UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020


☐			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

PACIFIC OAK 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.)

11150 Santa Monica Blvd., Suite 400

Los Angeles,

California

90025

(Address of Principal Executive Offices)

(Zip Code)

(424) 208-8100

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________________________

Securities registered pursuant to Section 12(b) for the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

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

Large Accelerated Filer

☐

Accelerated Filer

☐

Non-Accelerated Filer

☒

Smaller reporting company

☒

Emerging growth company

☒☐

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

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

~~Securities registered pursuant to Section 12(b) for the Act:~~


~~Title of each class~~	~~Trading Symbol(s)~~	~~Name of each exchange on which registered~~
~~None~~	~~N/A~~	~~N/A~~

As of ~~November 4, 2019,~~May 12, 2020, there were ~~17,949,244~~17,842,301 and ~~12,269,483~~12,222,534 outstanding shares of Class A and Class T common stock, respectively, of Pacific Oak Strategic Opportunity REIT II, Inc.

Table of Contents

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

FORM 10-Q

~~September 30, 2019~~March 31, 2020

INDEX

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets as of ~~September~~ ~~30, 2019~~March 31, 2020 (unaudited) and December 31, ~~2018~~2019

Consolidated Statements of Operations (unaudited) for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2020 and 2019 ~~and 2018~~

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2020 and 2019 ~~and 2018~~

Consolidated Statements of Equity (unaudited) for the Three ~~and~~ ~~Nine~~Months Ended ~~September~~ ~~30,~~March 31, 2020 and 2019 ~~and 2018~~

Consolidated Statement of Cash Flows (unaudited) for the ~~Nine~~Three Months Ended ~~September~~ ~~30,~~ March 31, 2020 and 2019 ~~and 2018~~

Condensed Notes to Consolidated Financial Statements as of ~~September~~ ~~30, 2019~~March 31, 2020 (unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3528

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

5240

Item 4.

Controls and Procedures

PART II.

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

5442

Item 3.

Defaults upon Senior Securities

5544

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
		(unaudited)					(unaudited)
Assets	Assets					Assets
Real estate, net	Real estate, net	$	507,427	$	511,606	Real estate, net	$	492,719	$	493,683
Real estate equity securities	Real estate equity securities	9,818		7,230		Real estate equity securities	10,095		9,934
Total real estate and real estate-related investments, net	Total real estate and real estate-related investments, net	517,245		518,836		Total real estate and real estate-related investments, net	502,814		503,617
Cash and cash equivalents	Cash and cash equivalents	30,524		21,063		Cash and cash equivalents	7,913		17,500
Restricted cash	Restricted cash	6,858		5,795		Restricted cash	4,440		5,976
Investment in unconsolidated entity		539		2,868
Investment in unconsolidated entities						Investment in unconsolidated entities	3,121		3,468
Rents and other receivables	Rents and other receivables	4,996		5,612		Rents and other receivables	4,298		4,648
Above-market leases, net	Above-market leases, net	51		65		Above-market leases, net	41		44
Prepaid expenses and other assets	Prepaid expenses and other assets	8,895		8,239		Prepaid expenses and other assets	9,864		8,230
Total assets	Total assets	$	569,108	$	562,478	Total assets	$	532,491	$	543,483
Liabilities and equity	Liabilities and equity					Liabilities and equity
Notes payable, net	Notes payable, net	$	347,530	$	326,543	Notes payable, net	$	326,236	$	325,995
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	9,136		7,226		Accounts payable and accrued liabilities	8,415		6,684
Due to affiliates	Due to affiliates	251		235		Due to affiliates	1,132		649
Distributions payable	Distributions payable	241		484		Distributions payable	—		242
Below-market leases, net	Below-market leases, net	5,309		7,348		Below-market leases, net	4,135		4,677
Other liabilities	Other liabilities	12,485		13,176		Other liabilities	12,726		12,776
Redeemable common stock payable	Redeemable common stock payable	1,907		3,028		Redeemable common stock payable	632		2,218
Total liabilities	Total liabilities	376,859		358,040		Total liabilities	353,276		353,241
Commitments and contingencies (Note 11)
Redeemable common stock		—		—
Commitments and contingencies (Note 10)						Commitments and contingencies (Note 10)

Equity	Equity					Equity
Pacific Oak Strategic Opportunity REIT II, Inc. stockholders’ equity	Pacific Oak Strategic Opportunity REIT II, Inc. stockholders’ equity					Pacific Oak Strategic Opportunity REIT II, Inc. stockholders’ equity
Preferred stock, $.01 par value per share; 10,000,000 shares authorized, 0 shares issued and outstanding	Preferred stock, $.01 par value per share; 10,000,000 shares authorized, 0 shares issued and outstanding	—		—		Preferred stock, $.01 par value per share; 10,000,000 shares authorized, 0 shares issued and outstanding	—		—
Class A common stock, $.01 par value per share; 500,000,000 shares authorized, 17,934,013 and 18,103,437 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		179		181
Class T common stock, $.01 par value per share; 500,000,000 shares authorized, 12,255,327 and 12,208,242 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		123		122
Class A common stock, $.01 par value per share; 500,000,000 shares authorized, 17,842,301 and 17,949,194 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively						Class A common stock, $.01 par value per share; 500,000,000 shares authorized, 17,842,301 and 17,949,194 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	178		179
Class T common stock, $.01 par value per share; 500,000,000 shares authorized, 12,222,534 and 12,272,927 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively						Class T common stock, $.01 par value per share; 500,000,000 shares authorized, 12,222,534 and 12,272,927 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	123		123
Additional paid-in capital	Additional paid-in capital	266,320		266,339		Additional paid-in capital	266,312		266,310
Cumulative distributions and net losses	Cumulative distributions and net losses	(82,792)		(73,461)		Cumulative distributions and net losses	(94,809)		(84,339)
Accumulated other comprehensive income		—		89

Total Pacific Oak Strategic Opportunity REIT II, Inc. stockholders’ equity	Total Pacific Oak Strategic Opportunity REIT II, Inc. stockholders’ equity	183,830		193,270		Total Pacific Oak Strategic Opportunity REIT II, Inc. stockholders’ equity	171,804		182,273
Noncontrolling interests	Noncontrolling interests	8,419		11,168		Noncontrolling interests	7,411		7,969
Total equity	Total equity	192,249		204,438		Total equity	179,215		190,242
Total liabilities and equity	Total liabilities and equity	$	569,108	$	562,478	Total liabilities and equity	$	532,491	$	543,483

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK 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,
		2019		2018		2019		2018			2020		2019
Revenues:	Revenues:									Revenues:
Office revenues	Office revenues	$	7,358	$	7,515	$	21,669	$	22,475	Office revenues	$	7,096	$	7,117
Hotel revenues	Hotel revenues	9,271		10,461		25,318		26,234		Hotel revenues	4,080		5,980
Apartment revenues	Apartment revenues	2,014		1,940		5,979		5,459		Apartment revenues	2,056		1,995
Dividend income from real estate equity securities	Dividend income from real estate equity securities	104		77		313		113		Dividend income from real estate equity securities	139		104
Interest income from real estate loan receivable		—		—		—		10

Total revenues	Total revenues	18,747		19,993		53,279		54,291		Total revenues	13,371		15,196
Expenses:	Expenses:									Expenses:
Office expenses	Office expenses	3,493		3,241		10,317		8,951		Office expenses	3,374		3,397
Hotel expenses	Hotel expenses	6,249		6,106		17,560		17,161		Hotel expenses	4,661		5,175
Apartment expenses	Apartment expenses	927		976		2,707		2,858		Apartment expenses	811		897
Asset management fees to affiliate	Asset management fees to affiliate	1,026		1,020		3,137		2,940		Asset management fees to affiliate	1,044		1,049
General and administrative expenses	General and administrative expenses	892		704		2,368		1,947		General and administrative expenses	1,643		707
Depreciation and amortization	Depreciation and amortization	5,133		5,150		15,314		15,322		Depreciation and amortization	4,896		5,074
Interest expense	Interest expense	5,210		3,435		15,197		9,740		Interest expense	4,126		4,961
Impairment charge on real estate		—		4,245		—		4,245

Total expenses	Total expenses	22,930		24,877		66,600		63,164		Total expenses	20,555		21,260
Other income:
Other (loss) income:										Other (loss) income:
Other interest income	Other interest income	125		105		237		257		Other interest income	35		64
Equity in income of unconsolidated entity	Equity in income of unconsolidated entity	—		94		2,800		225		Equity in income of unconsolidated entity	—		2,800
Gain (loss) on real estate equity securities		1,253		(486)		2,588		(172)
Loss on extinguishment of debt		(90)		—		(90)		—
Total other income (loss)		1,288		(287)		5,535		310
Net loss before income taxes		(2,895)		(5,171)		(7,786)		(8,563)
Income tax benefit		—		—		—		9
(Loss) gain on real estate equity securities										(Loss) gain on real estate equity securities	(3,889)		1,114

Total other (loss) income										Total other (loss) income	(3,854)		3,978

Net loss	Net loss	(2,895)		(5,171)		(7,786)		(8,554)		Net loss	(11,038)		(2,086)
Net loss attributable to noncontrolling interests	Net loss attributable to noncontrolling interests	338		208		1,109		421		Net loss attributable to noncontrolling interests	568		551
Net loss attributable to common stockholders	Net loss attributable to common stockholders	$	(2,557)	$	(4,963)	$	(6,677)	$	(8,133)	Net loss attributable to common stockholders	$	(10,470)	$	(1,535)

Class A Common Stock:	Class A Common Stock:									Class A Common Stock:
Net loss attributable to common stockholders	Net loss attributable to common stockholders	$	(1,519)	$	(2,914)	$	(3,971)	$	(4,514)	Net loss attributable to common stockholders	$	(6,216)	$	(914)
Net loss per common share, basic and diluted	Net loss per common share, basic and diluted	$	(0.08)	$	(0.16)	$	(0.22)	$	(0.26)	Net loss per common share, basic and diluted	$	(0.35)	$	(0.05)
Weighted-average number of common shares outstanding, basic and diluted	Weighted-average number of common shares outstanding, basic and diluted	17,937,658		17,968,924		17,949,375		17,670,771		Weighted-average number of common shares outstanding, basic and diluted	17,879,627		17,984,563

Class T Common Stock:	Class T Common Stock:									Class T Common Stock:
Net loss attributable to common stockholders	Net loss attributable to common stockholders	$	(1,038)	$	(2,049)	$	(2,706)	$	(3,619)	Net loss attributable to common stockholders	$	(4,254)	$	(621)
Net loss per common share, basic and diluted	Net loss per common share, basic and diluted	$	(0.08)	$	(0.17)	$	(0.22)	$	(0.31)	Net loss per common share, basic and diluted	$	(0.35)	$	(0.05)
Weighted-average number of common shares outstanding, basic and diluted	Weighted-average number of common shares outstanding, basic and diluted	12,251,341		12,065,049		12,231,856		11,753,608		Weighted-average number of common shares outstanding, basic and diluted	12,241,151		12,213,311

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2020		2019
Net loss	$	(11,038)	$	(2,086)
Other comprehensive loss:
Foreign currency translation loss	—		(52)

Total other comprehensive loss	—		(52)
Total comprehensive loss	(11,038)		(2,138)
Total comprehensive loss attributable to noncontrolling interests	568		551
Total comprehensive loss attributable to common stockholders	$	(10,470)	$	(1,587)

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended March 31, 2020 and 2019

(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
	Class A				Class T
	Shares	Amounts		Shares	Amounts
Balance, December 31, 2019	17,949,194	$	179	12,272,927	$	123	$	266,310	$	(84,339)	$	—	$	182,273	$	7,969	$	190,242
Net loss	—	—		—	—		—		(10,470)		—		(10,470)		(568)		(11,038)
Issuance of common stock	6,552	—		6,290	—		135		—		—		135		—		135
Redemptions of common stock	(113,445)	(1)		(56,683)	—		(1,719)		—		—		(1,720)		—		(1,720)
Transfers from redeemable common stock	—	—		—	—		1,586		—		—		1,586		—		1,586

Noncontrolling interest contributions	—	—		—	—		—		—		—		—		10		10
Balance, March 31, 2020	17,842,301	$	178	12,222,534	$	123	$	266,312	$	(94,809)	$	—	$	171,804	$	7,411	$	179,215

	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
	Shares	Amounts		Shares	Amounts
Balance, December 31, 2018	18,103,437	$	181	12,208,242	$	122	$	266,339	$	(73,461)	$	89	$	193,270	$	11,168	$	204,438
Net loss	—	—		—	—		—		(1,535)		—		(1,535)		(551)		(2,086)
Other comprehensive loss	—	—		—	—		—		—		(52)		(52)		—		(52)
Issuance of common stock	49,225	—		43,979	—		899		—		—		899		—		899

Redemptions of common stock	(226,534)	(2)		(35,977)	—		(2,492)		—		—		(2,494)		—		(2,494)
Transfers from redeemable common stock	—	—		—	—		1,574		—		—		1,574		—		1,574
Distributions declared	—	—		—	—		—		(1,206)		—		(1,206)		—		(1,206)


Noncontrolling interest contributions	—	—		—	—		—		—		—		—		110		110

Balance, March 31, 2019	17,926,128	$	179	12,216,244	$	122	$	266,320	$	(76,202)	$	37	$	190,456	$	10,727	$	201,183

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)~~

~~(unaudited)~~

~~(in thousands)~~

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net loss $ (2,895) $ (5,171) $ (7,786) $ (8,554)
Other comprehensive loss:
Foreign currency translation loss — (16) (25) (84)
Reclassification adjustment for amounts recognized in net loss — — (64) —
Total other comprehensive loss — (16) (89) (84)
Total comprehensive loss (2,895) (5,187) (7,875) (8,638)
Total comprehensive loss attributable to noncontrolling interests 338 208 1,109 421
Total comprehensive loss attributable to common stockholders $ (2,557) $ (4,979) $ (6,766) $ (8,217)

~~See accompanying condensed notes to consolidated financial statements.~~

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONSOLIDATED STATEMENTS OF EQUITY~~

~~For the Three Months Ended September 30, 2019 and 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
Class A Class T
Shares Amounts Shares Amounts
Balance, June 30, 2019 17,925,774 $ 179 12,238,090 $ 123 $ 266,320 $ (79,511) $ — $ 187,111 $ 10,507 $ 197,618
Net loss — — — — — (2,557) — (2,557) (338) (2,895)
Issuance of common stock 23,927 — 21,664 — 439 — — 439 — 439
Redemptions of common stock (15,688) — (4,427) — (194) — — (194) — (194)
Transfers to redeemable common stock — — — — (245) — — (245) — (245)
Distributions declared — — — — — (724) — (724) — (724)
Distributions to noncontrolling interests — — — — — — — — (1,750) (1,750)
Balance, September 30, 2019 17,934,013 $ 179 12,255,327 $ 123 $ 266,320 $ (82,792) $ — $ 183,830 $ 8,419 $ 192,249
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
Shares Amounts Shares Amounts
Balance, June 30, 2018 17,619,873 $ 176 11,770,887 $ 118 $ 259,191 $ (47,614) $ 134 $ 212,005 $ 13,352 $ 225,357
Net loss — — — — — (4,963) — (4,963) (208) (5,171)
Other comprehensive loss — — — — — — (16) (16) — (16)
Issuance of common stock 284,944 3 272,508 2 5,369 — — 5,374 — 5,374
Stock dividends issued 88,816 1 59,596 1 1,341 (1,343) — — — —
Redemptions of common stock (30,434) — (2,255) — (295) — — (295) — (295)
Transfers to redeemable common stock — — — — (474) — — (474) — (474)
Distributions declared — — — — — (1,349) — (1,349) — (1,349)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate — — — — (280) — — (280) — (280)
Other offering costs — — — — (45) — — (45) — (45)
Noncontrolling interests contributions — — — — — — — — 536 536
Distributions to noncontrolling interests — — — — — — — — (150) (150)
Balance, September 30, 2018 17,963,199 $ 180 12,100,736 $ 121 $ 264,807 $ (55,269) $ 118 $ 209,957 $ 13,530 $ 223,487

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

~~CONSOLIDATED STATEMENTS OF EQUITY~~

~~For the Nine Months Ended September 30, 2019 and 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
Class A Class T
Shares Amounts Shares Amounts
Balance, December 31, 2018 18,103,437 $ 181 12,208,242 $ 122 $ 266,339 $ (73,461) $ 89 $ 193,270 $ 11,168 $ 204,438
Net loss — — — — — (6,677) — (6,677) (1,109) (7,786)
Other comprehensive loss — — — — — — (89) (89) — (89)
Issuance of common stock 97,476 1 87,489 1 1,784 — — 1,786 — 1,786
Redemptions of common stock (266,900) (3) (40,404) — (2,924) — — (2,927) — (2,927)
Transfers from redeemable common stock — — — — 1,121 — — 1,121 — 1,121
Distributions declared — — — — — (2,654) — (2,654) — (2,654)
Noncontrolling interests contributions — — — — — — — — 210 210
Distributions to noncontrolling interests — — — — — — — — (1,850) (1,850)
Balance, September 30, 2019 17,934,013 $ 179 12,255,327 $ 123 $ 266,320 $ (82,792) $ — $ 183,830 $ 8,419 $ 192,249
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
Shares Amounts Shares Amounts
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 — — — — — (8,133) — (8,133) (421) (8,554)
Other comprehensive loss — — — — — — (84) (84) — (84)
Issuance of common stock 1,047,279 10 937,874 9 19,074 — — 19,093 — 19,093
Stock dividends issued 260,498 3 173,135 2 3,919 (3,924) — — — —
Redemptions of common stock (233,518) (2) (42,168) — (2,415) — — (2,417) — (2,417)
Transfers from redeemable common stock — — — — 291 — — 291 — 291
Distributions declared — — — — — (3,555) — (3,555) — (3,555)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate — — — — (965) — — (965) — (965)
Other offering costs — — — — (174) — — (174) — (174)
Noncontrolling interests contributions — — — — — — — — 1,054 1,054
Distributions to noncontrolling interests — — — — — — — — (500) (500)
Balance, September 30, 2018 17,963,199 $ 180 12,100,736 $ 121 $ 264,807 $ (55,269) $ 118 $ 209,957 $ 13,530 $ 223,487

~~See accompanying condensed notes to consolidated financial statements.~~

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


		For the Nine Months Ended September 30,							For the Three Months Ended March 31,
		2019		2018			2020		2019
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:					Cash Flows from Operating Activities:
Net loss	Net loss	$	(7,786)	$	(8,554)	Net loss	$	(11,038)	$	(2,086)
Adjustment to reconcile net loss to net cash provided by operating activities
Adjustment to reconcile net loss to net cash used in operating activities						Adjustment to reconcile net loss to net cash used in operating activities
Equity in income of unconsolidated entity	Equity in income of unconsolidated entity	(2,800)		(225)		Equity in income of unconsolidated entity	—		(2,800)
Distribution of earnings from unconsolidated joint venture		—		29

Depreciation and amortization	Depreciation and amortization	15,314		15,322		Depreciation and amortization	4,896		5,074
Impairment charge on real estate		—		4,245
(Gain) loss on real estate equity securities		(2,588)		172
Loss on extinguishment of debt		90		—

Loss (gain) on real estate equity securities						Loss (gain) on real estate equity securities	3,889		(1,114)

Deferred rents	Deferred rents	(413)		(1,244)		Deferred rents	(255)		(96)
Bad debt expense		—		285

Amortization of above- and below-market leases, net	Amortization of above- and below-market leases, net	(2,025)		(2,656)		Amortization of above- and below-market leases, net	(539)		(698)
Amortization of deferred financing costs	Amortization of deferred financing costs	1,271		794		Amortization of deferred financing costs	524		406
Foreign currency translation gain		(64)		—

