of the assets. In addition, these stock dividends may reflect in part cash flow from operations. However, we can provide no assurances that our stock dividends will reflect appreciation in our portfolio or cash flow from operations. Unless our assets appreciate in an amount sufficient to offset the dilutive effect of any stock dividends, the return per share for later investors purchasing our stock will be below the return per share of earlier investors. With respect to any non-performing assets that we acquire, we believe that within a relatively short time after acquisition or taking control of such investments via foreclosure or deed-in-lieu proceedings, we will often experience an increase in their value. For example, in most instances, we bring financial stability to the property, which reduces uncertainty in the market and alleviates concerns regarding the property’s management, ownership and future. We also may have more capital available for investment in these properties than their prior owners and operators were willing to invest, and as such, we are able to invest in tenant improvements and capital expenditures with respect to such properties, which enables us to attract substantially increased interest from brokers and tenants.

~~Table of Contents~~


~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2017 filed with the SEC. There have been no significant changes to our policies during ~~2017.~~2018, except for our adoption of the revenue recognition and financial instruments standards issued by the Financial Accounting Standards Board effective on January 1, 2018.

Revenue Recognition

Effective January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the entity’s adoption. Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018. A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. We elected to apply this standard only to contracts that were not completed as of January 1, 2018.

Based on our evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by other operating income and tenant reimbursements for substantial services earned at our office properties and hotel revenues. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied.

Table of Contents


PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Hotel Revenue

We recognize revenue for hotels as hotel revenue when earned. Revenues are recorded net of any sales or occupancy tax collected from our guests. Additionally, some of our hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, we book revenue for the room at the price we sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays us directly, we book revenue for the room on a gross basis. We participate in frequent guest programs sponsored by the brand owners of our hotels and we expense the charges associated with those programs, as incurred. Hotel operating revenues are disaggregated in the real estate footnote into the categories of rooms revenue, food, beverage and convention services revenue, campground revenue and other revenue to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.

Room revenue is generated through contracts with customers whereby the customer agrees to pay a daily rate for right to use a hotel room. Our contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from our hotel. We record contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future stay at our hotels. Advanced deposits for room revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits are recognized as revenue at the time of the guest’s stay. We note no significant judgements regarding the recognition of rooms revenue.

Food, beverage and convention revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate for restaurant dining services or convention services. Our contract performance obligations are fulfilled at the time that the meal is provided to the customer or when the convention facilities and related dining amenities are provided to the customer. We recognize food and beverage revenue upon the fulfillment of the contract with the customer. We record contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future banquet event at our hotels. Advanced deposits for food and beverage revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits for banquet services are recognized as revenue following the completion of the banquet services. We note no significant judgements regarding the recognition of food and beverage revenue.

Campground revenue is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured.

Real Estate Equity Securities

Our real estate equity securities are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Upon adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings.

Dividend income from real estate equity securities is recognized on an accrual basis based on eligible shares as of the ex-dividend date.

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Status of the Offering

We commenced our initial public offering on August 12, 2014 and broke escrow on January 7, 2015. As of ~~November 9, 2017,~~May 4, 2018, we had sold ~~11,132,941~~11,930,285 and ~~10,587,211~~11,245,934 shares of Class A and Class T common stock, respectively, in our initial public offering for aggregate gross offering proceeds of ~~$211.0~~$225.1 million. Included in these amounts were ~~376,084~~478,578 and ~~92,926~~138,454 shares of Class A and Class T common stock, respectively, sold under our dividend reinvestment plan for aggregate gross offering proceeds of ~~$4.4~~$5.7 million.

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PART I.	FINANCIAL INFORMATION (CONTINUED)


Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Distributions Paid

On ~~October~~April 3, 2017, we paid distributions of $0.3 million related to cash distributions on the outstanding shares of the common stock based on daily record dates for the period from September 1, 2017 through September 30, 2017. On November 1, 2017,2018, we paid distributions of $0.4 million related to cash distributions on the outstanding shares of the common stock based on daily record dates for the period from ~~October~~March 1, ~~2017~~2018 through ~~October~~March 31, ~~2017.~~2018. On May 1, 2018, we paid distributions of $0.4 million related to cash distributions on the outstanding shares of the common stock based on daily record dates for the period from April 1, 2018 through April 30, 2018. Distributions for the period from ~~September~~March 1, ~~2017~~2018 through ~~October 31, 2017~~April 30, 2018 were calculated based on stockholders of record each day during the period at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

Stock Dividends Issued

On ~~August 10, 2017,~~January 25, 2018, our board of directors authorized stock dividends for the month of ~~September 2017,~~March 2018, in the amount of 0.001667 shares of our common stock on each outstanding share of common stock issuable to all common stockholders of record as of the close of business on ~~September 30, 2017.~~March 31, 2018. We issued the ~~September 2017~~March 2018 stock dividend, consisting of ~~44,877~~47,702 shares, on ~~October~~April 4, ~~2017.~~2018.