Unrealized gain on derivative instruments	Unrealized gain on derivative instruments	(24)		(84)		Unrealized gain on derivative instruments	(13)		(71)
Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Rents and other receivables	Rents and other receivables	1,029		(2,521)		Rents and other receivables	575		(1,746)
Prepaid expenses and other assets	Prepaid expenses and other assets	(1,404)		(1,633)		Prepaid expenses and other assets	(1,862)		(1,518)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	1,720		538		Accounts payable and accrued liabilities	766		138
Due to affiliates	Due to affiliates	28		20		Due to affiliates	412		48
Other liabilities	Other liabilities	(495)		1,115		Other liabilities	67		1,352
Net cash provided by operating activities		1,853		5,603
Net cash used in operating activities						Net cash used in operating activities	(2,578)		(3,111)
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:
Improvements to real estate	Improvements to real estate	(9,840)		(6,485)		Improvements to real estate	(2,802)		(3,278)
Investment in real estate securities	Investment in real estate securities	(4)		(6,986)		Investment in real estate securities	(3,979)		(4)
Payments for construction costs	Payments for construction costs	(437)		(4,796)		Payments for construction costs	(11)		(240)
Payoff of real estate loan receivable		—		3,500
Distribution of capital from unconsolidated joint venture		5,104		—
Purchase of interest rate cap agreement		(48)		(8)
Proceeds from termination of derivative instruments		145		—
Proceeds from insurance claims		—		237
Investment in unconsolidated entities						Investment in unconsolidated entities	(36)		—
Distribution of capital from unconsolidated entities						Distribution of capital from unconsolidated entities	383		—

Net cash used in investing activities	Net cash used in investing activities	(5,080)		(14,538)		Net cash used in investing activities	(6,445)		(3,522)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Proceeds from notes payable	Proceeds from notes payable	135,778		2,058		Proceeds from notes payable	84		3,147
Principal payments on notes payable	Principal payments on notes payable	(113,881)		(5,154)		Principal payments on notes payable	(348)		(4,400)
Payments of deferred financing costs	Payments of deferred financing costs	(2,272)		(100)		Payments of deferred financing costs	(19)		(22)
Principal payments on finance lease obligations		(196)		(175)
Proceeds from issuance of common stock		—		16,921

Payments to redeem common stock	Payments to redeem common stock	(2,927)		(2,417)		Payments to redeem common stock	(1,720)		(2,494)
Payments of commissions on stock sales, dealer manager fees and stockholder servicing fees		—		(1,645)
Payments of other offering costs		—		(1,162)

Distributions paid	Distributions paid	(1,111)		(1,322)		Distributions paid	(107)		(550)
Noncontrolling interest contributions	Noncontrolling interest contributions	210		1,054		Noncontrolling interest contributions	10		110
Distributions to noncontrolling interest		(1,850)		(500)
Net cash provided by financing activities		13,751		7,558
Net increase (decrease) in cash, cash equivalents and restricted cash		10,524		(1,377)

Net cash used in financing activities						Net cash used in financing activities	(2,100)		(4,209)
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(11,123)		(10,842)
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	26,858		35,053		Cash, cash equivalents and restricted cash, beginning of period	23,476		26,858
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	$	37,382	$	33,676	Cash, cash equivalents and restricted cash, end of period	$	12,353	$	16,016
Supplemental Disclosure of Cash Flow Information:	Supplemental Disclosure of Cash Flow Information:					Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $0 and $3,920 for the nine months ended September 30, 2019 and 2018, respectively		$	14,527	$	8,101
Interest paid, net of capitalized interest of $36 and $0 for the three months ended March 31, 2020 and 2019, respectively						Interest paid, net of capitalized interest of $36 and $0 for the three months ended March 31, 2020 and 2019, respectively	$	3,525	$	4,417
Supplemental Disclosure of Noncash Investing and Financing Activities:	Supplemental Disclosure of Noncash Investing and Financing Activities:					Supplemental Disclosure of Noncash Investing and Financing Activities:
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	1,786	$	2,126	Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	135	$	899
Stock dividends issued		$	—	$	3,924

Foreign currency translation loss on investment in unconsolidated entity	Foreign currency translation loss on investment in unconsolidated entity	$	(25)	$	(84)	Foreign currency translation loss on investment in unconsolidated entity	$	—	$	(52)
Redemption payable	Redemption payable	$	1,907	$	2,126	Redemption payable	$	632	$	1,454
Accrued improvements to real estate	Accrued improvements to real estate	$	1,698	$	1,020	Accrued improvements to real estate	$	2,123	$	1,158
Other offering costs due to affiliates		$	—	$	54
Acquisition fees due to affiliates		$	8	$	133

Distributions payable	Distributions payable	$	241	$	473	Distributions payable	$	—	$	242
Construction cost payable	Construction cost payable	$	13	$	682	Construction cost payable	$	—	$	55

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2019~~March 31, 2020

(unaudited)

1.ORGANIZATION

Pacific Oak Strategic Opportunity REIT II, Inc. ~~(formerly known as 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 Pacific Oak 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. Pacific Oak 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 3 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 was externally managed by KBS Capital Advisors LLC ~~(the “Advisor”~~(“KBS Capital Advisors”), an affiliate of the Company, since July 2013 pursuant to an advisory agreement the Company renewed with ~~the Advisor~~KBS Capital Advisors on September 26, ~~2019 (the “Advisory Agreement”). The Advisor~~2019. KBS Capital Advisors conducted the Company’s operations and managed its portfolio of real estate loans, opportunistic real estate and other real estate-related investments. On October 31, 2019, ~~the Advisor~~KBS Capital Advisors ceased to serve as the ~~Company’s~~Company's advisor or have any advisory responsibility to the Company immediately following the filing of the ~~Company’s~~Company's Quarterly Report on Form 10-Q for the period ~~ending~~ended September 30, 2019 ~~(the “Third Quarter 10-Q”)~~(filed November 8, 2019) with the Securities and Exchange Commission (the “SEC”). On November 1, 2019, the Company entered into an advisory agreement (the “Advisory Agreement”) with Pacific Oak Capital Advisors, LLC ~~(“Pacific Oak Capital Advisors”~~(the “Advisor”). The ~~advisory agreement~~Advisory Agreement is effective as of November 1, 2019 through November 1, 2020; however the Company may terminate the ~~advisory agreement~~Advisory Agreement without cause or penalty upon providing 30 days’ written notice and ~~Pacific Oak Capital Advisors~~the Advisor may terminate the ~~advisory agreement~~Advisory Agreement without cause or penalty upon providing 90 days’ written notice. The terms of the ~~advisory agreement~~Advisory Agreement are consistent with those of the advisory agreement that was previously in effect with ~~the Advisor. The Advisor has~~KBS Capital Advisors. KBS Capital Advisors previously entered into a sub-advisory agreement with STAM Europe (“STAM”), a real estate operating company based in Paris, France, to provide real estate acquisition and portfolio management services to ~~the Advisor~~KBS Capital Advisors in connection with any investments the Company may make in value-added real estate, distressed debt, and real estate-related investments in Europe. Effective April 17, 2019, STAM terminated the sub-advisory agreement with ~~the Advisor. 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.~~KBS Capital Advisors.

The Company has invested in and manages a portfolio of opportunistic real estate, ~~real estate-related loans,~~ real estate equity securities and other real estate-related investments located in the United States and Europe. As of ~~September 30, 2019,~~March 31, 2020, the Company had invested in 2 hotel properties, 43 office properties, 1 apartment building, ~~an investment~~2 investments in an unconsolidated ~~entity~~entities and an investment in real estate equity securities. Additionally, as of ~~September 30, 2019,~~March 31, 2020, the Company had entered into a consolidated joint venture to develop 1 office/retail property.

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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

On November 14, 2013, the Company filed a registration statement on Form S-11 with 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~~offered 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,~~Company’s former advisor, served 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 iswas responsible for marketing the Company’s shares. The Company ceased offering shares of common stock in the primary portion of the Public Offering on July 31, 2018 and terminated the primary portion of the Public Offering on September 28, 2018. The Company continues to offer shares of common stock under its dividend reinvestment plan. In some states, the Company will need to renew the registration statement annually or file a new registration statement to continue its dividend reinvestment plan offering. The Company may terminate its dividend reinvestment plan offering at any time.

The Company sold 11,977,758 and 11,537,701 shares of Class A and Class T common stock, respectively, in the Public Offering for aggregate gross offering proceeds of $228.6 million. As of ~~September 30, 2019,~~March 31, 2020, the Company had sold ~~699,941~~730,193 and ~~312,627~~340,131 shares of Class A and Class T common stock, respectively, under its dividend reinvestment plan for aggregate gross offering proceeds of ~~$9.4~~$10.0 million. Also as of ~~September 30, 2019,~~March 31, 2020, the Company had redeemed ~~710,444~~832,408 and ~~104,330~~164,618 shares of Class A and Class T common stock, respectively, for ~~$7.3~~$9.2 million.

In addition, the Company raised $4.2 million in separate private transactions exempt from the registration requirements of the Act pursuant to Section 4(2) of the Act.

On July 3, 2013, the Company issued 21,739 shares of its Class A common stock to KBS Capital Advisors at a purchase price of $9.20 per share. 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 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 February 19, 2020, the Company, Pacific Oak Strategic Opportunity REIT, Inc. (“POSOR I”), and Pacific Oak SOR II, LLC, an indirect subsidiary of POSOR I (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Subject to the terms and conditions of the Merger Agreement, the Company will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger (the “Surviving Entity”), such that following the Merger, the Surviving Entity will continue as an indirect subsidiary of POSOR I. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of the Company shall cease. At the effective time of the Merger and subject to the terms and conditions of the Merger Agreement, each issued and outstanding share of the Company's common stock will be converted into the right to receive 0.9643 shares of POSOR I common stock. The combined company after the Merger will retain the name “Pacific Oak Strategic Opportunity REIT, Inc.”

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2020

(unaudited)

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, ~~2018, except for the Company’s adoption of the lease accounting standards issued by the Financial Accounting Standards Board (“FASB”) effective on January 1,~~ 2019. 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, ~~2018~~2019 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 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, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020.

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.~~interest and VIEs in which the Company has a primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation.

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

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.

~~Reclassifications~~Restricted Cash

~~Certain amounts in~~Restricted cash is comprised of lender impound reserve accounts on the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods. Upon adoption of the lease accounting standards of Topic 842 on January 1, 2019 (described below), the Company accountedborrowings for ~~tenant reimbursements for~~security deposits, property taxes, insurance, debt service obligations and ~~common area maintenance as variable lease payments~~capital improvements and ~~recorded these amounts as rental income. For~~replacements.

Redeemable Common Stock

The Company limits the dollar value of shares that may be redeemed under the share redemption program. During the three months ended ~~September 30, 2018,~~March 31, 2020, the Company ~~reclassified $0.7~~had redeemed $1.7 million of common stock under the share redemption program. The Company processed all redemption requests received in good order and eligible for redemption through the March 2020 redemption date, except for 785,440 shares totaling $8.0 million due to the limitations under the share redemption program. The Company recorded $0.6 million and ~~$5,000~~$2.2 million of ~~tenant reimbursement revenue for property taxes, insurance, and~~redeemable common area maintenance to office revenues and apartment revenues, respectively, for comparability purposes. For the nine months ended September 30, 2018, the Company reclassified $1.9 million and $17,000 of tenant reimbursement revenue for property taxes, insurance, and common area maintenance to office revenues and apartment revenues, respectively, for comparability purposes.

In addition, upon adoption of the lease accounting standards of Topic 842, the Company’s 2 ground leases which were classified as capital leases under ASC 840 were reclassified as finance leases under ASC 842. The existing capital lease assets were reclassified as right-of-use assets and the existing obligation as lease liabilities as of January 1, 2019. The reclassification of these ground leases did not have a material impact to the Company’s financial statements as the accounting and presentation of the related assets and liabilitiesstock payable on the Company’s balance sheet as of ~~September 30,~~March 31, 2020 and December 31, 2019, ~~was consistent~~respectively, related to unfulfilled redemption requests received in good order under the share redemption program. Based on the fourth amended and restated share redemption program, the Company has $0.5 million available for redemptions in the remainder of 2020, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations under the share redemption program. Effective beginning with the ~~previous periods. The Company’s 2 ground leases had an aggregate right-of-use asset~~month of $8.6 million and an aggregate lease liability of $8.2 million as of September 30, 2019, which are included in total real estate, net and other liabilities, respectively, on the Company’s consolidated balance sheet.

~~Revenue Recognition - Operating Leases~~

~~Office and Apartment Revenues~~

~~On January 1, 2019,~~February 2020, the Company ~~adopted~~suspended (a) redemptions requested under the ~~lease accounting standards under Topic 842 including the package~~share redemption program in connection with a stockholder’s death, “qualifying disability” or “determination of ~~practical expedients for all leases that commenced before the effective date of January 1, 2019. Accordingly,~~incompetence”, until the Company ~~(i) did not reassess whether any expired or existing contracts are or contain leases, (ii) did not reassess~~and POSOR I file with the ~~lease classification~~SEC a registration statement on Form S-4 containing a Joint Proxy Statement/Prospectus for ~~any expired or existing lease,~~the proposed merger, and (iii) did not reassess initial direct costs for any existing leases. The Company did not elect the practical expedient related to using hindsight to reevaluate the lease term. In addition, the Company adopted the practical expedient for land easements and did not assess whether existing or expired land easements that were not previously accounted for as leases(b) all other redemptions under the ~~lease accounting standards of Topic 840 are or contain a lease under Topic 842.~~

~~In addition, Topic 842 provides an optional transition method to allow entities to apply~~share redemption program until after the new lease accounting standards at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. The Company adopted this transition method upon its adoption of the lease accounting standards of Topic 842, which did not result in a cumulative effect adjustment to the opening balance of retained earnings on January 1, 2019. The Company’s comparative periods presented in the financial statements will continue to be reported under the lease accounting standards of Topic 840.merger closes.

109

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

In accordance with Topic 842, tenant reimbursements for property taxes and insurance are included in the single lease component of the lease contract (the right of the lessee to use the leased space) and therefore are accounted for as variable lease payments and are recorded as rental income on the Company’s statement of operations beginning January 1, 2019. In addition, the Company adopted the practical expedient available under Topic 842 to not separate nonlease components from the associated lease component and instead to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue recognition standard (Topic 606) and if certain conditions are met, specifically related to tenant reimbursements for common area maintenance which would otherwise be accounted for under the revenue recognition standard. The Company believes the two conditions have been met for tenant reimbursements for common area maintenance as (i) the timing and pattern of transfer of the nonlease components and associated lease components are the same and (ii) the lease component would be classified as an operating lease. Accordingly, tenant reimbursements for common area maintenance are also accounted for as variable lease payments and recorded as rental income on the Company’s statement of operations beginning January 1, 2019.

The Company recognizes minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is probable and records amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive and amortized as a reduction of rental revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

•~~whether the lease stipulates how a tenant improvement allowance may be spent;~~

•~~whether the lessee or lessor supervises the construction and bears the risk of cost overruns;~~

•~~whether the amount of a tenant improvement allowance is in excess of market rates;~~

•~~whether the tenant or landlord retains legal title to the improvements at the end of the lease term;~~

•~~whether the tenant improvements are unique to the tenant or general purpose in nature; and~~

•~~whether the tenant improvements are expected to have any residual value at the end of the lease.~~

The Company leases apartment units under operating leases with terms generally of one year or less. Generally, credit investigations will be performed for prospective residents and security deposits will be obtained. The Company recognizes rental revenue, net of concessions, on a straight-line basis over the term of the lease, when collectibility is determined to be probable.

In accordance with Topic 842, the Company makes a determination of whether the collectibility of the lease payments in an operating lease is probable. If the Company determines the lease payments are not probable of collection, the Company would fully reserve for any contractual lease payments, deferred rent receivable, and variable lease payments and would recognize rental income only if cash is received. Beginning January 1, 2019, these changes to the Company’s collectibility assessment are reflected as an adjustment to rental income included in office revenues and apartment revenues in the Company’s consolidated statement of operations. Prior to January 1, 2019, bad debt expense related to uncollectible accounts receivable and deferred rent receivable was included in office expenses and apartment expenses in the Company’s consolidated statement of operations. Any subsequent changes to the collectibility of the allowance for doubtful accounts as of December 31, 2018, which was recorded prior to the adoption of Topic 842, are recorded in office expenses and apartment expenses in the Company’s consolidated statement of operations.

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

Beginning January 1, 2019, the Company, as a lessor, records costs to negotiate or arrange a lease that would have been incurred regardless of whether the lease was obtained, such as legal costs incurred to negotiate an operating lease, as an expense and classify such costs as operating, maintenance, and management expense, which is included in office expenses in the Company’s consolidated statement of operations, as these costs are no longer capitalizable under the definition of initial direct costs under Topic 842.

Segments

The Company has invested in opportunistic real estate investments, real estate equity securities, other real estate-related assets and originated a loan secured by a non-stabilized real estate 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 1 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~~Europe, which was terminated on ~~the Company’s investment portfolio and future investment focus, the Company does not believe that its investment in the European asset is a reportable segment.~~April 17, 2019.

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 0 potentially dilutive securities outstanding during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. 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.

From March 2015 through November 2018, the Company’s board of directors declared and issued stock dividends on shares of the Company’s common stock. During the three and nine months ended September 30, 2018, the Company’s board of directors declared 0.005001 and 0.015003 shares per share outstanding, respectively, and, accordingly, issued 148,412 and 433,633 shares, respectively. The amount declared per share outstanding included monthly dividends and assumed each share was issued and outstanding for the entire period presented. Stock dividends were issued in the same class of shares as the shares for which such stockholder received the stock dividend. Stock dividends are non-taxable to stockholders at the time of issuance. During the Company’s offering stage and through November 2018, the Company’s board of directors declared stock dividends on a set monthly basis based on monthly record dates. The Company currently does not expect its board of directors to declare additional monthly stock dividends.

Cash distributions declared per share of Class A and Class T common stock were ~~$0.02397501 and $0.08790835~~$0.03995833 for the three ~~and nine~~ months ended ~~September 30, 2019, respectively.~~March 31, 2019. Distributions declared per common share assumes each share was issued and outstanding each day that was a record date for distributions and were based on a monthly record date for each month during the periods commencing January 2019 through ~~September~~March 2019.

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

~~Cash~~ There were 0 distributions declared ~~per share of Class A common stock were $0.04834416 and $0.14345604~~ for the three ~~and nine~~ months ended September 30, 2018, respectively. Cash distributions declared per share of Class T common stock were $0.04054959 and $0.08984833 for the three and nine months ended September 30, 2018, respectively. Until the Company ceased offering shares of common stock in the Public Offering on JulyMarch 31, 2018, the declared rate of cash distributions for Class T Shares was 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 Class A common stock assumes each share was issued and outstanding each day that was a record date during the three and nine months ending September 30, 2018. Distributions declared per share of Class T common stock assumes each share was issued and outstanding each day that was a record date during the three and nine months ending September 30, 2018. Each day during the period from January 1, 2018 through September 30, 2018 was a record date for distributions. Distributions for January 1, 2018 through September 30, 2018 were calculated based on stockholders of record each day during the period at a rate of $0.00052548 per share per day, all of which were reduced by 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.2020.

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 and nine months ended September 30, 2019 and 2018 were as follows (in thousands, except share and per share amounts):~~

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Net loss attributable to common stockholders $ (2,557) $ (4,963) $ (6,677) $ (8,133)
Less: Class A Common Stock cash distributions declared 430 862 1,578 2,505
Less: Class T Common Stock cash distributions declared 294 487 1,076 1,050
Undistributed net loss attributable to common stockholders $ (3,281) $ (6,312) $ (9,331) $ (11,688)
Class A Common Stock:
Undistributed net loss attributable to common stockholders $ (1,949) $ (3,776) $ (5,549) $ (7,019)
Class A Common Stock cash distributions declared 430 862 1,578 2,505
Net loss attributable to Class A common stockholders $ (1,519) $ (2,914) $ (3,971) $ (4,514)
Net loss per common share, basic and diluted $ (0.08) $ (0.16) $ (0.22) $ (0.26)
Weighted-average number of common shares outstanding, basic and diluted 17,937,658 17,968,924 17,949,375 17,670,771
Class T Common Stock:
Undistributed net loss attributable to common stockholders $ (1,332) $ (2,536) $ (3,782) $ (4,669)
Class T Common Stock cash distributions declared 294 487 1,076 1,050
Net loss attributable to Class T common stockholders $ (1,038) $ (2,049) $ (2,706) $ (3,619)
Net loss per common share, basic and diluted $ (0.08) $ (0.17) $ (0.22) $ (0.31)
Weighted-average number of common shares outstanding, basic and diluted 12,251,341 12,065,049 12,231,856 11,753,608

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

The Company’s calculated earnings per share for the three months ended March 31, 2020 and 2019 were as follows (in thousands, except share and per share amounts):


	Three Months Ended March 31,
	2020		2019
Net loss attributable to common stockholders	$	(10,470)	$	(1,535)
Less: Class A Common Stock cash distributions declared	—		718
Less: Class T Common Stock cash distributions declared	—		488
Undistributed net loss attributable to common stockholders	$	(10,470)	$	(2,741)
Class A Common Stock:
Undistributed net loss attributable to common stockholders	$	(6,216)	$	(1,632)
Class A Common Stock cash distributions declared	—		718
Net loss attributable to Class A common stockholders	$	(6,216)	$	(914)
Net loss per common share, basic and diluted	$	(0.35)	$	(0.05)
Weighted-average number of common shares outstanding, basic and diluted	17,879,627		17,984,563
Class T Common Stock:
Undistributed net loss attributable to common stockholders	$	(4,254)	$	(1,109)
Class T Common Stock cash distributions declared	—		488
Net loss attributable to Class T common stockholders	$	(4,254)	$	(621)
Net loss per common share, basic and diluted	$	(0.35)	$	(0.05)
Weighted-average number of common shares outstanding, basic and diluted	12,241,151		12,213,311

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)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2020

(unaudited)

Recently Issued Accounting Standards Updates

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments(“ (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale debt 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~~available-for-sale debt 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. In November 2018, the FASB issued ASU No. ~~2016-13 is effective~~2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, which clarified that receivables from operating leases are not within the scope of Topic 326 and instead, impairment of receivables arising from operating leases should be accounted 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. During October 2019, the FASB announced that certain entities. including smaller reporting companies, will be allowed additional implementation timein accordance with ~~the standard becoming effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years.~~Topic 842. 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 March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). ASU No. 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the three months ended March 31, 2020, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. For the period from January 1, 2020 (the earliest date the Company may elect to apply ASU No. 2020-04) through March 31, 2020, the Company did not have any contract modifications that meet the criteria described above, specifically contract modifications that have been modified from LIBOR to an alternative reference rate. The Company’s loan agreements, derivative instruments, and certain lease agreements use LIBOR as the current reference rate. For eligible contract modifications, the Company expects to adopt the temporary optional expedients described in ASU No. 2020-04. The optional expedients for hedging relationships described in ASU No. 2020-04 are not expected to have an impact to the Company, as the Company has elected to not designate its derivative instruments as a hedge.

In April 2020, the FASB issued a FASB Staff Q&A related to Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic (the “Topic 842 Q&A”) which focused on the application of lease guidance for concessions related to the effects of the COVID-19 pandemic. In this Q&A document, the FASB staff will allow entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842, Leases, (“Topic 842”) as though enforceable rights and obligations for those qualifying concessions existed. The Company did not have any material lease concessions related to the effects of the COVID-19 pandemic that had a material impact to the Company’s consolidated balance sheet as of March 31, 2020 or consolidated statement of operations for the three months ended March 31, 2020. The Company is continuing to evaluate the impact of this optional election on the condensed consolidated financial statements and related disclosures.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

~~In August 2018, the FASB issued ASU No. 2018-13,~~ ~~Fair Value Measurement (Topic 820):Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement~~ (“ASU No. 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. ASU No. 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for the timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and to disclose the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop the Level 3 fair value measurement. In addition, public entities are required to provide information about the measurement uncertainty of recurring Level 3 fair value measurements from the use of significant unobservable inputs if those inputs reasonably could have been different at the reporting date. ASU No. 2018-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities are permitted to early adopt either the entire standard or only the provisions that eliminate or modify the requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is still evaluating the impact of adopting ASU No. 2018-13 on its financial statements, but does not expect the adoption of ASU No. 2018-13 to have a material impact on its financial statements.

3. REAL ESTATE

As of ~~September 30, 2019,~~March 31, 2020, the Company’s real estate portfolio was composed of 2 hotel properties, 43 office properties and 1 apartment building. In addition, as of ~~September 30, 2019,~~March 31, 2020, the Company has entered into a consolidated joint venture to develop 1 office/retail property. The following table summarizes the Company’s real estate as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
Land	Land	$	104,138	$	104,138	Land	$	102,288	$	102,288
Buildings and improvements	Buildings and improvements	436,448		425,989		Buildings and improvements	431,474		427,696
Tenant origination and absorption costs	Tenant origination and absorption costs	16,022		17,183		Tenant origination and absorption costs	15,018		15,422
Total real estate, cost and net of impairment charge		556,608		547,310
Total real estate, cost and net of impairment charges						Total real estate, cost and net of impairment charges	548,780		545,406
Accumulated depreciation and amortization	Accumulated depreciation and amortization	(49,181)		(35,704)		Accumulated depreciation and amortization	(56,061)		(51,723)
Total real estate, net	Total real estate, net	$	507,427	$	511,606	Total real estate, net	$	492,719	$	493,683

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

The following table provides summary information regarding the Company’s real estate as of ~~September 30, 2019~~March 31, 2020 (in thousands):


Property	Property	Date Acquired	City	State	Property Type	Land		Building and Improvements ⁽¹⁾		Tenant Origination and Absorption		Total Real Estate, at Cost and Net of Impairment Charge		Accumulated Depreciation and Amortization		Total Real Estate, Net			Ownership %	Property		Date Acquired		City		State		Property Type		Land			Building and Improvements ⁽¹⁾			Tenant Origination and Absorption			Total Real Estate, at Cost and Net of Impairment Charges			Accumulated Depreciation and Amortization			Total Real Estate, Net			Ownership %
Springmaid Beach Resort	Springmaid Beach Resort	12/30/2014	Myrtle Beach	SC	Hotel	$	27,438	$	36,040	$	—	$	63,478	$	(9,558)	$	53,920		90.0%	Springmaid Beach Resort		12/30/2014		Myrtle Beach		SC		Hotel		$	27,438		$	39,999		$	—		$	67,437		$	(11,058)		$	56,379		90.0%
Q&C Hotel	Q&C Hotel	12/17/2015	New Orleans	LA	Hotel	1,232		53,137		—		54,369		(7,751)		46,618			90.0%	Q&C Hotel		12/17/2015		New Orleans		LA		Hotel		1,232			53,318			—			54,550			(8,880)			45,670			90.0%
2200 Paseo Verde ⁽²⁾		12/23/2015	Henderson	NV	Office	1,850		12,271		419		14,540		(1,910)		12,630			100.0%
Lincoln Court	Lincoln Court	05/20/2016	Campbell	CA	Office	14,706		35,887		2,307		52,900		(5,346)		47,554			100.0%	Lincoln Court		05/20/2016		Campbell		CA		Office		14,706			36,017			1,722			52,445			(5,711)			46,734			100.0%
Lofts at NoHo Commons	Lofts at NoHo Commons	11/16/2016	North Hollywood	CA	Apartment	26,222		81,193		—		107,415		(6,013)		101,402			90.0%	Lofts at NoHo Commons		11/16/2016		North Hollywood		CA		Apartment		26,222			81,721			—			107,943			(7,240)			100,703			90.0%
210 West 31st Street ⁽³⁾		12/01/2016	New York	NY	Retail	—		55,236		—		55,236		—		55,236			80.0%
210 West 31st Street ⁽²⁾																		210 West 31st Street ⁽²⁾			12/01/2016		New York		NY		Office/Retail		—			55,255			—			55,255			—			55,255			80.0%
Oakland City Center	Oakland City Center	08/18/2017	Oakland	CA	Office	22,150		141,287		10,496		173,933		(15,637)		158,296			100.0%	Oakland City Center		08/18/2017		Oakland		CA		Office		22,150			143,050			10,496			175,696			(19,296)			156,400			100.0%
Madison Square ⁽⁴⁾		10/03/2017	Phoenix	AZ	Office	10,540		21,397		2,800		34,737		(2,966)		31,771			90.0%
Madison Square ⁽³⁾																		Madison Square ⁽³⁾			10/03/2017		Phoenix		AZ		Office		10,540			22,114			2,800			35,454			(3,876)			31,578			90.0%
						$	104,138	$	436,448	$	16,022	$	556,608	$	(49,181)	$	507,427													$	102,288		$	431,474		$	15,018		$	548,780		$	(56,061)		$	492,719

_____________________

⁽¹⁾ Building and improvements includes construction costs for the Company’s project that was under development.

⁽²⁾ ~~On November 4, 2019, the Company sold this property. See note 12, “Subsequent Events - Real Estate Disposition Subsequent to September 30, 2019” for more information.~~

⁽³⁾ The Company acquired the rights to a leasehold interest with respect to this property, which was accounted for as a finance lease. The Company applied a 6.1% discount rate to the finance lease and the lease expires on January 31, 2114. As of ~~September 30, 2019,~~March 31, 2020, the finance lease right-of-use asset had a carrying value of $6.8 million included in building and improvements. NaN depreciation or amortization was recorded to this property as of ~~September 30, 2019.~~March 31, 2020.

⁽⁴⁾⁽³⁾ The Company acquired the rights to a leasehold interest with respect to the land at this property, which was accounted for as a finance lease. The Company applied a 5.4% discount rate to the finance lease and as of ~~September 30, 2019,~~March 31, 2020, the finance lease had a weighted average remaining lease term of ~~2.8~~2.3 years. As of ~~September 30, 2019,~~March 31, 2020, the finance lease right-of-use asset had a carrying value of $1.9 million included in land.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

Office Properties

As of ~~September 30, 2019,~~March 31, 2020, the Company owned 43 office properties encompassing in the aggregate ~~865,370~~806,960 rentable square feet which were ~~72%~~69% occupied. The following table provides detailed information regarding the Company’s office revenues and expenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Office revenues:	Office revenues:									Office revenues:
Rental income ⁽¹⁾	Rental income ⁽¹⁾	$	7,137	$	7,332	$	21,056	$	21,932	Rental income ⁽¹⁾	$	6,870	$	6,912
Other income	Other income	221		183		613		543		Other income	226		205
Office revenues	Office revenues	$	7,358	$	7,515	$	21,669	$	22,475	Office revenues	$	7,096	$	7,117

Office expenses:	Office expenses:									Office expenses:
Operating, maintenance, and management ⁽²⁾	Operating, maintenance, and management ⁽²⁾	$	2,386	$	2,219	$	7,049	$	6,072	Operating, maintenance, and management ⁽²⁾	$	2,274	$	2,325
Real estate taxes and insurance ⁽²⁾	Real estate taxes and insurance ⁽²⁾	1,107		1,022		3,268		2,879		Real estate taxes and insurance ⁽²⁾	1,100		1,072
Office expenses	Office expenses	$	3,493	$	3,241	$	10,317	$	8,951	Office expenses	$	3,374	$	3,397

~~_____________________~~

⁽¹⁾ For the three and nine months ended September 30, 2018, the Company reclassified $0.7 million and $1.9 million of tenant reimbursement revenue for property taxes, insurance, and common area maintenance to rental income. See note 2, “Summary of Significant Accounting Policies” for a further discussion on this reclassification.

⁽²⁾ On October 1, 2018, the Company placed the development of 210 West 31st Street on hold and began expensing certain costs that were previously capitalized. Included in office expenses for the three months ended September 30, 2019 is $0.1 million of operating, maintenance and management and $0.1 million of real estate taxes and insurance and for the nine months ended September 30, 2019 is $0.5 million of operating, maintenance and management and $0.3 million of real estate taxes and insurance for 210 West 31st Street.

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, 2019,~~March 31, 2020, the leases had remaining terms, excluding options to extend, of up to ~~8.9~~11.6 years with a weighted-average remaining term of 3.5 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 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 ~~$1.2~~$1.8 million and ~~$1.3~~$1.1 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company recognized deferred rent from tenants of ~~$0.2~~$0.3 million and ~~$0.4 million, respectively, net of lease incentive amortization. During the three and nine months ended September 30, 2018, the Company recognized deferred rent from tenants of $0.2 million and $1.2~~$0.1 million, respectively, net of lease incentive amortization. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was ~~$3.2~~$3.1 million and ~~$2.8~~$2.9 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $0.1 million and $0.2 million of unamortized lease incentives as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~

2019, respectively.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

As of ~~September 30, 2019,~~March 31, 2020, the future minimum rental income from the Company’s office properties under its non-cancelable operating leases was as follows (in thousands):


October 1, 2019 through December 31, 2019		$	5,729
2020		22,804
April 1, 2020 through December 31, 2020				April 1, 2020 through December 31, 2020	$	16,388
2021	2021	20,962		2021	20,097
2022	2022	17,395		2022	16,403
2023	2023	14,470		2023	13,304
2024				2024	10,827
Thereafter	Thereafter	46,774		Thereafter	33,323
		$	128,134		$	110,342

As of ~~September 30, 2019,~~March 31, 2020, the Company’s commercial real estate properties were leased to approximately 9580 tenants over a diverse range of industries and geographic areas. As of ~~September 30, 2019,~~March 31, 2020, 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
Professional, Scientific and Technical Services 16 $ 4,833 20.2 %
Legal Services 13 4,282 17.9 %
Public Administration (Government) 6 3,547 14.8 %
Finance 13 2,542 10.6 %
$ 15,204 63.5 %


Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Legal Services	13	$	4,547	20.2	%
Public Administration	6	3,589		16.0	%
Professional, Scientific, and Technical Services	11	2,947		13.1	%
		$	11,083	49.3	%

_____________________

⁽¹⁾Annualized base rent represents annualized contractual base rental income as of ~~September 30, 2019,~~March 31, 2020, 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.

No other tenant industries accounted for more than 10% of annualized base rent. No tenant accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company ~~did not record any~~recorded a $45,000 adjustment to office revenues for lease payments deemed not probable of collection. During the ~~nine~~three months ended ~~September 30,~~March 31, 2019, ~~and 2018,~~ the Company recorded bad debt ~~expense~~recovery of ~~$17,000 and $0.3~~$0.1 million, ~~respectively,~~ which were included in office expenses in the accompanying consolidated statements of operations.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

Hotel Properties

As of ~~September 30, 2019,~~March 31, 2020, the Company owned 2 hotel properties. The following table provides detailed information regarding the Company’s hotel revenues and expenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Hotel revenues:	Hotel revenues:									Hotel revenues:
Room	Room	$	7,151	8,094		$	19,206	20,207		Room	$	2,954	$	4,465
Food, beverage and convention services	Food, beverage and convention services	1,339		1,574		3,891		3,893		Food, beverage and convention services	601		873
Campground	Campground	278		298		829		879		Campground	255		271
Other	Other	503		495		1,392		1,255		Other	270		371
Hotel revenues	Hotel revenues	$	9,271	$	10,461	$	25,318	$	26,234	Hotel revenues	$	4,080	$	5,980

Hotel expenses:	Hotel expenses:									Hotel expenses:
Room	Room	$	1,689	1,824		$	4,693	4,839		Room	$	1,090	$	1,324
Food, beverage and convention services	Food, beverage and convention services	1,137		1,084		3,077		3,005		Food, beverage and convention services	626		776
General and administrative	General and administrative	749		704		2,243		2,149		General and administrative	805		786
Sales and marketing	Sales and marketing	870		932		2,476		2,381		Sales and marketing	540		694
Repairs and maintenance	Repairs and maintenance	563		571		1,655		1,566		Repairs and maintenance	462		566
Utilities	Utilities	391		364		876		916		Utilities	294		261
Property taxes and insurance	Property taxes and insurance	435		447		1,308		1,311		Property taxes and insurance	589		438
Other	Other	415		180		1,232		994		Other	255		330
Hotel expenses	Hotel expenses	$	6,249	$	6,106	$	17,560	$	17,161	Hotel expenses	$	4,661	$	5,175

On March 31, 2020, both hotels were temporarily closed due to COVID-19 (Coronavirus) and the Springmaid Beach Resort reopened on May 1, 2020. The Company is unable to predict when the Q&C Hotel will resume operations. The extent of the effects of the COVID-19 pandemic on the Company’s business and the hotel industry at large is highly uncertain and will ultimately depend on future developments, including, but not limited to, the duration and severity of the outbreak, the length of time it takes for demand and pricing to return and normal economic and operating conditions to resume.

Contract liabilities

The following table summarizes the Company’s contract liabilities, which are comprised of advanced deposits and are included in other liabilities in the accompanying consolidated balance sheets, as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):


		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
Contract liability	Contract liability	$	652	$	324	Contract liability	$	483	$	500
Revenue recognized in the period from:	Revenue recognized in the period from:					Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period	Amounts included in contract liability at the beginning of the period	$	276	$	—	Amounts included in contract liability at the beginning of the period	$	262	$	281

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

Apartment Property

As of ~~September 30, 2019,~~March 31, 2020, the Company owned 1 apartment property with 292 units which was ~~96%~~90% occupied. The following table provides detailed information regarding the Company’s apartment revenues and expenses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Apartment revenues:	Apartment revenues:									Apartment revenues:
Rental income⁽¹⁾	Rental income⁽¹⁾	$	1,867	$	1,779	$	5,526	$	5,020	Rental income⁽¹⁾	$	1,827	$	1,830
Other income	Other income	147		161		453		439		Other income	229		165
Apartment revenues	Apartment revenues	$	2,014	$	1,940	$	5,979	$	5,459	Apartment revenues	$	2,056	$	1,995

Apartment expenses:	Apartment expenses:									Apartment expenses:
Operating, maintenance, and management	Operating, maintenance, and management	$	582	$	639	$	1,662	$	1,844	Operating, maintenance, and management	$	445	$	536
Real estate taxes and insurance	Real estate taxes and insurance	345		337		1,045		1,014		Real estate taxes and insurance	366		361
Apartment expenses	Apartment expenses	$	927	$	976	$	2,707	$	2,858	Apartment expenses	$	811	$	897

_____________________

⁽¹⁾ For the three and nine months ended September 30, 2018, the Company reclassified $5,000 and $17,000, respectively, of tenant reimbursement revenue for property taxes, insurance, and common area maintenance to rental income. See note 2, “Summary of Significant Accounting Policies” for a further discussion on this reclassification.

Geographic Concentration Risk

As of ~~September 30, 2019,~~March 31, 2020, the Company’s real estate investments in California represented ~~54.0%~~57.1% 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 real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Disposition of Real Estate

During the year ended December 31, 2019, the Company disposed of 1 office building and there were 0 dispositions during the three months ended March 31, 2020.

On November 4, 2019, the Company, through an indirect wholly owned subsidiary, sold 2200 Paseo Verde to a purchaser unaffiliated with the Company or the Advisor for a sales price, net of closing credits of $18.7 million, excluding closing costs. The carrying value of 2200 Paseo Verde as of the disposition date was $13.5 million, which was net of $2.0 million of accumulated depreciation and amortization. The Company recognized a gain on sale of $4.2 million related to the disposition of 2200 Paseo Verde.