On ~~August 10, 2017,~~March 8, 2018, our board of directors authorized stock dividends for the month of ~~October 2017,~~April 2018, in the amount of 0.001667 shares of our common stock on each outstanding share of common stock issuable to all common stockholders of record as of the close of business on ~~October 31, 2017.~~April 30, 2018. We issued the ~~October 2017~~April 2018 stock dividend, consisting of ~~45,366~~48,101 shares, on ~~November~~May 2, ~~2017.~~2018.

Distributions Declared

On ~~October 11, 2017,~~May 10, 2018, our board of directors declared cash distributions on the outstanding shares of all classes of our common stock based on daily record dates for the period from ~~November~~June 1, ~~2017~~2018 through ~~November~~June 30, ~~2017,~~2018 and July 1, 2018 through July 31, 2018, which we expect to pay in ~~December 2017.~~July 2018 and August 2018, respectively. Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan. Distributions for this period will be calculated based on stockholders of record each day during this period at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

Also on October 11, 2017, our board of directors authorized a stock dividend for the month of November 2017 in the amount of 0.001667 shares of common stock on each outstanding share of common stock, issuable to all common stockholders of record as of the close of business on November 30, 2017. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend. We expect to issue this stock dividend in December 2017.

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~~PART I.~~	~~FINANCIAL INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)~~

On November 13, 2017, our board of directors declared cash distributions on the outstanding shares of all classes of our common stock based on daily record dates for the period from December 1, 2017 through December 31, 2017 and January 1,May 10, 2018, through January 31, 2018, which we expect to pay in January 2018 and February 2018, respectively. Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan. Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the number of shares of common stock of such class outstanding as of the close of business on each respective record date.

~~Also on November 13, 2017,~~ our board of directors authorized a stock dividend for the months of ~~December 2017~~June 2018 and ~~January~~July 2018 in the amount of 0.001667 shares of common stock on each outstanding share of common stock, issuable to all common stockholders of record as of the close of business on ~~December~~June 30, 2018 and July 31, ~~2017 and January 31, 2018, respectively.~~2018. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend. We expect to issue ~~these~~this stock ~~dividends~~dividend in ~~January~~July 2018 and ~~February 2018, respectively.~~

~~Acquisition of Real Estate~~

~~Grace Court~~

On October 3, 2017, we, through a joint venture (the “Grace Court Joint Venture”) between our indirect wholly owned subsidiary and Verus Grace Court, LLC and Verus Partners, LLC (collectively, the “JV Partner”) (together, the “Grace Court Purchaser”), acquired a portfolio containing three office buildings (“Grace Court II, III and IV”) and one schoolhouse (“Grace Court School”) with an aggregate of 310,886 rentable square feet in Phoenix, Arizona (collectively, “Grace Court”). Neither the JV Partner nor the seller is affiliated with us or our advisor.

We own a 90% equity interest in the Grace Court Joint Venture. The JV Partner is the managing member of the joint venture; however, its authority is limited, as we must give approval of major decisions involving the business of the joint venture and Grace Court and its operations, in the manner set forth in the joint venture agreement. Income, losses and distributions are generally allocated based on the members’ respective equity interests, subject to adjustments based on certain performance thresholds set forth in the joint venture agreement. Additionally, in certain circumstances described in the joint venture agreement, we and the JV Partner may be required to make additional capital contributions to the Grace Court Joint Venture, in proportion to the members’ respective equity interests.

~~The purchase price of Grace Court was $33.3 million plus closing costs.~~

~~Grace Court II, III and IV were developed in 2003, 2008 and 2007, respectively, and Grace Court School was developed in 1911 and remodeled in 2006. At acquisition, Grace Court was 41% leased.~~

~~Grace Court Mortgage Loan~~

KBS SOR US Properties II LLC (“SOR US Properties II”) is providing a guaranty of the payment of (i) any losses, damages, costs, claims, fines, suits or other expenses of any kind incurred by the lender (including reasonable attorneys' fees and expenses and court costs) as a result of certain actions or omissions committed by us, the Grace Court Purchaser, SOR US Properties II and/or their affiliates in violation of the loan documents and (ii) the principal balance and any interest or sums outstanding under the Grace Court Mortgage Loan in the event of: the breach of certain covenants in the loan documents by the Grace Court Purchaser; certain prohibited transfers of Grace Court; and certain bankruptcy, insolvency or related proceedings involving the Grace Court Purchaser, the Grace Court Joint Venture, SOR US Properties II and /or their affiliates.