2017

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

The operations of this property and gain on sales are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to this property for the three months ended March 31, 2020 and 2019 (in thousands):


	For the Three Months Ended March 31,
	2020		2019
Revenues
Rental income	$	—	$	391
Other operating income	—		5
Total revenues	$	—	$	396
Expenses
Operating, maintenance, and management	$	—	$	87
Real estate taxes and insurance	—		20
Asset management fees to affiliate	—		34
Depreciation and amortization	—		168
Interest expense	—		101
Total expenses	$	—	$	410

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

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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					Tenant Origination and Absorption Costs						Above-Market Lease Assets	Below-Market Lease Liabilities
		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Cost	Cost	$	16,022	$	17,183	$	99	$	99	$	(10,801)	$	(11,526)	Cost	$	15,018	$	15,422	$	72	$	72	$	(10,685)	$	(10,802)
Accumulated Amortization	Accumulated Amortization	(7,690)		(6,163)		(48)		(34)		5,492		4,178		Accumulated Amortization	(8,271)		(7,954)		(31)		(28)		6,550		6,125
Net Amount	Net Amount	$	8,332	$	11,020	$	51	$	65	$	(5,309)	$	(7,348)	Net Amount	$	6,747	$	7,468	$	41	$	44	$	(4,135)	$	(4,677)

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,~~March 31, 2020 and 2019 ~~and 2018~~ 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,
2019 2018 2019 2018 2019 2018
Amortization $ (857) $ (1,117) $ (5) $ (5) $ 657 $ 838


	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,
	2020		2019		2020		2019		2020		2019
Amortization	$	(720)	$	(943)	$	(3)	$	(5)	$	542	$	703

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,
2019 2018 2019 2018 2019 2018
Amortization $ (2,688) $ (3,495) $ (14) $ (14) $ 2,039 $ 2,670

As of September 30, 2019 and December 31, 2018, 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 $2.3 million and $2.4 million, respectively, which is amortized on a straight line basis over 31.8 years. During each of the three months ended September 30, 2019 and 2018, the Company recorded amortization expense of $20,000 related to the housing subsidy intangible asset. During each of the nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $60,000 related to the housing subsidy intangible asset.

Additionally, as of September 30, 2019 and December 31, 2018, 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 $1.9 million and $2.3 million, respectively, which are amortized on a straight line basis over a range of 0.7 to 6.6 years. During each of the three months ended September 30, 2019 and 2018, the Company recorded amortization expense of $0.1 million related to the property tax abatement intangible assets. During the nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $0.4 million related to the property tax abatement intangible assets.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

As of March 31, 2020 and December 31, 2019, 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 $2.3 million. As of March 31, 2020, the housing subsidy intangible asset has a remaining amortization period of 28.4 years. During each of the three months ended March 31, 2020 and 2019, the Company recorded amortization expense of $20,000 related to the housing subsidy intangible asset.

Additionally, as of March 31, 2020 and December 31, 2019, 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 $1.6 million and $1.8 million, respectively. As of March 31, 2020, the property tax abatement intangible assets have a weighted-average remaining amortization period of 3.5 years. During each of the three months ended March 31, 2020 and 2019, the Company recorded amortization expense of $0.1 million related to the property tax abatement intangible assets.

5. 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. Unrealized gains and losses on real estate equity securities are recognized in earnings.

~~As of September 30, 2019 and December~~


	March 31, 2020				December 31, 2019
Real Estate Equity Securities	Number of Shares Owned	Total Carrying Value		Number of Shares Owned	Total Carrying Value
Franklin Street Properties Corp.	1,580,713	$	9,057	1,160,591	$	9,935
Plymouth Industrial REIT, Inc.	92,931	1,038		—	—
	1,673,644	$	10,095	1,160,591	$	9,935

During the three months ended March 31, ~~2018,~~2020, the Company ~~owned 1,160,591~~purchased 92,931 shares of common stock of Plymouth Industrial REIT, Inc. (NYSE Ticker: PLYM) for an aggregate purchase price of $1.3 million and also purchased 420,122 shares of Franklin Street Properties Corp., (NYSE Ticker: FSP)~~. As~~ for an aggregate purchase price of ~~September 30, 2019 and December 31, 2018, the total book value~~$2.8 million. During each of the ~~Company’s real estate equity securities was $9.8 million and $7.2 million, respectively. During the~~ three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company recognized $0.1 ~~million and $0.3~~ million of dividend income from real estate equity ~~securities, respectively.~~securities. During the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2020 and 2019, the Company ~~recognized $77,000~~had recorded an unrealized loss of $3.9 million and ~~$113,000~~an unrealized gain of ~~dividend income from real estate~~$1.1 million related to the change in fair value of equity securities, ~~respectively.~~respectively

6. INVESTMENT IN UNCONSOLIDATED ~~ENTITY~~ENTITIES

On June 28, 2016, the Company originated a participating loan facility (“STAM investment”) in an amount up to €2.6 million ($2.9 million at closing). with STAM, a real estate operating company that provides real estate acquisition and portfolio management services to make in value-added real estate, distressed debt, and real estate-related investments in Europe. 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, 2018, the Company recognized $94,000 and $225,000 of income with respect to this investment.~~

During the ~~nine months~~year ended ~~September 30,~~December 31, 2019, STAM completed the liquidation of the portfolio and the Company recognized $2.8 million of equity in income of unconsolidated entity with respect to this investment. ~~On May 9, 2019,~~During the three months ended March 31, 2020, the Company received a distribution ~~in the amount~~ of ~~€4.5~~€0.4 million or ~~$5.1 million. As~~$0.4 million and as of ~~September 30, 2019,~~March 31, 2020, the Company’s investment in ~~unconsolidated entity~~the STAM investment was ~~$0.5~~$0.1 million.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

On December 31, 2019, the Company acquired 13 Class A Units for $2.9 million in Pacific Oak Opportunity Zone Fund I, LLC (“Pacific Oak Opportunity Zone Fund I”). As of March 31, 2020, Pacific Oak Opportunity Zone Fund I consolidated 2 joint ventures with real estate under development. As of March 31, 2020, the Company has concluded that Pacific Oak Opportunity Zone Fund I qualifies as a Variable Interest Entity (“VIE”) because there is insufficient equity at risk to finance the entity’s activities and the entity is structured with non-substantive voting rights. The Company concluded it is not the primary beneficiary of this VIE since it does not have the power to direct the activities that most significantly impact the entity’s economic performance and will account for its investment under the equity method of accounting.

The Company’s maximum exposure to loss as a result of its involvement with this VIE is limited to the carrying value of the investment in Pacific Oak Opportunity Zone Fund I which totaled $3.0 million as of March 31, 2020.

7. NOTES PAYABLE

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company’s notes payable consisted of the following (in thousands):


		Book Value as of September 30, 2019		Book Value as of December 31, 2018		Contractual Interest Rate ⁽¹⁾	Effective Interest Rate ⁽¹⁾	Payment Type	Maturity Date		Book Value as of March 31, 2020		Book Value as of December 31, 2019		Contractual Interest Rate ⁽¹⁾	Effective Interest Rate ⁽¹⁾	Payment Type	Maturity Date
Springmaid Beach Resort Mortgage Loan ⁽²⁾	Springmaid Beach Resort Mortgage Loan ⁽²⁾	$	56,884	$	37,280	One-month LIBOR + 3.50% ⁽²⁾	5.75%	Principal & Interest	08/10/2022	Springmaid Beach Resort Mortgage Loan ⁽²⁾	$	56,188	$	56,536	One-month LIBOR + 2.25% ⁽²⁾	5.75%	Principal & Interest	08/10/2022
Q&C Hotel Mortgage Loan	Q&C Hotel Mortgage Loan	23,166		23,551		One-month LIBOR + 3.25%	5.34%	Interest Only	12/17/2019	Q&C Hotel Mortgage Loan	25,000		25,000		One-month LIBOR + 2.50% ⁽³⁾	4.50%	Principal & Interest ⁽³⁾	12/23/2022
2200 Paseo Verde Mortgage Loan ⁽³⁾		8,667		7,947		One-month LIBOR + 2.25%	4.34%	Principal & Interest	07/01/2020
Lincoln Court Mortgage Loan	Lincoln Court Mortgage Loan	34,615		33,500		One-month LIBOR + 1.75%	3.85%	Interest Only	06/01/2020	Lincoln Court Mortgage Loan	34,615		34,615		One-month LIBOR + 1.75%	2.74%	Interest Only	06/01/2020
Lofts at NoHo Commons Mortgage Loan ⁽⁴⁾	Lofts at NoHo Commons Mortgage Loan ⁽⁴⁾	73,861		72,100		One-month LIBOR + 2.18%	4.21%	Interest Only	09/09/2021	Lofts at NoHo Commons Mortgage Loan ⁽⁴⁾	73,862		73,862		One-month LIBOR + 2.18%	3.17%	Interest Only	09/09/2021
210 West 31st Street Mortgage Loan	210 West 31st Street Mortgage Loan	34,041		38,041		One-month LIBOR + 5.50%	7.60%	Interest Only	12/01/2019	210 West 31st Street Mortgage Loan	20,000		20,000		One-month LIBOR + 3.00%	3.99%	Interest Only	12/16/2020
Oakland City Center Mortgage Loan ⁽⁵⁾	Oakland City Center Mortgage Loan ⁽⁵⁾	95,989		94,500		One-month LIBOR + 1.75%	3.85%	Interest Only ⁽⁴⁾	09/01/2022	Oakland City Center Mortgage Loan ⁽⁵⁾	95,989		95,989		One-month LIBOR + 1.75%	2.74%	Interest Only	09/01/2022
Madison Square Mortgage Loan ⁽⁶⁾	Madison Square Mortgage Loan ⁽⁶⁾	23,488		21,895		One-month LIBOR + 4.05% ⁽⁵⁾	6.08%	Interest Only	10/09/2020	Madison Square Mortgage Loan ⁽⁶⁾	23,677		23,593		One-month LIBOR + 4.05% ⁽⁶⁾	5.05%	Interest Only	10/09/2020
Total notes payable principal outstanding	Total notes payable principal outstanding	350,711		328,814						Total notes payable principal outstanding	329,331		329,595
Deferred financing costs, net	Deferred financing costs, net	(3,181)		(2,271)						Deferred financing costs, net	(3,095)		(3,600)
Total notes payable, net	Total notes payable, net	$	347,530	$	326,543					Total notes payable, net	$	326,236	$	325,995

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of ~~September 30, 2019.~~March 31, 2020. Effective interest rate is calculated as the actual interest rate in effect as of ~~September 30, 2019~~March 31, 2020 (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, 2019,~~March 31, 2020, where applicable.

⁽²⁾ ~~On July 19, 2019, the Springmaid Beach Resort Mortgage Loan was refinanced. See below, “- Recent Financing Transactions - Refinancing of the Springmaid Beach Resort Mortgage Loan.”~~ As of ~~September 30, 2019, $56.9~~March 31, 2020, $56.5 million ofhad been disbursed to the ~~Springmaid Beach Resort Mortgage Loan~~Company and up to $10.5 million was ~~outstanding and $10.0 million remained~~ available for future disbursements, subject to certain terms and conditions ~~set forth~~contained in the loan documents. The interest rate is variable at the higher of one-month LIBOR + 2.25% or 5.75%.

⁽³⁾ The interest rate is variable at the higher of one-month LIBOR + 2.5% or 4.5%. Principal payments will commence on January 1, 2022.

⁽⁴⁾As of ~~September 30, 2019, $8.7~~March 31, 2020, $73.9 million had been disbursed to the Company and up to ~~$0.8~~$2.1 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. ~~On November 4, 2019, in connection with the disposition of 2200 Paseo Verde, the Company repaid the $8.7 million outstanding principal balance due under the 2200 Paseo Verde Mortgage Loan.~~

⁽⁴⁾ ~~On August 30, 2019, the Lofts at NoHo Commons Mortgage Loan was refinanced. See below, “- Recent Financing Transactions - Refinancing of the Lofts at NoHo Commons Mortgage Loan.”~~

⁽⁵⁾ As of ~~September 30, 2019,~~March 31, 2020, $96.0 million had been disbursed to the Company and up to $7.4 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.

⁽⁶⁾ As of ~~September 30, 2019, $23.5~~March 31, 2020, $23.7 million had been disbursed to the Company and up to ~~$10.6~~$10.4 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 Madison Square 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 property securing this mortgage loan was formerly known as Grace Court and was re-named Madison Square in connection with the Company’s re-branding strategy of the property.~~

The Company plans to refinance or utilize available extension options for notes payable with maturities through the first quarter of 2021. There can be no assurance that the Company will be able to refinance or utilize extension options.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company incurred ~~$5.2~~$4.1 million and ~~$15.2 million, respectively, of interest expense. During the three and nine months ended September 30, 2018, the Company incurred $3.4 million and $9.7~~$5.0 million, respectively, of interest expense. Included in interest expense was: (i) the amortization of deferred financing costs of $0.5 million and ~~$1.3~~$0.4 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~respectively, and $0.4 million and $1.3 million for the three and nine months ended September 30, 2018,~~ respectively, (ii) an unrealized gain of $13,000 interest rate cap agreements for the three months ended March 31, 2020 and an unrealized loss of ~~$47,000 and $53,000~~$6,000 on interest rate cap agreements for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 ~~respectively, and an unrealized gain of $1,000 and $11,000 on interest rate cap agreements for the three and nine months ended September 30, 2018, respectively,~~ and (iii) $0.1 ~~million and $0.4~~ million of interest on finance leases for both of the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020 and $0.1 million and $0.4 million for the three and nine months ended September 30, 2018, respectively. Additionally, during the three and nine months ended September 30, 2018, the Company capitalized interest to building and improvements related to its redevelopment project at 210 West 31st Street of $1.3 million and $3.9 million, respectively.March 31, 2019. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company’s interest payable was ~~$1.1~~$0.9 million and ~~$1.4~~$0.8 million, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of ~~September 30, 2019~~March 31, 2020 (in thousands):


October 1, 2019 through December 31, 2019		$	57,585
2020		68,462
April 1, 2020 through December 31, 2020				April 1, 2020 through December 31, 2020	$	79,668
2021	2021	76,575		2021	76,574
2022	2022	148,089		2022	173,089
		$	350,711		$	329,331

The Company’s notes payable contain financial and non-financial debt covenants. As of ~~September 30, 2019,~~March 31, 2020, the Company was in compliance with all debt covenants, except that the borrower under the Madison Square Mortgage Loan was out of debt service coverage compliance. Such non-compliance does not constitute an event of default under the loan agreement. As a result of such non-compliance, the Company is required to maintain an interest shortfall reserve.

~~Recent Financing Transactions~~

~~Refinancing of the Springmaid Beach Resort Mortgage Loan~~

On December 30, 2014, the Company, through a joint venture (“Springmaid Property JV”) between the Company’s indirect wholly owned subsidiary and IC Myrtle Beach Holdings LLC (the “JV Partner”), acquired a 30-acre property, containing a 491-room hotel, a 36,000 square foot conference center and a 187-unit recreational vehicle campground located at 3200 S. Ocean Boulevard, Myrtle Beach, South Carolina (the “Springmaid Beach Resort”). In connection with the acquisition of the Springmaid Beach Resort, Springmaid Property JV entered a lease agreement for the hotel portion of the Springmaid Beach Resort, which includes the resort and conference center, with a joint venture (“Springmaid Operations JV”) between the Company’s indirect wholly owned subsidiary which the Company has elected to treat as a TRS and the JV Partner. The Company owns a 90% equity interest in the joint ventures. In connection with the acquisition of the Springmaid Beach Resort, Springmaid Property JV, as borrower, and Springmaid Operations JV, as operating lessee, entered into a mortgage loan with an unaffiliated lender, for borrowings of up to $38.0 million, secured by the Springmaid Beach Resort (the “Springmaid Beach Resort Mortgage Loan”).

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

On July 19, 2019, the joint ventures closed the refinancing of the Springmaid Beach Resort Mortgage Loan with unaffiliated lenders (the “Springmaid Refinancing”). The joint ventures repaid $36.9 million of principal in satisfaction of the Springmaid Beach Resort Mortgage Loan. The Springmaid Refinancing was comprised of a maximum loan amount of up to $67.0 million, comprised of a mortgage loan of up to $65.3 million and a mezzanine loan amount of up to $1.7 million. At closing, $57.0 million of the Springmaid Refinancing was funded and the remaining $10.0 million was available for future disbursements, subject to certain terms and conditions contained in the loan documents.

~~The loans under the Springmaid Refinancing mature on August 10, 2022, with 2~~ ~~one~~-year extension options, subject to certain terms and conditions contained in the loan documents. Monthly payments include principal and interest with principal payments of $0.1 million, with the remaining principal balance, all accrued and unpaid interest and all other sums due under the loan documents payable at maturity. The weighted-average interest rate is 350 basis points plus the higher of one-month LIBOR or 225 basis points. The joint ventures entered into interest rate caps that effectively limits one-month LIBOR at 4.0% on $65.3 million and $1.7 million, effective July 25, 2019 through August 10, 2021. The joint ventures have the right to prepay all or a portion of the Refinancing, subject to certain fees and conditions contained in the loan documents.

Pacific Oak 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 Refinancing in the event of certain bankruptcy or insolvency proceedings involving Springmaid Property JV, Springmaid Operations JV or SOR US Properties II or any affiliate thereof, the transfer of Springmaid Property JV’s interest in the property in violation of the loan documents, and certain other events as described in the loan documents and (ii) the payment of certain liabilities, losses or damages incurred by the lender as a result of certain intentional acts committed by Springmaid Property JV or Springmaid Operations JV, the fraud or intentional misrepresentation by Springmaid Property JV, Springmaid Operations JV or SOR US Properties II in connection with the loan or the loan documents, and certain other events as described in the loan documents.

~~Refinancing of the Lofts at NoHo Commons Mortgage Loan~~

On November 16, 2016, the Company, through a joint venture (the “Lofts at NoHo Commons JV”) between the Company’s indirect wholly owned subsidiary and Noho Commons Pacific Investors LLC (the “Lofts at NoHo Commons JV Partner”), acquired a 292-unit apartment building in North Hollywood, California (the “Lofts at NoHo Commons”). The Company owns a 90% equity interest in the Lofts at NoHo Commons JV. The Lofts at NoHo Commons 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 or the Lofts at NoHo Commons and its operations, in the manner set forth in the joint venture agreement. In connection with the acquisition of the Lofts at NoHo Commons, the Lofts at NoHo Commons JV entered into a multifamily loan and security agreement with an unaffiliated lender, for borrowings of $72.1 million, secured by the Lofts at NoHo Commons (the “Lofts at NoHo Commons Mortgage Loan”).

On August 30, 2019, the joint venture closed the refinancing of the Lofts at NoHo Commons Mortgage Loan with an unaffiliated lender (the “Lofts at NoHo Commons Refinancing”). The joint venture repaid $72.1 million of principal in satisfaction of the Lofts at NoHo Commons Mortgage Loan. The Lofts at NoHo Commons Refinancing was comprised of a maximum loan amount of up to $76.0 million. At closing, $73.9 million of the Lofts at NoHo Commons Refinancing was funded and the remaining $2.1 million was available for future disbursements, subject to certain terms and conditions contained in the loan documents.

The loan under the Lofts at NoHo Commons Refinancing matures on September 9, 2021, with 3-one year extension options, subject to certain terms and conditions contained in the loan documents. The loan under the Lofts at NoHo Commons Refinancing bears an interest rate at higher of a floating rate of 218 basis points over one-month LIBOR or 3.93%. The joint venture entered into interest rate caps that effectively limits one-month LIBOR at 3.50% on $76.0 million. The joint venture have the right to prepay all or a portion of the Lofts at NoHo Commons Refinancing, subject to certain fees and conditions contained in the loan documents.

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

SOR US Properties II provided a guaranty of (i) the principal balance and any interest or other sums outstanding under the Lofts at NoHo Commons Refinancing in the event of certain bankruptcy or insolvency proceedings involving the Lofts at NoHo Commons JV or SOR US Properties II or any affiliate thereof, the transfer of the Lofts at NoHo Commons JV’s interest in the property in violation of the loan documents, and certain other events as described in the loan documents and (ii) the payment of certain liabilities, losses or damages incurred by the lender as a result of certain intentional acts committed by the Lofts at NoHo Commons JV, the fraud or intentional misrepresentation by the Lofts at NoHo Commons JV or SOR US Properties II in connection with the loan or the loan documents, and certain other events as described in the loan documents.

8. ~~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, 2019, the Company had 5 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, 2019 and December 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 (dollars in thousands):

Fair Value of Asset
Derivative Instruments Effective Date Maturity Date Notional Value Reference Rate September 30, 2019 December 31, 2018 Balance Sheet Location
Interest Rate Cap 07/25/2019 08/10/2021 $ 65,325 One-month LIBOR at 4.00% $ — $ — Prepaid expenses and other assets
Interest Rate Cap 07/25/2019 08/10/2021 1,675 One-month LIBOR at 4.00% — — Prepaid expenses and other assets
Interest Rate Cap 08/30/2019 09/15/2021 75,950 One-month LIBOR at 3.50% 1 — Prepaid expenses and other assets
Interest Rate Cap 12/01/2016 12/01/2019 47,110 One-month LIBOR at 3.00% — 4 Prepaid expenses and other assets
Interest Rate Cap 10/03/2017 10/15/2019 34,125 One-month LIBOR at 3.00% — 2 Prepaid expenses and other assets
Interest Rate Cap 12/30/2018 06/30/2019 26,000 One-month LIBOR at 3.00% — — Prepaid expenses and other assets
Interest Rate Cap 01/03/2019 06/01/2019 23,551 One-month LIBOR at 3.00% — — Prepaid expenses and other assets
Total Derivative Instruments not designated as hedging instruments $ 1 $ 6

During the three and nine months ended September 30, 2019, the Company recorded an unrealized loss of $47,000 and $53,000 on interest rate cap agreements, which was included in interest expense on the accompanying consolidated statements of operations. During the three and nine months ended September 30, 2018, the Company recorded an unrealized gain of $1,000 and $11,000 on interest rate cap agreements, which is included as an offset to interest expense on the accompanying consolidated statements of operations.

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

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. On May 9, 2019, the Company terminated its $2.1 million foreign currency forward contract and received $0.1 million in connection with the termination.

During the nine months ended September 30, 2019, the Company recorded a foreign currency gain of $77,000 on the foreign currency forward contract, which is included as an offset to general and administrative expenses on the accompanying consolidated statements of operations. During the three and nine months ended September 30, 2018, the Company recorded a foreign currency gain of $22,000 and $73,000, respectively, on the foreign currency forward contract, which is included as an offset to general and administrative expenses on the accompanying consolidated statements of operations. The fair value of the foreign currency forward contract was $0.1 million asset as of December 31, 2018, which is included in prepaid expenses and other assets on the accompanying balance sheets.

9. FAIR VALUE DISCLOSURES

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

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

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

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

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

~~Cash and cash equivalents, 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.~~

~~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 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.

~~Table of Contents~~

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

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

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

~~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.

~~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, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, which carrying amounts do not approximate the fair values (in thousands):


		September 30, 2019										December 31, 2018											March 31, 2020				December 31, 2019
		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 liability:
Financial liability (Level 3):														Financial liability (Level 3):
Notes payable	Notes payable	$	350,711	$	347,530	$	351,811	$	328,814	$	326,543	$	329,588	Notes payable	$	329,331	$	326,236	$	323,148	$	329,595	$	325,995	$	330,687

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, 2019,~~March 31, 2020, the Company measured the following assets at fair value on a recurring basis (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:	Recurring Basis:									Recurring Basis:
Real estate equity securities	Real estate equity securities	$	9,818	$	9,818	$	—	$	—	Real estate equity securities	$	10,095	$	10,095	$	—	$	—
Asset derivatives - interest rate caps	Asset derivatives - interest rate caps	$	1	$	—	$	1	$	—	Asset derivatives - interest rate caps	$	15	$	—	$	15	$	—

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

As of December 31, 2019, the Company measured the following assets at fair value on a recurring basis (in thousands):


			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Real estate equity securities	$	9,934	$	9,934	$	—	$	—

~~10.~~

9. RELATED PARTY TRANSACTIONS

~~The~~As described further below, the Company has entered into ~~the Advisory Agreement with the Advisor and dealer manager~~ agreements with ~~the Dealer Manager, with respect~~certain affiliates pursuant to the Private Offering and the Public Offering. These agreements entitled 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 providingwhich they provide 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 or has served 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 TrustKeith D. Hall and Peter McMillan III ~~Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”),~~control and indirectly own Pacific Oak ~~Strategic Opportunity REIT, Inc.~~Holding Group, LLC (“Pacific Oak ~~Strategic Opportunity REIT”~~Holding”), the Company’s sponsor since November 1, 2019. Pacific Oak Holding is the sole owner of Pacific Oak Capital Advisors, LLC, the Company’s advisor since November 1, 2019. Messrs. Hall and McMillan are also two of the Company’s executive officers and directors.

In addition, along with Charles J. Schreiber, Jr., Keith D. Hall and Peter McMillan III control and indirectly own KBS Holdings LLC (“KBS Holdings”), the Company’s sponsor prior to November 1, 2019. KBS Holdings is the sole owner of KBS Capital Advisors LLC (“KBS Capital Advisors”), the Company’s advisor prior to November 1, 2019, and KBS ~~Growth & Income REIT, Inc. (“KBS Growth & Income REIT”). The Dealer Manager also serves or has served~~Capital Markets Group LLC, the entity that acted as the dealer manager ~~for~~of the ~~KBS dividend reinvestment plan offerings for Pacific Oak Strategic Opportunity REIT, KBS REIT III and KBS Growth & Income REIT.~~Company’s now-terminated primary initial public offering.

OnFrom the Company’s inception through October 31, 2019, ~~the Advisor ceased to serve as~~KBS Capital Advisors provided day-to-day management of the Company’s ~~advisor or have any~~business. The advisory ~~responsibility to~~agreement with KBS Capital Advisors terminated on October 31, 2019, and the Company ~~immediately following~~hired Pacific Oak Capital Advisors under substantially the ~~filing of the Third Quarter 10-Q with the SEC. On~~same terms on November 1, ~~2019, the Company entered into an~~2019. The advisory agreement with Pacific Oak Capital Advisors ~~LLC (“Pacific Oak Capital Advisors”). The advisory agreement is effective as~~has a one year term subject to an unlimited number of ~~November 1, 2019 through November 1, 2020; however~~successive one year renewals upon the Company may terminate the advisory agreement without cause or penalty upon providing 30 days’ written notice and Pacific Oak Capital Advisors may terminate the advisory agreement without cause or penalty upon providing 90 days’ written notice. The termsmutual consent of the ~~advisory agreement are consistent with those of the advisory agreement that was previously in effect with the Advisor.~~

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, Pacific Oak 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 such insurance coverage were shared. The cost of these lower tiers was allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and was billed directly to each entity. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. KBS REIT I elected to cease participation in the program at the June 2017 renewal and obtained separate insurance coverage. At renewal in June 2018, the Company, Pacific Oak Strategic Opportunity REIT and KBS Legacy Partners Apartment REIT elected to cease participation in the program and obtain separate insurance coverage. The Company, together with Pacific Oak Strategic Opportunity REIT, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each REIT covered by the program, and is billed directly to each REIT. The program is effective through June 30, 2020.

~~During the three and nine months ended September 30, 2019 and 2018, no other business transactions occurred between the Company and these other KBS-sponsored programs.~~parties.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(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,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively, and any related amounts payable as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

Incurred Payable as of
Three Months Ended September 30, Nine Months Ended September 30, September 30, 2019 December 31, 2018
2019 2018 2019 2018
Expensed
Asset management fees $ 1,026 $ 1,020 $ 3,137 $ 2,940 $ 27 $ 22
Reimbursable operating expenses ⁽¹⁾
99 113 293 337 42 35
Capitalized
Acquisition fees 8 19 8 234 182 178
Additional Paid-in Capital
Sales commissions — 190 — 614 — —
Dealer manager fees — 92 — 337 — —
Stockholder servicing fees ⁽²⁾
— (2) — 14 — —
Reimbursable other offering costs ⁽³⁾
— 45 — 174 — —
$ 1,133 $ 1,477 $ 3,438 $ 4,650 $ 251 $ 235


	Incurred						Payable as of
	Three Months Ended March 31,						March 31, 2020		December 31, 2019
	2020		2019
Expensed
Asset management fees	$	1,044	$	1,049	$	1,032	$	620
Reimbursable operating expenses ⁽¹⁾	72		102		—		—
Capitalized
Acquisition fees on real estate equity securities	71		—		71		—





Acquisition fee on investment in unconsolidated entities	—		—		29		29
	$	1,187	$	1,151	$	1,132	$	649

_____________________

⁽¹⁾Reimbursable operating expenses primarily consists of internal audit personnel costs, accounting software and cyber-security related expenses incurred by the ~~Advisor~~applicable advisor under the ~~Advisory Agreement.~~applicable advisory agreement. The Company has reimbursed the ~~Advisor~~applicable advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $0.1 million ~~and $0.2 million for the~~ three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 ~~respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2018, respectively,~~ and were the only employee costs reimbursed under the ~~Advisory Agreement for~~applicable advisory agreement over the ~~three and nine months ended September 30, 2019 and 2018. The~~shown periods. In the future, 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~~reimbursed the ~~Advisor~~applicable advisor for certain of the Company’s direct costs incurred from third parties that were initially paid by the ~~Advisor~~applicable advisor on behalf of the Company.

⁽²⁾~~Reflects the stockholder servicing fee paid based on the terms of the Class T Shares. Pursuant to the terms of the Class T shares as set forth in the Articles Supplementary and Multiple Class Plan of~~Insurance.

On January 6, 2014, the Company, ~~the Company ceased accruing for stockholder servicing fees after July 31, 2018.~~

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

~~During the nine months ended September 30, 2018, the Advisor reimbursed the Company $35,000 for property insurance rebates.~~

~~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,~~together with KBS Real Estate Investment Trust, Inc. ("KBS REIT I"), KBS Real Estate Investment Trust II, Inc. ("KBS REIT II"), KBS Real Estate Investment Trust, Inc. ("KBS REIT III"), KBS Legacy Partners Apartment REIT, Inc. ("KBS Legacy Partners Apartment REIT"), POSOR I, the Dealer Manager, ~~or their affiliates on behalf~~KBS Capital Advisors and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers was allocated by KBS Capital Advisors and its insurance broker among each of the ~~Company or may be paid directly~~various entities covered by the ~~Company. These offering costs include all expenses incurred~~program, and was billed directly to each entity. In June 2015, KBS Growth & Income REIT, Inc. ("KBS Growth & Income REIT") was added to the insurance program at terms similar to those described above. At renewal in June 2018, the Company, along with POSOR I and KBS Legacy Partners Apartment REIT elected to cease participation in the program and obtain separate insurance coverage. The Company, together with POSOR I, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is or was allocated by the ~~Company in connection with the Private Offering~~Company’s applicable advisor and ~~the Public Offering. Organization costs include all expenses incurred~~its insurance broker among each REIT covered by the ~~Company in connection with the formation of the Company, including but not limited~~program, and is billed directly to ~~legal fees and other costs to incorporate the Company.~~each REIT. The program is effective through June 30, 2020.

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)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

~~During the Public Offering, pursuant to the Advisory Agreement and the Dealer Manager Agreement,~~Pacific Oak Opportunity Zone Fund I.

On December 31, 2019, the Company made a $2.9 million investment in the Pacific Oak Opportunity Zone Fund I. Pacific Oak Opportunity Zone Fund I is ~~obligated~~sponsored by Pacific Oak Holding. Pacific Oak Capital Advisors is entitled 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 Companycertain fees in connection with the ~~Public Offering (including selling commissions, dealer manager fees and the stockholder servicing fee)~~fund. The fund will pay an acquisition fee equal to ~~exceed 15%~~1.5% of the ~~aggregate gross proceeds from the Public Offering~~purchase price of each asset (including any debt incurred or assumed and significant capital improvement costs budgeted as of the date of ~~reimbursement.~~acquisition) with a purchase price less than or equal to $25.0 million plus 1.0% of the purchase price in excess of $25.0 million; a quarterly asset management fee equal to 0.25% of the total purchase price of all assets (including any debt incurred or assumed and significant capital improvement costs budgeted as of the date of acquisition) as of the end of the applicable quarter; and a financing fee equal to 0.5% of the original principal amount of any indebtedness they incur (reduced by any financing fee previously paid with respect to indebtedness being refinanced). In ~~addition,~~ the ~~Advisor and its affiliates reimbursed~~case of investments made through joint ventures, the ~~Company~~fees above will be determined based on our proportionate share of the investment. Pacific Oak Holding is also entitled to certain distributions paid by the ~~extent that~~Pacific Oak Opportunity Zone Fund I after the ~~organization and other offering expenses (which exclude selling commissions, dealer manager~~Class A Members have received their preferred return. These 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, exceeded 1.0% of gross offering proceeds from the primary portion of the Public Offering. The Advisor and its affiliates are responsibledistributions have been waived 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, 2019, 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 $11.4 million. As of September 30, 2019, the Company had recorded $14.5~~$2.9 million in selling commissions and dealer manager fees and $1.7 million of stockholder servicing fees. As of September 30, 2019, the Company had recorded $2.3 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, 2019 based on the 1.0% limitation described above.

In addition, as of September 30, 2019, the Advisor had incurred $0.1 million 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. On December 18, 2018, the Company withdrew the proposed follow-on offering.investment.

~~11.~~10. 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)~~

~~PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.~~

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

~~September 30, 2019~~

~~(unaudited)~~

Pursuant to the management agreement, the Operator 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.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2020

(unaudited)

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.

During each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company incurred ~~$0.2~~$0.1 million ~~and $0.5 million, respectively,~~ of fees related to the management agreement, which are included in hotel expenses on the accompanying consolidated statements of operations. On March 31, 2020, the Springmaid Beach Resort temporarily closed due to COVID-19 (Coronavirus) and reopened on May 1, 2020.

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 each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company incurred $0.1 million ~~and $0.3 million, respectively,~~ of fees related to the management agreement, which 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 each of the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company incurred $0.2 million ~~and $0.6 million, respectively,~~ of fees related to the Marriott franchise agreement. ~~During~~On March 31, 2020, the ~~three and nine months ended September 30, 2018, the~~Q&C Hotel temporarily closed due to COVID-19 (Coronavirus). The Company ~~incurred $0.2 million and $0.8 million, respectively, of fees related~~is unable to ~~the Marriott franchise agreement.~~predict when Q&C Hotel will resume their operations.

In addition, in connection with the execution of the franchise agreement, Pacific Oak SOR US Properties II, an indirect wholly owned subsidiary of the Company, 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.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

Lease Obligations

As of ~~September 30, 2019,~~March 31, 2020, the Company had leasehold interests expiring on various expiration dates between ~~October~~April 1, ~~2019~~2020 and 2114. Future minimum lease payments owed by the Company under the finance leases as of ~~September 30, 2019~~March 31, 2020 are as follows (in thousands):


October 1, 2019 through December 31, 2019		$	150
2020		680
April 1, 2020 through December 31, 2020				April 1, 2020 through December 31, 2020	$	650
2021	2021	735		2021	735
2022	2022	935		2022	935
2023	2023	525		2023	525
2024				2024	360
Thereafter	Thereafter	53,316		Thereafter	52,956
Total expected minimum lease liabilities	Total expected minimum lease liabilities	56,341		Total expected minimum lease liabilities	56,161
Less: Amount representing interest ⁽¹⁾	Less: Amount representing interest ⁽¹⁾	(48,150)		Less: Amount representing interest ⁽¹⁾	(47,939)
Present value of net minimum lease payments ⁽²⁾	Present value of net minimum lease payments ⁽²⁾	$	8,191	Present value of net minimum lease payments ⁽²⁾	$	8,222

_____________________

⁽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 for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide these 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, 2019.~~March 31, 2020. 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.

COVID-19

While the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business, the situation is rapidly evolving and the Company cannot predict how long the COVID-19 pandemic will last or what the long term impact will be on the Company’s operations. As a result, the Company has experienced and continues to experience a significant negative impact on its liquidity, and could experience additional material impacts including, but not limited to, asset impairment charges. The Company anticipates this will have a material impact on its business, results of operations and cash flows in 2020.

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)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

~~September 30, 2019~~March 31, 2020

(unaudited)

~~12.~~11. SUBSEQUENT EVENTS

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

~~Cash Distributions Paid~~While the Company is closely monitoring the impact of the COVID-19 pandemic on all aspects of its business, the situation is rapidly evolving and the Company cannot predict how long the COVID-19 pandemic will last or what the long term impact will be on the Company’s operations.

On ~~October 1, 2019,~~May 8, 2020, the Company ~~paid distributions of $0.2 million related to~~was granted a ~~monthly distribution in the amount of $0.00799167 per share~~loan payment deferral on the ~~outstanding shares of all classes of its common stock as of September 20, 2019. On November 1, 2019, the~~Springmaid Beach Resort mortgage loan. The Company ~~paid distributions of $0.2 million related to a monthly distribution in the amount of $0.00799167 per share on the outstanding shares of all classes of its common stock as of October 21, 2019.~~

~~Distributions Declared~~

On November 7, 2019, the Company’s board of directors declared monthly distributions in the amount of $0.00799167 per share on the outstanding shares of all classes of its common stock as of November 20, 2019 and December 19, 2019, which the Company expects to pay in December 2019 and January 2020, respectively. Investors may ~~choose to receive cash distributions or purchase additional shares through the Company’s dividend reinvestment plan.~~

~~Real Estate Disposition Subsequent to September 30, 2019~~

~~Disposition of 2200 Paseo Verde~~

On November 4, 2019, the Company sold 2200 Paseo Verde to a purchaser unaffiliated with the Company, the Advisor or Pacific Oak Capital Advisors for a sales price, net of closing credits, of $18.6 million, excluding closing costs. As of September 30, 2019, the carrying value of 2200 Paseo Verde was $13.1 million, which was net of $1.9 million of accumulated depreciation and amortization.

~~On November 4, 2019, in connection with the disposition of 2200 Paseo Verde, the Company repaid $8.7 million~~defer one-half of the ~~outstanding~~monthly interest due and the deferred interest will be compounded during the deferral period of April 2020 through October 2020. In addition, the deferral includes deferring the monthly principal ~~balance due under the 2200 Paseo Verde mortgage loan.~~

~~Resignation of Officers~~

~~On October 31, 2019, Jeffrey K. Waldvogel notified the Board of Directors~~payments of the Company (the “Board”) of his resignation as Secretary and Treasurer of the Company effective immediately and of his resignation as Chief Financial Officer of the Company effective immediately following the filing of the Third Quarter 10-Q with SEC. Also on October 31, 2019, Stacie K. Yamane notified the Board of her resignation as Chief Accounting Officer of the Company immediately following the filing of the Third Quarter 10-Q with the SEC.

~~Appointment of New Chief Financial Officer~~

On October 31, 2019, the Board appointed Michael A. Bender to serve as Executive Vice President, Treasury, Secretary and Chief Financial Officer-Elect of the Company effective as of November 1, 2019, and as Chief Financial Officer effective immediately following the filing by the Company of the Third Quarter 10-Q with the SEC. As Chief Financial Officer, Mr. Bender will serve as principal financial officerloan until March 2021, at which time all deferred interest and principal ~~accounting officer for~~will be due. All other loan requirements remain the ~~Company.~~

same.

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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Pacific Oak Strategic Opportunity REIT II, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Pacific Oak Strategic Opportunity REIT II, Inc., a Maryland corporation, and, as required by context, Pacific Oak 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 Pacific Oak 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 depend on our advisor to conduct our operations and eventually dispose of our investments.

•Because our new advisor, Pacific Oak Capital Advisors, was recently formed, it could face challenges with employee hiring and retention, information technology, vendor relationships, and funding; if Pacific Oak Capital Advisors faces challenges in performing its obligations to us, it could negatively impact our ability to achieve our investment objectives.

•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 ~~former or current~~ advisor ~~our dealer manager~~ and other ~~KBS or~~ Pacific Oak-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 or~~ Pacific Oak-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions.