August 2018.

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Item 3.	Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the financing of our real estate investment portfolio and operations. We are also exposed to the effects of changes in interest rates as a result of the origination of a mortgage loan. We are also exposed to the effects of foreign currency changes in the Euro with respect to our €2.1 million participating loan facility. Foreign currency exchange rate risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes and foreign currency changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.

As of September 30, 2017, we owned one fixed-rate real estate loan receivable. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate real estate loan receivable unless such instrument matures or is otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instrument. At September 30, 2017, the fair value and carrying value of our fixed rate real estate loan receivable was $3.5 million. The fair value estimate of our real estate loan receivable is estimated using an internal valuation model that considers the expected cash flows for the loan, underlying collateral value and the estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. As we expect to hold our fixed rate instrument to maturity and the amounts due under such instrument would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instrument, would have a significant impact on our operations.

~~Conversely, movements~~Movements in interest rates on variable rate debt would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of ~~September 30, 2017,~~March 31, 2018, we were exposed to market risks related to fluctuations in interest rates on ~~$309.4~~$331.1 million of variable rate debt outstanding. Based on interest rates as of ~~September 30, 2017,~~March 31, 2018, if interest rates were 100 basis points higher or lower during the 12 months ending ~~September 30, 2018,~~March 31, 2019, interest expense on our variable rate debt would increase or decrease, respectively, by ~~$3.1~~$3.3 million.

The annual effective interest rate of our fixed rate real estate loan receivable as of September 30, 2017 was 11.7%. The effective interest rate represents the effective interest rate as of September 30, 2017, using the interest method, which we use to recognize interest income on our real estate loan receivable. The weighted-average interest rate of our variable rate debt as of ~~September 30, 2017~~March 31, 2018 was ~~3.9%~~4.5%. The weighted-average interest rate represents the actual interest rate in effect as of ~~September 30, 2017~~March 31, 2018 (consisting of the contractual interest rate and the effect of interest rate caps, if applicable), using interest rate indices as of ~~September 30, 2017~~March 31, 2018 where applicable.

We are exposed to financial market risk with respect to our real estate equity securities. Financial market risk is the risk that we will incur economic losses due to adverse changes in our real estate equity security prices. Our exposure to changes in real estate equity security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market prices of a real estate equity security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. In addition, amounts realized in the sale of a particular security may be affected by the relative quantity of the real estate equity security being sold. We do not currently engage in derivative or other hedging transactions to manage our real estate equity security price risk. As of March 31, 2018, we owned real estate equity securities with a book value of $3.1 million. Based solely on the prices of real estate equity securities for the three months ended March 31, 2018, if prices were to increase or decrease by 10%, our net income would increase or decrease, respectively, by approximately $0.3 million.

For a discussion of the interest rate risks related to the current capital and credit markets, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Outlook” herein, and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as filed with the SEC.

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Item 4.	Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II.	OTHER INFORMATION


Item 1.	Legal Proceedings

From time to time, we are party to legal proceedings that arise in the ordinary course of our business. Management is not aware of any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by government agencies.


Item 1A.	Risk Factors

The following risk factor supplements the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

We have paid distributions in part from financings and expect that in the future we may not pay distributions solely from our cash flow from operating activities. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available for investment in properties and other assets, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

Our organizational documents permit us to pay distributions from any source, including offering proceeds or borrowings (which may constitute a return of capital), and our charter does not limit the amount of funds we may use from any source to pay such distributions. We have paid distributions in part from financings and expect that in the future we may not pay distributions solely from our cash flow from operating activities, in which case distributions may be paid in whole or in part from debt financing. We may also fund such distributions with proceeds from the sale of assets or from the maturity, payoff or settlement of debt investments. If we fund distributions from borrowings, our interest expense and other financing costs, as well as the repayment of such borrowings, will reduce our earnings and cash flow from operating activities available for distribution in future periods. If we fund distributions from the sale of assets or the maturity, payoff or settlement of debt investments, this will affect our ability to generate cash flow from operating activities in future periods. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have fewer funds available with which to make real estate investments, the overall return to our stockholders may be reduced and subsequent investors will experience dilution. In addition, to the extent distributions exceed cash flow from operating activities, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder may recognize capital gain. There is no limit on the amount of distributions we may fund from sources other than from cash flow from operating activities.

During our public offering stage, when we may raise capital in this offering (and possibly future offerings) more quickly than we acquire income-producing assets, and from time to time during our operational stage, we may not pay distributions solely from our cash flow from operating activities.

For the ~~year~~three months ended ~~December~~March 31, ~~2016,~~2018, we paid aggregate distributions of ~~$2.7~~$1.1 million, including ~~$1.1~~$0.4 million distributions paid in cash and ~~$1.6~~$0.7 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the ~~year~~three months ended ~~December~~March 31, ~~2016~~2018 was ~~$6.5~~$2.9 million and cash flow ~~provided by~~used in operations was ~~$0.7~~$1.9 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with ~~$2.0 million of~~ cash flow from operating ~~activities and $0.7 million of debt financing.~~activities. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

~~For~~To the ~~nine months ended September 30, 2017,~~extent that we ~~paid aggregate~~pay distributions ~~of $2.8 million, including $1.1 million distributions paid in cash and $1.7 million of distributions reinvested through~~from sources other than our dividend reinvestment plan. Our net loss attributable to common stockholders for the nine months ended September 30, 2017 was $0.8 million and cash flow provided by operations was $10.4 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $1.8 million of cash flow from operating activities, we will have less funds available for the acquisition of real estate investments, the overall return to our stockholders may be reduced and $1.0 million of debt financing. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments.

~~From inception through September 30, 2017, we paid cumulative distributions of $6.5 million and our cumulative net loss during the same period was $11.9 million.~~

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~~PART II. OTHER INFORMATION (CONTINUED)~~

subsequent investors will experience dilution.

We have a history of operating losses and cannot assure ~~you~~our stockholders that we will achieve profitability.

Since our inception in 2013, we have experienced net losses (calculated in accordance with GAAP) for each fiscal year, which have contributed to our cumulative net loss of ~~$11.9~~$17.2 million from inception through ~~September 30, 2017.~~March 31, 2018. Our net loss attributable to common stockholders for the ~~nine~~three months ended ~~September 30,~~March 31, 2018 was $2.9 million. Our net loss attributable to common stockholders for the year ended December 31, 2017, and from inception through December 31, 2017 was ~~$0.8 million.~~$3.3 million and $14.3 million, respectively. Our net loss attributable to common stockholders for the year ended December 31, 2016, and from inception through December 31, 2016 was $6.5 million and $11.1 ~~million, respectively. Our net loss attributable to common stockholders for the year ended December 31, 2015, and from inception through December 31, 2015 was $2.1 million and $4.6~~ million, respectively. The extent of our future operating losses and the timing of when we will achieve profitability are highly uncertain, and we may never achieve or sustain profitability.

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PART II.	OTHER INFORMATION (CONTINUED)

Item 1A. Risk Factors (continued)

Our bylaws designate the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the Circuit Court for Baltimore City, Maryland shall be the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders with respect to our company, our directors, our officers or our employees (we note we currently have no employees). This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors, officers or employees, which may discourage meritorious claims from being asserted against us and our directors, officers and employees. Alternatively, if a court were to find this provision of our bylaws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations. We adopted this provision because we believe it makes it less likely that we will be forced to incur the expense of defending duplicative actions in multiple forums and less likely that plaintiffs’ attorneys will be able to employ such litigation to coerce us into otherwise unjustified settlements, and we believe the risk of a court declining to enforce this provision is remote, as the General Assembly of Maryland has specifically amended the Maryland General Corporation Law to authorize the adoption of such provisions.


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

During the period covered by this Form 10-Q, we sold the following equity securities that were not registered under the Securities Act of 1933. On ~~July~~February 13, ~~2017,~~2018, we issued ~~214,175~~10,935 of Class A shares of common stock for $9.15 per share (or an aggregate purchase price of ~~$2.0~~$0.1 million) to a business associate of Keith D. Hall and Peter McMillan III. The shares were issued in private transactions exempt from the registration requirements pursuant to Section 4(a)(2) of the Securities Act of 1933. We did not pay selling commissions or dealer manager fees with respect to this sale. The purchase price reflects a $0.85 discount to the $10.00 per share offering price in our ongoing initial public offering, reflecting that no selling commissions or dealer manager fees were paid on the sale.

On August 12, 2014, our Registration Statement on Form S-11 (File No. 333-192331), covering a public offering of up to 100,000,000 shares of common stock in a primary offering and 80,000,000 shares of common stock under our dividend reinvestment plan, was declared effective under the Securities Act of 1933. We commenced our initial public offering on August 12, 2014 upon retaining KBS Capital Markets Group LLC, an affiliate of our advisor, as the dealer manager of our offering. Initially, we were offering 100,000,000 shares of common stock in our primary offering at an aggregate offering price of up to $1.0 billion, or $10.00 per share with discounts available to certain categories of purchasers. The 80,000,000 shares offered under our dividend reinvestment plan were initially being offered at an aggregate offering price of $760 million, or $9.50 per share.