•We face potential business disruptions due to the recent global outbreak of COVID-19 (Coronavirus). The virus has significantly disrupted economic markets and impacted commercial activity worldwide, including the US, and the prolonged economic impact is uncertain. Our tenants and potential tenants of the properties we own could be adversely affected by the disruption to business caused by the virus.

•We raised substantially less than the maximum offering amount in our initial public offering. Therefore, our portfolio of properties may not be as diverse as it otherwise would, which will cause the value of our stockholders’ investment to vary more widely with the performance of specific assets.

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

•Our distribution policy is generally not to use offering proceeds to 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 and the overall return to our stockholders may be reduced.

•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. 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.

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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.

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

~~Table of Contents~~

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

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

•Our estimated net asset value per share does not currently represent our enterprise value and may not accurately reflect the actual prices at which our assets could be liquidated on any given day, the value a third party would pay for all or substantially all of our shares, or the price that our shares would trade at on a national stock exchange.

•Certain of our debt obligations have variable interest rates and related payments that vary with the movement of LIBOR or other indexes. Increases in these indexes could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

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, ~~2018,~~2019, 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. We have no employees and KBS Capital Advisors LLC (“KBS Capital Advisors”) ~~has~~had served as our external advisor since commencement of the private offering. On October 31, 2019, KBS Capital Advisors ceased to serve as our advisor or have any advisory responsibility to us immediately following the filing of our Quarterly Report on Form 10-Q for the period ending September 30, 2019 ~~(the “Third Quarter 10-Q”)~~(filed November 8, 2019) with the SEC. On November 1, 2019, we entered into a new advisory agreement with Pacific Oak Capital Advisors, LLC (“Pacific Oak Capital Advisors”). The new advisory agreement is effective as of November 1, 2019 through November 1, 2020; however we may terminate the advisory agreement without cause or penalty upon providing 30 days’ written notice and Pacific Oak Capital Advisors may terminate the advisory agreement without cause or penalty upon providing 90 days’ written notice. The terms of the advisory agreement are consistent with those of the advisory agreement that was previously in effect with KBS Capital Advisor. As our advisor, Pacific Oak Capital Advisors manages our day-to-day operations and managed our portfolio of real estate properties and real estate-related investments. Pacific Oak Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf.

KBS Capital Advisors entered a sub-advisory agreement with STAM Europe (“STAM”), a real estate operating company based in Paris, France, pursuant to which STAM would provide real estate acquisition and portfolio management services to our advisor in connection with investments in Europe. Effective April 17, 2019, STAM terminated the sub-advisory agreement with KBS Capital Advisors.

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.

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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 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 were 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 could 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 was responsible for marketing our shares in the initial public offering. We ceased offering shares of common stock in our initial public primary offering on July 31, 2018 and terminated our initial public primary offering on September 28, 2018. We continue to offer shares of common stock under our dividend reinvestment plan. In some states, we will need to renew the registration statement annually or file a new registration statement to continue our dividend reinvestment plan offering. We may terminate our dividend reinvestment plan offering at any time.

We have used substantially all of the net proceeds from our offerings to invest in and manage a portfolio of opportunistic real estate, real estate-related loans, real estate equity securities and other real estate-related investments located in the United States and Europe. As of ~~September 30, 2019,~~March 31, 2020, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, ~~an investment~~two investments in an unconsolidated ~~entity~~entities and an investment in real estate equity securities. Additionally, as of ~~September 30, 2019,~~March 31, 2020, we had entered into a consolidated joint venture to develop one retail property.

~~Table of Contents~~

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

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

We sold 11,977,758 and 11,537,701 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of $228.6 million in our initial public primary offering. As of ~~September 30, 2019,~~March 31, 2020, we had sold ~~699,941~~730,193 and ~~312,627~~340,131 shares of Class A and Class T common stock, respectively, under our dividend reinvestment plan for aggregate gross offering proceeds of ~~$9.4~~$10.0 million. Also as of ~~September 30, 2019,~~March 31, 2020, we had redeemed ~~710,444~~832,408 and ~~104,330~~164,618 shares of Class A and Class T common stock, respectively, for ~~$7.3~~$9.2 million.

We sold 3,619,851 shares of Class A common stock for gross offering proceeds of $32.2 million in our private offering. ~~In addition,~~Additionally, on each of April 2, 2014 and July 31, 2014, we ~~raised $4.2~~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 ~~Act pursuant~~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 ~~Section 4(2)~~a business associate of two of our officers and affiliated directors for $2.0 million and $0.1 million, respectively, in a separate private transaction exempt from the registration requirements of the Securities Act.

On February 19, 2020, we, Pacific Oak Strategic Opportunity REIT, Inc. (“POSOR I”), and Pacific Oak SOR II, LLC, an indirect subsidiary of POSOR I (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”). Subject to the terms and conditions of the Merger Agreement, we will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger (the “Surviving Entity”), such that following the Merger, the Surviving Entity will continue as an indirect subsidiary of POSOR I. In accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of our company shall cease. At the effective time of the Merger and subject to the terms and conditions of the Merger Agreement, each issued and outstanding share of our common stock will be converted into the right to receive 0.9643 shares of POSOR I common stock. The combined company after the Merger will retain the name “Pacific Oak Strategic Opportunity REIT, Inc.” The Merger is intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended.

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PART I. FINANCIAL INFORMATION (CONTINUED)

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

Market Outlook - Real Estate and Real Estate Finance Markets

Volatility in global financial markets and changing political environments can cause fluctuations in the performance of the U.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. To the extent there are increases in the cost of financing due to higher interest rates, this may cause difficulty in refinancing debt obligations at terms as favorable as the terms of existing indebtedness. Further, increases in interest rates would increase the amount of our debt payments on our variable rate debt to the extent the interest rates on such debt are not limited by interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our ~~debt.~~debt exposure. The recent global outbreak of COVID-19 (more commonly known as the Coronavirus) has significantly disrupted economic markets and impacted commercial activity worldwide, including the US, and the prolonged economic impact is uncertain. As a result, we have experienced and continue to experience a negative impact on our liquidity, and could experience additional material impacts including, but not limited to, asset impairment charges. We anticipate this will have a material impact on our business, results of operations and cash flows in 2020.

Liquidity and Capital Resources

Our principal demand for funds during the short and long-term is and will be for the payment of operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; capital commitments and development expenses under our joint venture agreements; and payments of distributions to stockholders. While we expect to have sufficient liquidity to meet our obligations for the foreseeable future, the COVID-19 outbreak and associated responses we have experienced and continue to experience a negative impact on our liquidity that will impact our future cash flows and financial condition.

To date, we have had five primary sources of capital for meeting our cash requirements:

•Proceeds from the primary portion of our initial public offering;

•Proceeds from our dividend reinvestment plan;

•Proceeds from the sale of real estate and the repayment of a real estate loan receivable;

•Debt financings; and

•Cash flow generated by our real estate investments.

We had sold 11,977,758 and 11,537,701 shares of Class A and Class T common stock, respectively, for aggregate gross offering proceeds of $228.6 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. We ceased offering shares of common stock in our initial public primary offering on July 31, 2018 and terminated our initial public primary offering on September 28, 2018.

To date, we have invested a significant amount of the proceeds from the primary public offering in real estate and do not anticipate making additional real estate acquisitions due to the termination of the primary portion of our initial public offering on July 31, 2018. We intend to use our cash on hand, cash flow generated by our real estate operations and proceeds from our dividend reinvestment plan as our primary sources of immediate and long-term liquidity.

As of ~~September 30, 2019,~~March 31, 2020, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, ~~an investment~~two investments in an unconsolidated ~~entity~~entities and an investment in real estate equity securities. Additionally, as of ~~September 30, 2019,~~March 31, 2020, we had entered into a consolidated joint venture to develop one retail property.

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, 2019,~~March 31, 2020, we owned ~~four~~three office properties that were ~~72%~~70% occupied and one apartment property that was ~~96%~~90% occupied.

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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 for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


Property(1)	Property(1)	Number of Rooms	Percentage Occupied for the Nine Months Ended September 30,			Average Daily Rate for the Nine Months Ended September 30,				Average Revenue per Available Room for the Nine Months Ended September 30,					Property(1)		Number of Rooms		Percentage Occupied for the Three Months Ended March 31,						Average Daily Rate for the Three Months Ended March 31,		Average Revenue per Available Room for the Three Months Ended March 31,
				2019	2018	2019	2018	2019		2018		Property(1)	Number of Rooms						2019		2020		2019		2020	2019
Springmaid Beach Resort	Springmaid Beach Resort	452	69.1%	65.7%	td49.36	td70.09	td03.22	td11.78	Springmaid Beach Resort		453			42.3%		$90.83		td08.32		td6.76		$45.84
Q&C Hotel	Q&C Hotel	196	72.4%	75.7%	$165.42	$158.08	$120.39	$119.61	Q&C Hotel		196			58.1%		83.0%		$178.64		$177.45		$103.76		$147.20

_____________________

⁽¹⁾
On March 31, 2020, both hotels were temporarily closed due to COVID-19 (Coronavirus). As such, the hotels experienced lower than normal occupancy rates during the months prior to the lockdown. The Springmaid Beach Resort subsequently reopened on May 1, 2020.

Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As of ~~September 30, 2019,~~March 31, 2020, we had an investment in real estate equity securities outstanding with a total book value of ~~$9.8~~$10.1 million.

As of ~~September 30, 2019,~~March 31, 2020, we had mortgage debt obligations in the aggregate principal amount of ~~$350.7~~$329.3 million, with a weighted-average remaining term of ~~1.9~~1.7 years. As of ~~September 30, 2019,~~March 31, 2020, an aggregate amount of ~~$32.5~~$47.1 million was available under 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. As of March 31, 2020, we had a total of $80.3 million of debt obligations scheduled to mature within 12 months of that date. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates.

We expect to use our capital resources to make certain payments to our advisor in connection with the management of our assets and costs incurred by our advisor in providing services to us. ~~On October 31, 2019, KBS Capital Advisors ceased to serve as~~Our currently effective advisory agreement expires November 1, 2020 and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor or have any advisory responsibility to us. On November 1, 2019, we entered into a new advisory agreement with Pacific Oak Capital Advisors. The new advisory agreement is effective as of November 1, 2019 through November 1, 2020; however we may terminate the advisory agreement without cause or penalty upon providing 30 days’ written notice and Pacific Oak Capital Advisors may terminate the advisory agreement without cause or penalty upon providing 90 days’ written notice. The terms of the advisory agreement are consistent with those of the advisory agreement that was previously in effect with KBS Capital Advisor.our conflicts committee.

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.

We elected to be taxed and to operate as a REIT beginning with our taxable year ended December 31, 2014. 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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

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, 2019~~March 31, 2020 did not exceed the charter imposed limitation.

~~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 ~~September 30, 2019,~~March 31, 2020, we had invested in two hotel properties, ~~four~~three office properties, one apartment building, ~~an investment~~two investments in an unconsolidated ~~entity~~entities and an investment in real estate equity securities. Additionally, as of ~~September 30, 2019,~~March 31, 2020, we had entered into a consolidated joint venture to develop one office/retail property. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, net cash ~~provided by~~used in operating activities was ~~$1.9~~$2.6 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.

Cash Flows from Investing Activities

Net cash used in investing activities was ~~$5.1~~$6.4 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and primarily consisted of the following:

•$~~9.8~~4.0 million of investment in real estate securities;

•$2.8 million of improvements to real estate; and

•$~~5.1~~0.4 million of distribution of capital from unconsolidated ~~joint venture;~~

•~~$0.4 million of payments for a construction project; and~~

•~~$0.1 million of proceeds from termination of derivative instruments.~~entities.

Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$13.8~~$2.1 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and primarily consisted of the following:

•$19.6 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $135.8 million, partially offset by principal payments on notes payable of $113.9 million and payment of deferred financing costs of $2.3 million;

•~~$2.9~~1.7 million of cash used for redemptions of common stock;

•$~~1.9~~0.3 million of ~~distributions to noncontrolling interest;~~net cash used in debt and other financings as a result of principal payments on notes payable of $0.3 million and payment of deferred financing costs of $19,000 and partially offset by proceeds from notes payable of $0.1 million; and

•$~~1.1~~0.1 million of net cash distributions, after giving effect to distributions reinvested by stockholders of ~~$1.8 million;~~

•~~$0.2 million of noncontrolling interest contributions; and~~

•~~$0.2 million of principal payments on finance lease obligations.~~$0.1 million.

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. 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, 2019,~~March 31, 2020, our borrowings and other liabilities were approximately ~~61%~~60% of the cost (before depreciation and other noncash reserves) and book value (before depreciation) of our tangible assets.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2020 (in thousands):


			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2020		2021-2022		2023-2024		Thereafter
Outstanding debt obligations⁽¹⁾	$	329,331	$	79,668	$	249,663	$	—	$	—
Interest payments on outstanding debt obligations ⁽²⁾	21,618		8,439		13,179		—		—
Finance lease liabilities	56,161		650		1,670		885		52,956

_____________________

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, 2019 (in thousands):~~

Payments Due During the Years Ending December 31,
Contractual Obligations Total Remainder of 2019 2020-2021 2022-2023 Thereafter
Outstanding debt obligations⁽¹⁾
$ 350,711 $ 57,585 $ 145,037 $ 148,089 $ —
Interest payments on outstanding debt obligations ⁽²⁾
29,015 4,019 20,811 4,185 —
Finance lease liabilities 56,341 150 1,415 1,460 53,316

~~_____________________~~

⁽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, 2019.~~March 31, 2020. We incurred interest expense of ~~$13.9~~$3.6 million, excluding amortization of deferred financing costs of ~~$1.3~~$0.5 million for the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

Results of Operations

Overview

As of ~~September 30, 2018 and~~March 31, 2019, 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. As of March 31, 2020, we had invested in two hotel properties, three office properties, one apartment building, two investments in unconsolidated entities and an investment in real estate equity securities. Additionally, as of ~~September 30, 2018~~March 31, 2019 and ~~2019,~~2020, we had entered into a consolidated joint venture to develop one retail property. We funded the acquisitions of these investments with proceeds from our terminated offerings and debt financing. Our results of operations for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 are not indicative of those in future periods as we expect that our revenue and expenses related to our portfolio will increase in future periods as the occupancies at our properties stabilize as discussed below. 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 ~~September 30, 2019,~~March 31, 2020, 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 assets in the 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 assets will increase, or that we will recognize a gain on the sale of our assets. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and improving our properties but decrease due to disposition activity.

Comparison of the three months ended March 31, 2020 versus the three months ended March 31, 2019

The following table provides summary information about our results of operations for the three months ended March 31, 2020 and 2019 (dollar amounts in thousands):


	Three Months Ended March 31,						Increase (Decrease)		Percentage Change		$ Change Due to Acquisitions/Dispositions ⁽¹⁾		$ Change Due to Investments Held Throughout Both Periods ⁽²⁾
	2020		2019
Office revenues	$	7,096	$	7,117	$	(21)	—	%	$	(396)	$	375
Hotel revenues	4,080		5,980		(1,900)		(32)	%	—		(1,900)
Apartment revenues	2,056		1,995		61		3	%	—		61
Dividend income from real estate equity securities	139		104		35		34	%	35		—
Office expenses	3,374		3,397		(23)		(1)	%	(107)		84
Hotel expenses	4,661		5,175		(514)		(10)	%	—		(514)
Apartment expenses	811		897		(86)		(10)	%	—		(86)
Asset management fees to affiliate	1,044		1,049		(5)		—	%	(34)		29
General and administrative expenses	1,643		707		936		132	%	n/a		n/a
Depreciation and amortization	4,896		5,074		(178)		(4)	%	(168)		(10)
Interest expense	4,126		4,961		(835)		(17)	%	(101)		(734)

Other interest income	35		64		(29)		(45)	%	n/a		n/a
Equity in income of unconsolidated entity	—		2,800		(2,800)		(100)	%	—		(2,800)
(Loss) gain on real estate equity securities	(3,889)		1,114		(5,003)		(449)	%	n/a		n/a

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 related to real estate-related investments acquired on or after March 1, 2019.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

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Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

~~Comparison~~Office revenues remained consistent at $7.1 million for each of the three months ended ~~September 30, 2019 versus the three months ended September 30, 2018~~

~~The following table provides summary information about our results of operations for the three months ended September 30, 2019~~March 31, 2020 and ~~2018 (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⁾
2019 2018
Office revenues $ 7,358 $ 7,515 $ (157) (2) % $ — $ (157)
Hotel revenues 9,271 10,461 (1,190) (11) % — (1,190)
Apartment revenues 2,014 1,940 74 4 % — 74
Dividend income from real estate equity securities 104 77 27 35 % 27 —
Office expenses 3,493 3,241 252 8 % — 252
Hotel expenses 6,249 6,106 143 2 % — 143
Apartment expenses 927 976 (49) (5) % — (49)
Asset management fees to affiliate 1,026 1,020 6 1 % — 6
General and administrative expenses 892 704 188 27 % n/a n/a
Depreciation and amortization 5,133 5,150 (17) — % — (17)
Interest expense 5,210 3,435 1,775 52 % — 1,775
Impairment charge on real estate — 4,245 (4,245) (100) % (4,245)
Other interest income 125 105 20 19 % n/a n/a
Equity in income of unconsolidated entity — 94 (94) (100) % — (94)
Gain (loss) on real estate equity securities 1,253 (486) 1,739 (358) % 1,739 —
Loss on extinguishment of debt (90) — (90) (100) % — (90)

~~_____________________~~

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 related to real estate-related investments acquired on or after July 1, 2018.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

~~Office revenues decreased slightly from $7.5 million for the three months ended September 30, 2018 to $7.4 million for the three months ended September 30,~~ 2019. The occupancy of our office properties, collectively, held throughout both periods remained consistent at ~~72%~~70% as of ~~September 30, 2019~~March 31, 2020 and ~~2018, respectively.~~2019. We expect office revenues to vary in future periods based on occupancy and rental rates of our office properties.

Hotel revenues decreased from ~~$10.5~~$6.0 million for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~$9.3~~$4.1 million for the three months ended ~~September 30, 2019,~~March 31, 2020, primarily due to ~~a decrease in hotel room revenues collected as a result of a decrease in~~the COVID-19 pandemic and its effect on occupancy. The occupancy rate and the average daily room rate ~~at Springmaid Beach Resort and a decrease in occupancy at Q&C Hotel. The average daily rate at~~for the Springmaid Beach Resort decreased from ~~$192.42~~42.3% and $108.32 for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~$166.22~~29.5% and $90.83 for the three months ended ~~September 30, 2019. Springmaid Beach Resort~~March 31, 2020. The occupancy rate for the Q&C Hotel decreased from ~~81.3%~~83.0% and for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~80.7%~~58.1% for the three months ended September 30, 2019. The average daily rate at Q&C Hotel increased from $127.99 for the three months ended September 30, 2018 to $139.35 for the three months ended September 30, 2019. Q&C Hotel occupancy decreased from 66.2% for the three months ended September 30, 2018 to 58.9% for the three months ended September 30, 2019.March 31, 2020. We expect hotel revenues to vary in future periods based on occupancy and room rates.

Apartment revenues increased slightly from ~~$1.9 million for the three months ended September 30, 2018 to~~ $2.0 million for the three months ended ~~September 30,~~March 31, 2019 to $2.1 million for the three months ended March 31, 2020, primarily due to increased ~~occupancy. The~~rental rates and occupancy ~~of our apartment property increased from 91% as of September 30, 2018 to 96% as of September 30, 2019.~~rates were consistent between both periods. We expect apartment revenues to vary in future periods depending on occupancy and rental rates.

Dividend income from real estate equity securities increased from ~~$77,000 for the three months ended September 30, 2018 to~~ $104,000 for the three months ended ~~September 30,~~March 31, 2019 to $139,000 for the three months ended March 31, 2020 due to the acquisition of real estate equity securities. We expect dividend income from real estate equity securities to vary in future periods as a result of declaration of dividends and to the extent we buy or sell any securities.