On February 11, 2016, we filed an amended registration statement on Form S-11 with the SEC to add a second class of common stock designated as Class T shares and to designate our currently outstanding common stock as Class A shares. Pursuant to the registration statement, as amended, effective February 17, 2016 through June 7, 2017, we ~~are offering up to $1,000,000,000 in shares of our common stock in the primary offering, consisting of two classes of shares:~~offered Class A shares at a price of $10.00 per share and Class T shares at a price of $9.59 per share. Both classes of shares have discounts available to certain categories of purchasers. We ~~are~~ also ~~offering~~offered up to 76,366,006 in shares of our common stock pursuant to our dividend reinvestment plan: Class A shares at a price of $9.50 per share and Class T shares at a price of $9.12 per share. Effective June 8, 2017, Class A shares are being offered at $10.00 per share and Class T shares at $9.63 per share. We are offering to sell any combination of Class A and Class T shares in our primary offering and dividend reinvestment plan offering but in no event may we sell more than 180,000,000 of shares of our common stock pursuant to the offering. We reserve the right to reallocate shares between the primary offering and our dividend reinvestment plan offering. Based on our current estimates, we have allocated 103,633,994 and 76,366,006 shares of our common stock to our primary and dividend reinvestment plan offerings, respectively.

On August 10, 2017, we filed a registration statement on Form S-11 with the SEC to register the Follow-on Offering. Pursuant to the Follow-on Offering registration statement, we propose to register up to $500.0 million of shares of common stock for sale to the public in the primary Follow-on Offering. We also expect to register up to $125.0 million of shares of common stock pursuant to our dividend reinvestment plan in the Follow-on Offering. We can give no assurance that we will commence or complete the Follow-on Offering.

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PART II.	OTHER INFORMATION (CONTINUED)


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds (continued)

As of ~~September 30, 2017,~~March 31, 2018, we had sold ~~10,912,156~~11,793,467 and ~~10,407,804~~11,112,527 shares of Class A and Class T common stock, respectively, in our ongoing initial public offering for aggregate gross offering proceeds of ~~$207.1~~$222.5 million in our initial public offering, including ~~342,508~~443,593 and ~~78,227~~122,861 shares of Class A and Class T common stock, respectively, under our dividend reinvestment plan for aggregate gross offering proceeds of ~~$3.9~~$5.3 million. As of ~~September 30, 2017,~~March 31, 2018, we had incurred selling commissions, dealer manager fees and organization and other offering costs in connection with our initial public offering in the amounts set forth below. We pay selling commissions and dealer manager fees to KBS Capital Markets Group, and KBS Capital Markets Group reallows all selling commissions and a portion of the dealer manager fees to participating broker-dealers. In addition, we reimburse KBS Capital Advisors and KBS Capital Markets Group for certain offering expenses as described in our prospectus, as amended and supplemented.

On February 20, 2018, our board of directors approved the termination of our primary public offering stage effective July 31, 2018. Subscriptions must be dated on or before July 31, 2018, and subscriptions and all related documents and funds must be received by us in good order no later than September 28, 2018.


Type of Expense Amount	Amount (in thousands)		Estimated/Actual	Amount (in thousands)		Estimated/Actual
Selling commissions and dealer manager fees ⁽¹⁾	$	12,968	Actual	$	13,834	Actual
Organization and other offering costs (excluding selling commissions, dealer manager fees and stockholder servicing fees) ⁽²⁾	2,047		Actual	2,193		Actual
Total expenses	$	15,015		$	16,027

⁽¹⁾Except as described in the “Plan of Distribution” section of our prospectus, as amended and supplemented, an annual stockholder servicing fee of 1.0% of the purchase price per share (ignoring any discounts that may be available to certain categories of purchasers) for the Class T shares sold in the primary portion of our initial public offering will be paid to our dealer manager and will accrue daily and be paid monthly in arrears. Our dealer manager will reallow all of the stockholder servicing fees paid to it. The stockholder servicing fee is an ongoing fee that is not paid at the time of purchase and is not intended to be a principal use of offering proceeds; it is therefore not included in the table above. As of ~~September 30, 2017,~~March 31, 2018, we had recorded approximately ~~$1.5~~$1.7 million in stockholder servicing fees, which is the estimated amount of the stockholder servicing fee payable with respect to all Class T shares sold in the primary portion of our initial public offering as of ~~September 30, 2017.~~March 31, 2018.

⁽²⁾Organization and other offering costs (which exclude selling commissions, dealer manager fees and stockholder servicing fees) are capped at 1.0% of gross offering proceeds from the primary portion of our initial public offering. KBS Capital Advisors and its affiliates are responsible for any organization and other offering costs related to the primary portion of our initial public offering that exceed this limit. The amount included above represents our maximum liability for organization and other offering costs based on the 1.0% limit. As of ~~September 30, 2017,~~March 31, 2018, KBS Capital Advisors and its affiliates had incurred an additional ~~$8.2~~$8.3 million in organization and other offering costs on our behalf in connection with our initial public offering.

We expect to use substantially all of the net proceeds from our initial public offering to invest in and manage a diverse portfolio of opportunistic real estate, real estate-related loans, real estate-related debt securities and other real estate-related investments located in the United States and Europe. Such investments will include the acquisition of distressed debt, the origination and acquisition of mortgage, mezzanine, bridge and other real estate-related loans, investment in opportunistic real estate and investments in real estate-related debt securities such as residential and commercial mortgage-backed securities and collateralized debt obligations. We may also invest in entities that make similar investments.

As of ~~September 30, 2017,~~March 31, 2018, we had used the net proceeds from our now terminated private offering and our initial public offering and debt financing to invest ~~$511.6~~$560.0 million in two hotel properties, ~~three~~four office properties, one apartment building, an investment in an unconsolidated entity, a leasehold interest through a joint venture to develop one retail property, ~~and~~ one first mortgage loan and an investment in real estate equity securities, including ~~$12.5~~$17.9 million of acquisition fees and closing costs and origination fees and expenses.

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~~PART II.~~	~~OTHER INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds (continued)~~


c)	On July 3, 2013, our board of directors adopted a share redemption program that has been amended at various times thereafter and that may enable stockholders to sell their shares to us in limited circumstances. The terms of the share redemption program described below are the terms as are currently in effect.

Pursuant to the share redemption program there are several limitations on our ability to redeem shares:

Unless the shares are being redeemed in connection with a stockholder's death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.

During each calendar year, the share redemption program limits the number of shares we may redeem to those that we could purchase with the amount of the net proceeds from the issuance of shares under the dividend reinvestment plan during the prior calendar year. We may, however, increase or decrease the funding available for the redemption of shares pursuant to the program upon ten business days’ notice to our stockholders.

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PART II.	OTHER INFORMATION (CONTINUED)


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.

We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

Pursuant to the program, as amended, unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” (each as defined in the share redemption program), until June 6, 2017 when we established an estimated net asset value or NAV per share of our common stock, the price at which we redeemed the shares was as follows:

~~For those shares held by the redeeming stockholder for at least one year, 92.5% of the price paid to acquire the shares from us;~~

~~For those shares held by the redeeming stockholder for at least two years, 95.0% of the price paid to acquire the shares from us;~~

~~For those shares held by the redeeming stockholder for at least three years, 97.5% of the price paid to acquire the shares from us; and~~

~~For those shares held by the redeeming stockholder for at least four years, 100% of the price paid to acquire the shares from us.~~

Notwithstanding the foregoing, stock dividends were initially redeemed at the “net investment amount” per share, which was based on the “amount available for investment/net investment amount” percentage shown in our estimated use of proceeds table in our prospectus, as amended and supplemented. For each class of shares, this amount initially equaled $9.01 per share for redemptions of shares received as a result of a stock dividend.

On June 6, 2017, our board of directors approved an estimated NAV per share of our common stock of $9.05. As a result, and unless the shares are being redeemed in connection with a stockholder’s death, qualifying disability, or determination of incompetence, the price at which we redeem the shares is as follows:

For those shares held by the redeeming stockholder for at least one year, 92.5% of our most recent estimated NAV per share as of the applicable redemption date;

For those shares held by the redeeming stockholder for at least two years, 95.0% of our most recent estimated NAV per share as of the applicable redemption date;

For those shares held by the redeeming stockholder for at least three years, 97.5% of our most recent estimated NAV per share as of the applicable redemption date; and

For those shares held by the redeeming stockholder for at least four years, 100% of our most recent estimated NAV per share as of the applicable redemption date.

~~Table of Contents~~


~~PART II.~~	~~OTHER INFORMATION (CONTINUED)~~


~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds (continued)~~

For purposes of determining the time period a redeeming stockholder has held each share, the time period begins as of the date the stockholder acquired the share; provided, that shares purchased by the redeeming stockholder pursuant to our dividend reinvestment plan and shares received as a stock dividend will be deemed to have been acquired on the same date as the initial share to which the dividend reinvestment plan shares or stock dividend shares relate. The date of the share’s original issuance by us is not determinative. In addition, as described above, the shares owned by a stockholder may be redeemed at different prices depending on how long the stockholder has held each share submitted for redemption.