~~Table of Contents~~

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

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

~~Office~~Hotel expenses ~~increased~~decreased from ~~$3.2~~$5.2 million for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~$3.5~~$4.7 million for the three months ended September 30, 2019, primarily as a result of approximately $0.2 million of 210 West 31st Street expenses incurred during the three months ended September 30, 2019, which were previously capitalized to building and improvements prior to the development being placed on hold on October 1, 2018. Hotel expenses increased from $6.1 million for the three months ended September 30, 2018 to $6.2 million for the three months ended September 30, 2019,March 31, 2020, primarily due to ~~an increase in other hotel costs.~~the COVID-19 pandemic and its effect on decreasing occupancy during the months leading to the temporary closure of both hotels on March 31, 2020. We expect total expenses to vary in future periods based on occupancy rates.

Asset management fees to affiliate remained consistent at $1.0 million for each of the three months ended ~~September 30, 2018~~March 31, 2020 and 2019. We expect asset management fees to increase in future periods as a result of any additional improvements we make to our properties. Approximately ~~$27,000~~$1.0 million of asset management fees incurred were payable as of ~~September 30, 2019.~~March 31, 2020.

General and administrative expenses increased from $0.7 million for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~$0.9~~$1.6 million for the three months ended ~~September 30, 2019,~~March 31, 2020, primarily due $0.8 million related to ~~an increase in legal costs.~~the Merger. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.

Depreciation and amortization expenses ~~remained consistent at approximately $5.2~~decrease from $5.1 million for ~~each of~~ the three months ended ~~September 30, 2018 and 2019.~~March 31, 2019 to $4.9 million for the three months ended March 31, 2020, primarily due to the disposition of 2200 Paseo Verde. We expect depreciation and amortization expenses to vary in future periods as a result of a decrease in amortization related to fully amortized tenant origination and absorption costs, real estate dispositions and increase as a result of improvements to real ~~estate.~~estate and real estate acquisitions.

Interest expense ~~increased~~decreased from ~~$3.4~~$5.0 million for the three months ended ~~September 30, 2018~~March 31, 2019 to ~~$5.2~~$4.1 million for the three months ended ~~September 30, 2019,~~March 31, 2020, primarily ~~as a result of approximately $1.3 million of 210 West 31st Street interest expense incurred during~~due to decrease in one-month LIBOR rates and partially offset by the three months ended September 30, 2019, which was previously capitalized to building and improvements prior to the development being placed on hold on October 1, 2018. Additionally, interest expense increased as a result of an overall increase in ~~our~~ total debt outstanding during the three months ended September 30, 2019. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the availability and cost of debt financing. The increase in interest expense due to increases in LIBOR rates would be minimized somewhat to the extent rates are above the strike rates on our interest rate cap instruments.borrowing.

During the three months ended September 30, 2018, we recorded an impairment charge of $4.2 million to write-down the carrying value of 210 West 31st Street, a development property located in New York, New York, to its estimated fair value due to a change in the projected hold period and related decrease in projected cash flows.

~~During the three months ended September 30, 2018,~~March 31, 2019, we recognized ~~$0.1~~$2.8 million of equity income from an unconsolidated entity. We did not recognize any equity income from unconsolidated entity during the three months ended ~~September 30, 2019~~March 31, 2020 as a result of the liquidation of the underlying portfolio related to our STAM investment.

Gain on real estate equity securities was $1.1 million during the three months ended March 31, 2019. Loss on real estate equity securities was ~~$0.5~~$3.9 million during the three months ended ~~September 30, 2018. Gain on real estate equity securities was $1.3 million during the three months ended September 30, 2019.~~March 31, 2020. We expect ~~gain (loss)~~gains and losses on real estate equity securities to fluctuate in future periods as a result of changes in the share price of our investment in real estate equity securities.

~~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 nine months ended September 30, 2019 versus the nine months ended September 30, 2018~~

~~The following table provides summary information about our results of operations for the nine months ended September 30, 2019 and 2018 (dollar amounts in thousands):~~

Nine Months Ended September 30, Increase (Decrease) Percentage Change
$ Change Due to Acquisitions/Repayments ⁽¹⁾
$ Change Due to
Investments Held Throughout
Both Periods ⁽²⁾
2019 2018
Office revenues $ 21,669 $ 22,475 $ (806) (4) % $ — $ (806)
Hotel revenues 25,318 26,234 (916) (3) % — (916)
Apartment revenues 5,979 5,459 520 10 % — 520
Dividend income from real estate equity securities 313 113 200 177 % 200 —
Interest income from real estate loan receivable — 10 (10) (100) % (10) —
Office expenses 10,317 8,951 1,366 15 % — 1,366
Hotel expenses 17,560 17,161 399 2 % — 399
Apartment expenses 2,707 2,858 (151) (5) % — (151)
Asset management fees to affiliate 3,137 2,940 197 7 % 12 185
General and administrative expenses 2,368 1,947 421 22 % n/a n/a
Depreciation and amortization 15,314 15,322 (8) — % — (8)
Interest expense 15,197 9,740 5,457 56 % — 5,457
Impairment charge on real estate — 4,245 (4,245) (100) % (4,245)
Other interest income 237 257 (20) (8) % n/a n/a
Equity in income of unconsolidated entity 2,800 225 2,575 1,144 % — 2,575
Gain (loss) on real estate equity securities 2,588 (172) 2,760 (1,605) % 2,760 —
Loss on extinguishment of debt (90) — (90) (100) % — (90)

~~_____________________~~

⁽¹⁾ Represents the dollar amount increase (decrease) for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 related to real estate and real estate-related investments acquired or repaid on or after January 1, 2018.

⁽²⁾ Represents the dollar amount increase (decrease) for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

Office revenues decreased from $22.5 million for the nine months ended September 30, 2018 to $21.7 million for the nine months ended September 30, 2019, primarily due to a decrease in average occupancy to 70% for the nine months ended September 30, 2019 compared to 72% for the nine months ended September 30, 2018. We expect office revenues to vary in future periods based on occupancy and rental rates of our office properties.

Hotel revenues decreased from $26.2 million for the nine months ended September 30, 2018 to $25.3 million for the nine months ended September 30, 2019, primarily due to a decrease in hotel room revenues collected as a result of a decrease in average daily rate at Springmaid Beach Resort and a decrease in occupancy at Q&C Hotel. The average daily rate at Springmaid Beach Resort decreased from $170.09 for the nine months ended September 30, 2018 to $149.36 for the nine months ended September 30, 2019. Springmaid Beach Resort occupancy increased from 65.7% for the nine months ended September 30, 2018 to 69.1% for the nine months ended September 30, 2019. Q&C Hotel occupancy decreased from 75.7% for the nine months ended September 30, 2018 to 72.4% for the nine months ended September 30, 2019. We expect hotel revenues to vary in future periods based on occupancy and room rates.

Apartment revenues increased from $5.5 million for the nine months ended September 30, 2018 to $6.0 million for the nine months ended September 30, 2019, primarily due to increased rental income collected as a result of increased occupancy. The occupancy of our apartment property increased from 91% as of September 30, 2018 to 96% as of September 30, 2019. We expect apartment revenues to vary in future periods depending on occupancy and rental rates.

~~Table of Contents~~

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

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

Dividend income from real estate equity securities increased from $0.1 million for the nine months ended September 30, 2018 to $0.3 million for the nine months ended September 30, 2019 due to the acquisition of real estate equity securities. We expect dividend income from real estate equity securities to vary in future periods as a result of declaration of dividends and to the extent we buy or sell any securities.

Office expenses increased from $9.0 million for the nine months ended September 30, 2018 to $10.3 million for the nine months ended September 30, 2019, primarily as a result of (i) approximately $0.9 million of 210 West 31st Street expenses incurred during the nine months ended September 30, 2019, which were previously capitalized to building and improvements prior to the development being placed on hold on October 1, 2018 and (ii) a $0.4 million increase in Oakland City Center owner’s association fees. Hotel expenses increased from $17.2 million for the nine months ended September 30, 2018 to $17.6 million for the nine months ended September 30, 2019, primarily due to an increase in other hotel costs. We expect total expenses to vary in future periods based on occupancy rates.

Asset management fees to affiliate increased from $2.9 million for the nine months ended September 30, 2018 to $3.1 million for the nine months ended September 30, 2019, primarily as a result of improvements made at our properties and the acquisition of real estate equity securities in 2018. We expect asset management fees to increase in future periods as a result of any additional improvements we make to our properties. Approximately $27,000 of asset management fees incurred were payable as of September 30, 2019.

General and administrative expenses increased from $1.9 million for the nine months ended September 30, 2018 to $2.4 million for the nine months ended September 30, 2019, primarily due to an increase in legal costs. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.

Depreciation and amortization expenses remained consistent at approximately $15.3 million for each of the nine months ended September 30, 2018 and 2019. We expect depreciation and amortization expenses to vary in future periods as a result of a decrease in amortization related to fully amortized tenant origination and absorption costs and increase as a result of improvements to real estate.

Interest expense increased from $9.7 million for the nine months ended September 30, 2018 to $15.2 million for the nine months ended September 30, 2019, primarily as a result of approximately $3.9 million of 210 West 31st Street interest expense incurred during the nine months ended September 30, 2019, which was previously capitalized to building and improvements prior to the development being placed on hold on October 1, 2018. Additionally, interest expense increased as a result of an overall increase in our total debt outstanding during the nine months ended September 30, 2019. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the availability and cost of debt financing. The increase in interest expense due to increases in LIBOR rates would be minimized somewhat to the extent rates are above the strike rates on our interest rate cap instruments.

During the nine months ended September 30, 2018, we recorded an impairment charge of $4.2 million to write-down the carrying value of 210 West 31st Street, a development property located in New York, New York, to its estimated fair value due to a change in the projected hold period and related decrease in projected cash flows.

During the nine months ended September 30, 2019, we recognized $2.8 million of equity income from unconsolidated entity as a result of the liquidation of the underlying portfolio related to our STAM investment.

Loss on real estate equity securities was $0.2 million during the nine months ended September 30, 2018. Gain on real estate equity securities was $2.6 million during the nine months ended September 30, 2019. We expect gain (loss) on real estate equity securities to fluctuate in future periods as a result of changes in the share price of our investment in real estate equity securities.

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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. In addition, we elected the option to exclude mark-to-market changes in value recognized on equity securities in the calculation of FFO. 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 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.

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.

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.

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PART I. FINANCIAL INFORMATION (CONTINUED)

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

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, mark-to-market adjustments included in net income and loss on extinguishment of debt, 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

•Mark to Market adjustments included in net income. These are fair value adjustments to derivative instruments. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect core ~~operating performance; and~~

•~~Loss on extinguishment of debt.~~ A loss on extinguishment of debt, which includes prepayment fees related to the extinguishment of debt, represents the difference between the carrying value of any consideration transferred to the lender in return for the extinguishment of a debt and the net carrying value of the debt at the time of settlement. We have excluded the loss from extinguishment of debt in our calculation of MFFO because these losses do not impact the current operating performance of our investments and do not provide an indication of future 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.

~~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, 2020 and 2019 ~~and 2018~~ (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,							For the Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Net loss attributable to common stockholders	Net loss attributable to common stockholders	$	(2,557)	$	(4,963)	$	(6,677)	$	(8,133)	Net loss attributable to common stockholders	$	(10,470)	$	(1,535)
Depreciation of real estate assets	Depreciation of real estate assets	3,699		3,373		10,865		9,788		Depreciation of real estate assets	3,658		3,527
Amortization of lease-related costs	Amortization of lease-related costs	1,434		1,777		4,449		5,534		Amortization of lease-related costs	1,238		1,547
(Gain) loss on real estate equity securities		(1,253)		486		(2,588)		172
Impairment charge on real estate		—		4,245		—		4,245
Loss (gain) on real estate equity securities										Loss (gain) on real estate equity securities	3,889		(1,114)

Adjustments for noncontrolling interests ⁽¹⁾	Adjustments for noncontrolling interests ⁽¹⁾	(251)		(517)		(741)		(967)		Adjustments for noncontrolling interests ⁽¹⁾	(256)		(243)
Adjustments for investment in unconsolidated entity ⁽²⁾		—		(35)		(2,800)		(53)
Adjustments for investment in unconsolidated entities ⁽²⁾										Adjustments for investment in unconsolidated entities ⁽²⁾	—		(2,800)
FFO attributable to common stockholders	FFO attributable to common stockholders	1,072		4,366		2,508		10,586		FFO attributable to common stockholders	(1,941)		(618)
Straight-line rent and amortization of above- and below-market leases	Straight-line rent and amortization of above- and below-market leases	(832)		(1,035)		(2,438)		(3,900)		Straight-line rent and amortization of above- and below-market leases	(793)		(794)
Loss on extinguishment of debt		90		—		90		—
Unrealized loss (gain) on derivative instruments		47		(23)		(24)		(84)

Unrealized gain on derivative instruments										Unrealized gain on derivative instruments	(13)		(71)
Adjustments for noncontrolling interests ⁽¹⁾	Adjustments for noncontrolling interests ⁽¹⁾	(14)		(5)		(24)		(12)		Adjustments for noncontrolling interests ⁽¹⁾	(2)		(6)
MFFO attributable to common stockholders	MFFO attributable to common stockholders	363		3,303		112		6,590		MFFO attributable to common stockholders	(2,749)		(1,489)
Other capitalized operating expenses ⁽³⁾	Other capitalized operating expenses ⁽³⁾	—		(298)		—		(998)		Other capitalized operating expenses ⁽³⁾	(36)		—

Adjusted MFFO attributable to common stockholders	Adjusted MFFO attributable to common stockholders	$	363	$	3,005	$	112	$	5,592	Adjusted MFFO attributable to common stockholders	$	(2,785)	$	(1,489)

_____________________

⁽¹⁾ Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net 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 loss attributable to common stockholders to FFO for our equity ~~investment~~investments in an unconsolidated ~~entity.~~entities.

⁽³⁾ Reflects ~~real estate taxes, property insurance and~~ financing costs that are capitalized with respect to ~~certain renovation projects but excluding development projects. During~~our investment in the ~~time in which we are incurring costs necessary to bring these investments to their intended use, certain~~opportunity zone fund. Certain financing costs are capitalized in accordance with GAAP and not reflected in our net loss, FFO and MFFO.

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 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 stabilizing occupancies at our properties.

~~Organization and Offering Costs~~

Our organization and offering costs (other than selling commissions, dealer manager fees and the stockholder servicing fee) were paid by our advisor, the dealer manager or their affiliates on our behalf or 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 were 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 could 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 reimbursed 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, exceeded 1.0% of gross offering proceeds from the primary portion of our initial public offering. Our advisor and its affiliates are 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.

Through September 30, 2019, 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 our initial public offering of approximately $11.4 million. As of September 30, 2019, we had recorded $14.5 million in selling commissions and dealer manager fees and $1.7 million of stockholder servicing fees. As of September 30, 2019, we had recorded $2.3 million of other organization and offering expenses, which amounts represent our maximum liability for organization and other offering costs as of September 30, 2019 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.

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 (used in) ~~provided by~~used in operations were as follows for the first ~~second and third quarters~~quarter of ~~2019~~2020 (in thousands, except per share amounts):

Distributions Declared ⁽¹⁾
Distributions Declared Per Class A Share ⁽¹⁾
Distributions Declared Per Class T Share ⁽¹⁾
Distributions Paid ⁽²⁾
Cash Flows (used in) provided by Operations
Period Cash Reinvested Total
First Quarter 2019 $ 1,206 $ 0.040 $ 0.040 $ 550 $ 899 $ 1,449 $ (3,111)
Second Quarter 2019 724 0.024 0.024 276 448 724 2,899
Third Quarter 2019 724 0.024 0.024 285 439 $ 724 2,065
$ 2,654 $ 0.088 $ 0.088 $ 1,111 $ 1,786 $ 2,897 $ 1,853

~~_____________________~~

⁽¹⁾ For each month commencing January 2019 through February 2019 and March 2019 through September 2019, our board of directors declared distributions per common share in the amount of $0.01598333 and $0.00799167 per share of common stock, respectively, to stockholders of record based on a monthly record date.

⁽²⁾ ~~Distributions generally are paid on a monthly basis, on or about the first business day of the following month.~~


	Distribution Declared		Distributions Declared Per Share		Distributions Paid								Cash Flows Used In Operations
Period							Cash		Reinvested		Total
First Quarter 2020	$	—	$	—	$	107	$	135	$	242	$	(2,578)

~~Table of Contents~~

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

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

For the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we paid aggregate distributions of ~~$2.9~~$0.2 million including ~~$1.1~~$0.1 million distributions paid in cash and ~~$1.8~~$0.1 million of distributions reinvested through our dividend reinvestment plan. Our net loss attributable to common stockholders for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$6.7~~$10.5 million and cash flow ~~provided by~~used in operations was ~~$1.9~~$2.6 million. We funded our total distributions paid for the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, which includes net cash distributions and distributions reinvested by stockholders with ~~current period cash flow from operating activities of $1.5 million and~~ prior period cash flow from operating ~~activities of $1.4 million.~~activities. For purposes of determining the source of distributions paid, we assume first that we use cash flow from operating activities from the relevant or prior periods to fund distribution payments. To the extent that we pay distributions from sources other than our cash flow from operating activities, we will have less funds available, the overall return to our stockholders may be reduced and subsequent investors will experience dilution.

~~Going forward, we expect our board of directors to continue to authorize and declare monthly cash distributions.~~ Cash distributions 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 cash distributions to stockholders. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders.

We expect that we will fund these cash distributions from rental and other income on our real property investments and dividend income from real estate equity securities. 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.

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 and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at 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, ~~2018~~2019 filed with the SEC. There have been no significant changes to our policies during ~~2019, except for our adoption of the lease accounting standards issued by the Financial Accounting Standards Board effective on January 1, 2019.~~

~~Revenue Recognition - Operating Leases~~

~~Office and Apartment Revenues~~

On January 1, 2019, we adopted the lease accounting standards under Topic 842 including the package of practical expedients for all leases that commenced before the effective date of January 1, 2019. Accordingly, we (i) did not reassess whether any expired or existing contracts are or contain leases, (ii) did not reassess the lease classification for any expired or existing lease, and (iii) did not reassess initial direct costs for any existing leases. We did not elect the practical expedient related to using hindsight to reevaluate the lease term. In addition, we adopted the practical expedient for land easements and did not assess whether existing or expired land easements that were not previously accounted for as leases under the lease accounting standards of Topic 840 are or contain a lease under Topic 842.2020.

~~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, Topic 842 provides an optional transition method to allow entities to apply the new lease accounting standards at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. We adopted this transition method upon our adoption of the lease accounting standards of Topic 842, which did not result in a cumulative effect adjustment to the opening balance of retained earnings on January 1, 2019. Our comparative periods presented in the financial statements will continue to be reported under the lease accounting standards of Topic 840.

In accordance with Topic 842, tenant reimbursements for property taxes and insurance are included in the single lease component of the lease contract (the right of the lessee to use the leased space) and therefore are accounted for as variable lease payments and are recorded as rental income on our statement of operations beginning January 1, 2019. In addition, we adopted the practical expedient available under Topic 842 to not separate nonlease components from the associated lease component and instead to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue recognition standard (Topic 606) and if certain conditions are met, specifically related to tenant reimbursements for common area maintenance which would otherwise be accounted for under the revenue recognition standard. We believe the two conditions have been met for tenant reimbursements for common area maintenance as (i) the timing and pattern of transfer of the nonlease components and associated lease components are the same and (ii) the lease component would be classified as an operating lease. Accordingly, tenant reimbursements for common area maintenance are also accounted for as variable lease payments and recorded as rental income on our statement of operations beginning January 1, 2019.