~~We expect to update our estimated NAV per share annually in December.~~

The terms of our share redemption program with respect to redemptions sought upon a stockholder’s death, qualifying disability or determination of incompetence are as follows:

There is no one-year holding requirement;

Additional funds in an amount up to $500,000 are available for redemption;

Until we established an estimated NAV per share on June 6, 2017, the redemption price was the amount paid to acquire the shares from us; provided that, stock dividends will initially be redeemed at the “net investment amount” per share, which was based on the “amount available for investment/net investment amount” percentage shown in our estimated use of proceeds table in our prospectus for our initial public offering, as amended and supplemented. For each class of shares, this amount initially equaled $9.01 per share for redemptions of shares received as a result of a stock dividend; and

~~Once we have established an estimated NAV per share (which occurred in June 6, 2017), the~~The redemption price is the estimated NAV of the shares, as determined by our board of directors.

Upon a transfer of shares any pending redemption requests with respect to such transferred shares will be canceled as of the date we accept the transfer. Stockholders wishing to continue to have a redemption request related to any transferred shares considered by us must resubmit their redemption request.

Our board may amend, suspend or terminate the share redemption program upon 30 days’ notice to stockholders, provided that we may increase or decrease the funding available for the redemption of shares pursuant to the share redemption program upon 10 business days’ notice.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we fulfilled redemption requests and redeemed shares pursuant to the share redemption program as follows:

Month
Total Number
of Shares Redeemed

Average Price Paid
Per Share⁽¹⁾
Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2017 —
$ —

⁽²⁾
February 2017 12,209
$ 8.88

⁽²⁾
March 2017 11,520
$ 9.36

⁽²⁾
April 2017 1,706
$ 9.15

⁽²⁾
May 2017 2,123
$ 9.58

⁽²⁾
June 2017 5,806
$ 8.52

⁽²⁾
July 2017 1,195
$ 8.37

⁽²⁾
August 2017 27,166
$ 8.64

⁽²⁾
September 2017 10,257
$ 8.59

⁽²⁾
Total 71,982



Month	Total Number of Shares Redeemed	Average Price Paid Per Share⁽¹⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2018	72,262	$	8.82	⁽²⁾
February 2018	10,602	$	8.37	⁽²⁾
March 2018	11,025	$	8.57	⁽²⁾
Total	93,889

_____________________

⁽¹⁾Pursuant to the program, as amended, we will redeem shares at the purchase prices described above.

⁽²⁾We limit the dollar value of shares that may be redeemed under the program as described above. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, we redeemed ~~$0.6~~$0.8 million of common stock, which represented all redemption requests received in good order and eligible for redemption through the ~~September 2017~~March 2018 redemption date. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during ~~2017~~2018 and the ~~$0.5~~$0.2 million set aside for stockholder’s death, qualifying disability or determination of incompetence, we have ~~$1.5~~$1.8 million available for redemptions during the remainder of ~~2017,~~2018, subject to the limitations described above.

5550

Table of Contents

PART II. OTHER INFORMATION (CONTINUED)


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

None.


Item 5.	Other Information

None.

5651

Table of Contents


PART II.	OTHER INFORMATION (CONTINUED)


Item 6.	Exhibits



Ex.		Description

3.1		Second Articles of Amendment and Restatement adopted on August 11, 2014, incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed September 19, 2014

3.2		Second Amended and Restated Bylaws adopted August 6, 2015, incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2015, filed August 11, 2015

3.3		Articles Supplementary for the Class T Shares of common stock dated February 16, 2016, incorporated by reference to Exhibit 3.3 to Post-Effective Amendment no. 4 to the Company’s Registration Statement on Form S-11, Commission File no. 333-192331, filed February 16, 2016

3.4		Articles Supplementary for the Class A Shares of common stock dated February 16, 2016, incorporated by reference to Exhibit 3.4 to Post-Effective Amendment no. 4 to the Company’s Registration Statement on Form S-11, Commission File no. 333-192331, filed February 16, 2016

3.5		Articles of Amendment dated February 16, 2016, incorporated by reference to Exhibit 3.5 to Post-Effective Amendment no. 4 to the Company’s Registration Statement on Form S-11, Commission File no. 333-192331, filed February 16, 2016

4.1		Form of Subscription Agreement, incorporated by reference to Appendix A to the prospectus filed in Post-Effective Amendment no. 10 to the Company’s Registration Statement on Form S-11, Commission File no. 333-192331, filed April 18, 2017

4.2		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 by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed September 19, 2014

4.3		Fourth Amended and Restated Dividend Reinvestment Plan adopted May 18, 2017, incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, filed May 24, 2017

4.4		Escrow Agreement dated January 22, 2016, incorporated by reference to Exhibit 4.5 to Post-Effective Amendment no. 3 to the Company’s Registration Statement on Form S-11, Commission File No. 333-192331, dated February 11, 2016

4.5		Amended and Restated Multiple Class Plan, effective as of May 18, 2017, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 24, 2017

~~10.1~~		Assignment and Assumption of Contract of Sale, by and between KBS Capital Advisors and KBS SOR II Oakland City Center, LLC, dated as of July 10, 2017, incorporated by reference to Exhibit 10.58 to the Company's Registration Statement on Form S-11 (No. 333-192331), filed August 10, 2017

~~10.2~~		Promissory Note, by KBS SOR II Oakland City Center, LLC for the benefit of Bank of America, National Association, dated August 18, 2017, incorporated by reference to Exhibit 10.60 to Post-Effective Amendment no. 13 to the Company's Registration Statement on Form S-11, Commission File no. 333-192331, filed October 4, 2017

~~10.3~~		Loan Agreement, by and between KBS SOR II Oakland City Center, LLC and Bank of America, N.A., dated August 18, 2017, incorporated by reference to Exhibit 10.61 to Post-Effective Amendment no. 13 to the Company's Registration Statement on Form S-11, Commission File no. 333-192331, filed October 4, 2017

~~10.4~~		Guaranty Agreement, by KBS SOR US Properties II LLC for the benefit of Bank of America, N.A., dated August 18, 2017, incorporated by reference to Exhibit 10.62 to Post-Effective Amendment no. 13 to the Company's Registration Statement on Form S-11, Commission File no. 333-192331, filed October 4, 2017

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

~~Table of Contents~~


~~PART II.~~	~~OTHER INFORMATION (CONTINUED)~~


~~Item 6.~~	~~Exhibits~~



99.1		Third Amended and Restated Share Redemption Program adopted February 16, 2016, incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K, filed February 22, 2016

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		KBS STRATEGIC OPPORTUNITY REIT II, INC.

Date:	~~November 14, 2017~~May 11, 2018	By:	/S/ KEITH D. HALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Date:	~~November 14, 2017~~May 11, 2018	By:	/S/ JEFFREY K. WALDVOGEL
			Jeffrey K. Waldvogel
			Chief Financial Officer, Treasurer and Secretary
			(principal financial officer)

5953



Three Months Ended September 30,	Amount Declared per Share Outstanding ⁽¹⁾	Total Shares Issued
2016	0.005001 shares	71,656
2017	0.005001 shares	131,477



Nine Months Ended September 30,	Amount Declared per Share Outstanding ⁽¹⁾	Total Shares Issued
2016	0.015002 shares	168,866
2017	0.015003 shares	357,215



								Intangibles
Property Name	City	State	Acquisition Date	Land		Building and Improvements		Tenant Origination and Absorption Costs		Above-Market Lease Assets		Below-Market Lease Liabilities			Total Purchase Price
Oakland City Center	Oakland	CA	08/18/2017	$	22,150	$	136,544	$	11,951	$	—	$	(11,872	)	$	158,773



	Three Months Ended September 30, 2017		Nine Months Ended September 30, 2017
Apartment revenues:
Rental income	$	1,638	$	4,856
Tenant reimbursements and other income	108		328
Apartment revenues	$	1,746	$	5,184

Apartment expenses:
Operating, maintenance, and management	$	683	$	1,704
Real estate taxes and insurance	343		1,020
Apartment expenses	$	1,026	$	2,724



Property	Number of Rooms	Percentage Occupied for the Nine Months Ended September 30, 2017	Average Revenue per Available Room	Average Daily Rate
Springmaid Beach Resort ⁽¹⁾	452	79.1%	$109.47	$138.31
Q&C Hotel	196	67.3%	$108.11	$160.64



Month	Total Number of Shares Redeemed	Average Price Paid Per Share⁽¹⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2017	—	$	—	⁽²⁾
February 2017	12,209	$	8.88	⁽²⁾
March 2017	11,520	$	9.36	⁽²⁾
April 2017	1,706	$	9.15	⁽²⁾
May 2017	2,123	$	9.58	⁽²⁾
June 2017	5,806	$	8.52	⁽²⁾
July 2017	1,195	$	8.37	⁽²⁾
August 2017	27,166	$	8.64	⁽²⁾
September 2017	10,257	$	8.59	⁽²⁾
Total	71,982

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