We recognize minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is probable and records amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or by us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that can be taken in the form of cash or a credit against the tenant’s rent) that is funded is treated as a lease incentive and amortized as a reduction of rental revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

•~~whether the lease stipulates how a tenant improvement allowance may be spent;~~

•~~whether the lessee or lessor supervises the construction and bears the risk of cost overruns;~~

•~~whether the amount of a tenant improvement allowance is in excess of market rates;~~

•~~whether the tenant or landlord retains legal title to the improvements at the end of the lease term;~~

•~~whether the tenant improvements are unique to the tenant or general purpose in nature; and~~

•~~whether the tenant improvements are expected to have any residual value at the end of the lease.~~

We lease apartment units under operating leases with terms generally of one year or less. Generally, credit investigations will be performed for prospective residents and security deposits will be obtained. We recognize rental revenue, net of concessions, on a straight-line basis over the term of the lease, when collectibility is determined to be probable.

In accordance with Topic 842, we make a determination of whether the collectibility of the lease payments in an operating lease is probable. If we determine the lease payments are not probable of collection, we would fully reserve for any contractual lease payments, deferred rent receivable, and variable lease payments and would recognize rental income only if cash is received. Beginning January 1, 2019, these changes to our collectibility assessment are reflected as an adjustment to rental income included in office revenues and apartment revenues in our consolidated statement of operations. Prior to January 1, 2019, bad debt expense related to uncollectible accounts receivable and deferred rent receivable was included in office expenses and apartment expenses in our consolidated statement of operations. Any subsequent changes to the collectibility of the allowance for doubtful accounts as of December 31, 2018, which was recorded prior to the adoption of Topic 842, are recorded in office expenses and apartment expenses in our consolidated statement of operations.

Beginning January 1, 2019, we, as a lessor, record costs to negotiate or arrange a lease that would have been incurred regardless of whether the lease was obtained, such as legal costs incurred to negotiate an operating lease as an expense and classify such costs as operating, maintenance, and management expense, which is included in office expenses in our consolidated statement of operations, as these costs are no longer capitalizable under the definition of initial direct costs under Topic 842.

~~Table of Contents~~

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

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

Subsequent Events

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

~~Cash Distributions Paid~~

On ~~October 1, 2019,~~May 8, 2020, we ~~paid distributions of $0.2 million related to~~were granted a ~~monthly distribution in the amount of $0.00799167 per share~~loan payment deferral on the outstanding shares of all classes of our common stock as of September 20, 2019. On November 1, 2019, we paid distributions of $0.2 million related to a monthly distribution in the amount of $0.00799167 per share on the outstanding shares of all classes of our common stock as of October 21, 2019.

~~Distributions Declared~~

On November 7, 2019, our board of directors declared monthly distributions in the amount of $0.00799167 per share on the outstanding shares of all classes of our common stock as of November 20, 2019 and December 19, 2019, which we expect to pay in December 2019 and January 2020, respectively. InvestorsSpringmaid Beach Resort mortgage loan. We may ~~choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.~~

~~Real Estate Disposition Subsequent to September 30, 2019~~

~~Disposition of 2200 Paseo Verde~~

On November 4, 2019, we sold 2200 Paseo Verde to a purchaser unaffiliated with us, KBS Capital Advisors or Pacific Oak Capital Advisors for a sales price, net of closing credits, of $18.6 million, excluding closing costs.

~~Resignation of Officers~~

~~On October 31, 2019, Jeffrey K. Waldvogel notified the our board of directors (the “Board”) of his resignation as Secretary and Treasurer~~payments of the Company effective immediately and of his resignation as Chief Financial Officer of the Company effective immediately following the filing of the Third Quarter 10-Q with SEC. Also on October 31, 2019, Stacie K. Yamane notified the Board of her resignation as Chief Accounting Officer of the Company immediately following the filing of the Third Quarter 10-Q with the SEC.

~~Appointment of New Chief Financial Officer~~

On October 31, 2019, the Board appointed Michael A. Bender to serve as Executive Vice President, Treasury, Secretary and our Chief Financial Officer-Elect effective as of November 1, 2019, and as Chief Financial Officer effective immediately following our filing of the Third Quarter 10-Q with the SEC. As Chief Financial Officer, Mr. Bender will serve as our principal financial officerloan until March 2021, at which time all deferred interest and principal ~~accounting officer.~~

will be due. All other loan requirements remain the same.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the financing of our real estate investment portfolio and operations. 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.

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, 2019,~~March 31, 2020, we were exposed to market risks related to fluctuations in interest rates on ~~$350.7~~$329.3 million of variable rate debt outstanding. As of ~~September 30, 2019,~~March 31, 2020, we have also entered into ~~five~~four interest rate cap agreements with an aggregate notional value of ~~$224.2 million,~~$177.1, which effectively cap one-month LIBOR. The weighted-average remaining term of the interest rate caps is ~~1.3~~1.2 years. Based on interest rates as of ~~September 30, 2019,~~March 31, 2020, if interest rates were 100 basis points higher or lower during the 12 months ending ~~September 30, 2020,~~March 31, 2021, interest expense on our variable rate debt would increase by $2.5 million or decrease ~~respectively,~~ by ~~$1.3 million and $3.5 million, respectively.~~$2.2 million.

The weighted-average interest rate of our variable rate debt as of ~~September 30, 2019~~March 31, 2020 was ~~4.9%~~4.2%. The weighted-average interest rate represents the actual interest rate in effect as of ~~September 30, 2019~~March 31, 2020 (consisting of the contractual interest rate and the effect of interest rate caps, if applicable), using interest rate indices as of ~~September 30, 2019~~March 31, 2020 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 ~~September 30, 2019,~~March 31, 2020, we owned real estate equity securities with a book value of ~~$9.8~~$10.1 million. Based solely on the prices of real estate equity securities as of ~~September 30, 2019,~~March 31, 2020, if prices were to increase or decrease by 10%, our net income would increase or decrease, respectively, by approximately $1.0 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, ~~2018,~~2019, as filed with the SEC.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during 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, ~~2018.~~2019.

~~In January 2019, we exhausted funds available for redemptions under~~COVID-19 Pandemic

The current outbreak of the novel coronavirus, or COVID-19, has caused severe disruptions in the U.S. and global economy and will likely have a negative impact on our ~~share redemption program, other than those submitted in connection with a stockholder’s death, “qualifying disability”~~business and operations. This impact could be adverse to the extent the current COVID-19 outbreak, or ~~“determination of incompetence” for which we had $0.1 million available as of September 30, 2019. Therefore, except in limited circumstances, our stockholders will~~future pandemics, cause tenants to be unable to ~~sell~~pay their ~~shares under our share redemption program.~~rent or reduce the demand for commercial real estate, or cause other impacts described below.

~~During any calendar year, we may redeem only~~The outbreak of COVID-19 in many countries, including the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our distribution reinvestment plan during the prior calendar year provided that $500,000 of this amount is reserved for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence.” AsUnited States, continues to adversely impact global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the ~~January 2019 redemption date, we had exhausted the amount available for ordinary redemptions,~~outbreak has been rapidly evolving and, as cases of ~~September 30, 2019, we had $6.1 million outstanding~~the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and ~~unfulfilled redemption requests representing 644,900 shares. We~~restrictions on travel.

Nearly all U.S. cities and states, including cities and states where our properties are located, have ~~$0.1 million available~~also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to ~~fund special redemptions during the remainder~~operate, and/or restrictions on types of ~~2019. We~~construction projects that may continue. There can ~~provide~~be no assurances as to ~~whether~~the length of time these restrictions will remain in place. The COVID-19 outbreak has had, and future pandemics could have, a significant adverse impact on economic and market conditions of economies around the world, including the United States, and has triggered a period of global economic slowdown.

The effects of COVID-19 or another pandemic could negatively affect us and/or our ~~board~~tenants due to, among other factors:

•the unavailability of ~~directors will make additional funds available for our share redemption program.~~

~~Pacific Oak Capital Advisors has a limited operating history.~~

~~Pacific Oak Capital Advisors, our advisor, was formed in 2018~~personnel, including executive officers and ~~started operating as our advisor on November 1, 2019. Keith D. Hall, our Chief Executive Officer and one of our directors, and Peter McMillan III, our Chairman~~other leaders that are part of the Board and President and one of our directors, each own 50% and manage Pacific Oak Holdings, which owns and controls Pacific Oak Capital Advisors. Each of Messrs. Hall and McMillan has over 20 years of experience in investment management ~~including 14 years at KBS. Under their leadership, Pacific Oak has rapidly assembled a strong and experienced~~ team of real estate, finance, accounting and other professionals, many of whom were formerly at KBS. Messrs. Hall and McMillan work together at Pacific Oak Capital Advisors with their team of key real estate and debt finance professionals. These senior real estate and debt finance professionals have been through multiple real estate cycles in their careers and have the expertise gained through hands-on experience in acquisitions, originations, asset management, dispositions, development, leasing and property and portfolio management. Pacific Oak Capital Advisors currently manages approximately $3.3 billion of real estate investments. However, because Pacific Oak Capital Advisors was recently formed, it could face challenges with employee hiring and retention, information technology, vendor relationships, and funding. We rely on our sponsor, our officers, our advisor and the ~~real estate,~~inability to recruit, attract and retain skilled personnel-to the extent management or personnel are impacted in significant numbers by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work—business and operating results may be negatively impacted;

•difficulty accessing debt ~~finance, management~~ and ~~accounting professionals that~~equity capital on attractive terms, or at all—a severe disruption and instability in the global financial markets or deterioration in credit and financing conditions may affect our ~~advisor retains,~~and our tenants’ ability to ~~provide services~~access capital necessary to ~~us for~~fund business operations or replace or renew maturing liabilities on a timely basis, and may negatively affect the ~~day-to-day operation~~valuation of ~~our business. If Pacific Oak Capital Advisors faces challenges in performing its obligations to us, it~~financial assets and liabilities, any of which could ~~negatively impact~~affect our ability to ~~achieve~~meet liquidity and capital expenditure requirements or have a negative effect on our ~~investment objectives.~~business, financial condition, results of operations and cash flows;

•an inability to operate in affected areas, or delays in the supply of products or services from the vendors that are needed to operate effectively;

•tenants’ inability to pay rent on their leases or our inability to re-lease space that is or becomes vacant, which inability, if extreme, could cause us to: (i) no longer be able to pay distributions at our current rates or at all in order to preserve liquidity and (ii) be unable to meet our debt obligations to lenders, which could cause us to lose title to the properties securing such debt, trigger cross-default provisions, or could cause us to be unable to meet debt covenants, which could cause us to have to sell properties or refinance debt on unattractive terms; and

•our inability to deploy capital due to slower transaction volume which may be dilutive to shareholders.

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PART II. OTHER INFORMATION (CONTINUED)

Item 1A. Risk Factors (continued)

Because our property investments are located in the United States, COVID-19 has begun and will continue to impact our properties and operating results to the extent its continued spread within the United States reduces occupancy, increases the cost of operation, results in limited hours or necessitates the closure of such properties. In addition, quarantines, states of emergencies and other measures taken to curb the spread of COVID-19 may negatively impact the ability of such properties to continue to obtain necessary goods and services or provide adequate staffing, which may also negatively affect our properties and operating results.

Customers and potential customers of the properties we own, operate in industries that are being negatively affected by the disruption to business caused by this global outbreak. Tenants or operators have been, and may in the future be, required to suspend operations at our properties for what could be an extended period of time. Certain of our office properties have been negatively impacted by similar impacts on our tenants’ businesses. A number of our customers have requested rent concessions and more customers may request rent concessions or may not pay rent in the future. This could lead to increased customer delinquencies and/or defaults under leases, a lower demand for rentable space leading to increased concessions or lower occupancy, and/or tenant improvement expenditures, or reduced rental rates to maintain occupancies. Our operations could be negatively affected if the economic downturn is prolonged, which could also affect our operating results, ability to pay distributions, ability to repay or refinance debt, and the value of shares.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate impact of COVID-19. The full extent of the impact and effects of COVID-19 on our future financial performance, as a whole, and, specifically on our real estate property holdings, are uncertain at this time. The impact will depend on future developments, including, among other factors, the duration and spread of the outbreak, along with related travel advisories and restrictions, the recovery time of the disrupted supply chains, the consequential staff shortages, and production delays, and the uncertainty with respect to the duration of the global economic slowdown. COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our performance, financial condition, results of operations, cash flows, and value of shares. As a result of COVID-19, we have experienced and continue to experience a negative impact on our liquidity, and could experience additional material impacts including, but not limited to, asset impairment charges. We anticipate this will have a material impact on our business, results of operations and cash flows in 2020.

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

a).During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.

b).Not applicable

c).We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

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 provided that the last $0.5 million of net proceeds from the dividend reinvestment plan during the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” with any excess funds being available to redeem shares not requested in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence” during the December redemption date in the current 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.

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

Table of Contents

PART II. OTHER INFORMATION (CONTINUED)

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

•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 our share redemption program, redemptions made in connection with a stockholder’s death, qualifying disability, or determination of incompetence are made at a price per share equal to the most recent NAV per share as of the applicable redemption date. The price at which we redeem all other shares eligible for redemption is as follows:

•For those shares held by the redeeming stockholder for at least one year, 92.5% of our most recent estimated 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.

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.

On December ~~6, 2018,~~17, 2019, our board of directors approved an estimated NAV per share of our common stock of ~~$9.65~~$10.25 based on the estimated value of the our assets less the estimated value of our liabilities, or NAV, divided by the number of shares outstanding, all as of September 30, ~~2018.~~2019, with the exception of the following adjustments: (i) our consolidated investments in real estate properties were valued as of October 31, 2019; (ii) an adjustment to reduce cash for the amount of capital expenditures incurred in October 2019; (iii) an adjustment for disposition costs and fees incurred in connection with the disposition of 2200 Paseo Verde. Other than the adjustments, there were no material changes between September 30, 2019 and December 17, 2019 that impacted the overall estimated NAV per share. We expect to update our estimated NAV per share annually.

~~Table of Contents~~

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

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

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 10 business days’ notice to stockholders. We also may increase or decrease the funding available for the redemption of shares pursuant to the share redemption program upon 10 business days’ notice to stockholders.

Effective beginning with the month of February 2020, we have suspended (a) redemptions requested under the share redemption program in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”, until we and POSOR I file with the SEC a registration statement on Form S-4 containing a Joint Proxy Statement/Prospectus for the proposed Merger, and (b) all other redemptions under the share redemption program until after the Merger closes.

Table of Contents

PART II. OTHER INFORMATION (CONTINUED)

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

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, 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 2019 260,225 $ 9.50
⁽²⁾
February 2019 — $ —
⁽²⁾
March 2019 — $ —
⁽²⁾
April 2019 — $ —
⁽²⁾
May 2019 23,534 $ 9.65
⁽²⁾
June 2019 1,144 $ 9.65
⁽²⁾
July 2019 — $ —
⁽²⁾
August 2019 13,059 $ 9.65
⁽²⁾
September 2019 7,056 $ 9.65
⁽²⁾
Total 305,018


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 2020	170,128	$	10.10	⁽²⁾
February 2020	—	$	—	⁽²⁾
March 2020	—	$	—	⁽²⁾






Total	170,128

_____________________

⁽¹⁾Pursuant to the program, as amended, we 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, 2019,~~March 31, 2020, we redeemed ~~$2.9~~$1.7 million of common stock. In January ~~2019,~~2020, we exhausted all funds available for redemption of shares in ~~2019~~2020 in connection with redemption requests not made upon a stockholder’s death, “qualifying disability”, or determination of incompetence. As of ~~September 30, 2019,~~March 31, 2020, we had ~~$6.1~~$8.0 million outstanding and unfulfilled redemption requests representing ~~644,900~~785,440 shares due to the limitations described above. As of ~~September 30, 2019,~~March 31, 2020, we have ~~$0.1~~$0.5 million available for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence” during the remainder of ~~2019.~~2020. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during ~~2019,~~2020, we have ~~$1.8~~$0.1 million available for redemptions during ~~2020,~~2021, subject to the limitations described above.

In addition to the redemptions under the share redemption program described above, during the nine months ended September 30, 2019, we repurchased 2,286 shares of our common stock at $8.89 per share for an aggregate price of approximately $20,000.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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PART II. OTHER INFORMATION (CONTINUED)

Item 6. Exhibits


Ex.						Description

2.1						Agreement and Plan of Merger, dated as of February 19, 2020, by and among Pacific Oak Strategic Opportunity REIT, Inc., Pacific Oak SOR II, LLC and Pacific Oak Strategic Opportunity REIT II, Inc., incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed February 20, 2020

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						Articles of Amendment adopted on November 1, ~~201~~9 ,2019, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K,, filed November 1,~~, 201~~9 2019

3.3						Third Amended and Restated Bylaws adopted November 1, ~~201~~9 , 2019, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K,, filed November 1, 2019

3.4						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

3.5						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

3.6						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~~4.2						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~~4.3						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						~~Advisory~~Termination Agreement, dated as of February 19, 2020, by and between ~~the Company~~Pacific Oak Strategic Opportunity REIT II, Inc. and ~~KBS~~Pacific Oak Capital Advisors, LLC, ~~dated September 26, 2019,~~ incorporated by reference to Exhibit ~~99.1~~10.1 to the Company’s Current Report on Form 8-K filed ~~October 1, 2019~~February 20, 2020

~~10.2~~						~~Loan Agreement, by and between NOHO Commons Pacific Owner LLC and Invesco CMI Investments, L.P., dated August 30, 2019~~

~~10.3~~						Deed of Trust, Assignment of Leases and Rents and Security Agreement and Fixture Filing and Financing Statement, by and between NOHO Commons Pacific Owner LLC, Fidelity National Tile Company and Invesco CMI Investments, L.P., dated August 30, 2019

~~10.4~~						~~Promissory Note, by and between NOHO Commons Pacific Owner LLC and Invesco CMI Investments, L.P., dated August 30, 2019~~

~~10.5~~31.1						~~Guaranty~~Certification of ~~Recourse Obligations, by and between Karl Slovin, Slovin Properties, Inc. and KBS SOR US Properties II LLC, dated August 30,2019~~Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

~~10.6~~31.2						~~Advisory Agreement,~~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 ~~and between~~Section 906 of the ~~Company and KBS Pacific Oak Capital Advisors, dated November 1, 2019~~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

99.1						Fourth Amended and Restated Share Redemption Program adopted December 6, 2018, incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K, filed December 11, 2018

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PART II. OTHER INFORMATION (CONTINUED)

Item 6. Exhibits (continued)


Ex.						Description

~~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~~

~~99.1~~						~~Fourth Amended and Restated Share Redemption Program adopted December 6, 2018, incorporated by reference to Exhibit 99.3 to the Company's Current Report on Form 8-K, filed December 11, 2018~~

101.INS						Inline XBRL Instance Document

101.SCH						Inline XBRL Taxonomy Extension Schema

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase

104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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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.

PACIFIC OAK STRATEGIC OPPORTUNITY REIT II, INC.

Date:

~~November 8, 2019~~May 15, 2020

By:

/S/ KEITH D. HALL

Keith D. Hall

Chief Executive Officer and Director

(principal executive officer)

Date:

~~November 8, 2019~~May 15, 2020

By:

/S/ J~~EFFREY~~ ~~K. WALDVOGEL~~MICHAEL A. BENDER

~~Jeffrey K. Waldvogel~~Michael A. Bender

Chief Financial Officer

(principal financial officer)

5847


	Distributions Declared ⁽¹⁾		Distributions Declared Per Class A Share ⁽¹⁾		Distributions Declared Per Class T Share ⁽¹⁾		Distributions Paid ⁽²⁾											Cash Flows (used in) provided by Operations
Period											Cash			Reinvested			Total
First Quarter 2019	$	1,206	$	0.040	$	0.040	$	550	$	899		$	1,449		$	(3,111)
Second Quarter 2019	724		0.024		0.024		276		448			724			2,899
Third Quarter 2019	724		0.024		0.024		285		439			$	724		2,065
	$	2,654	$	0.088	$	0.088	$	1,111	$	1,786		$	2,897		$	1,853