Pacific Oak Strategic Opportunity REIT (PCOK) 8-K Interim Consolidated Financial Statements

Exhibit 99.1

KBS SOR (BVI) HOLDINGS, LTD.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 2019

UNAUDITED

U.S. DOLLARS IN THOUSANDS

INDEX

	Page
Consolidated Statements of Financial Position	2
Consolidated Statements of Operations	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statements of Changes in Equity	5
Consolidated Statements of Cash Flows	7
Notes to the Interim Consolidated Financial Statements	9

- - - - - - - - - - -

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

	June 30,				December 31,
	2019		2018		2018
	Unaudited				Audited
	U.S. dollars in thousands
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	102,221	$	44,348	$	127,680
Rents and other receivables, net	1,915		3,897		2,496
Prepaid expenses and other assets	981		1,850		1,424
Restricted cash	1,317		3,666		1,013
Investment in debt instruments, net	—		—		10,859
Due from Owner	—		—		4,500
	106,434		53,761		147,972
Investment properties held for sale	25,900		67,351		43,758
	132,334		121,112		191,730
NON-CURRENT ASSETS
Investment properties	997,482		1,093,144		912,989
Investment in joint ventures	178,282		168,662		185,684
Investment in debt instruments, net	—		17,879		—
Financial assets at fair value through profit or loss	69,734		101,141		75,351
Restricted cash	9,570		7,342		9,329
	1,255,068		1,388,168		1,183,353
Total assets	$	1,387,402	$	1,509,280	$	1,375,083
LIABILITIES
CURRENT LIABILITIES
Notes and bonds payable, net	$	81,818	$	77,495	$	49,957
Debentures, net	54,354		53,057		51,903
Accounts payable and accrued liabilities	19,693		18,272		18,950
Other liabilities	14,095		9,430		17,312
	169,960		158,254		138,122
Notes payable related to properties held for sale, net	10,589		27,566		22,845
	180,549		185,820		160,967
NON-CURRENT LIABILITIES
Notes and bonds payable, net	360,359		402,391		327,668
Debentures, net	159,413		206,707		203,099
Rental security deposits	3,964		5,191		3,703
	523,736		614,289		534,470
Total liabilities	704,285		800,109		695,437
EQUITY
Owner's net equity	663,919		679,867		657,049
Non-controlling interests	19,198		29,304		22,597
Total equity	683,117		709,171		679,646
Total liabilities and equity	$	1,387,402	$	1,509,280	$	1,375,083

The accompanying notes are an integral part of the interim consolidated financial statements.

August 8, 2019	/s/ Jeffrey Waldvogel	/s/ Peter McMillan III	/s/ Keith David Hall
Date of approval of	Waldvogel, Jeffrey	McMillan III, Peter	Hall, Keith David
financial statements	Chief Financial Officer	Chairman of Board	Chief Executive Officer

‑ 2 ‑

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Six months ended June 30,						Three months ended June 30,						Year ended December 31,
	2019			2018			2019			2018			2018
	Unaudited												Audited
	U.S. dollars in thousands
Revenues and other income:
Rental income	$	33,713		$	33,596		$	17,567		$	18,642		$	71,181
Tenant reimbursements	5,369			6,385			2,741			3,703			12,621
Interest income from debt investments	369			1,012			—			511			2,018
Other operating income	1,703			1,173			885			952			2,812
Total revenues and other income	41,154			42,166			21,193			23,808			88,632
Expenses:
Operating, maintenance, and management fees	(13,307		)	(13,058		)	(6,958		)	(7,571		)	(29,110		)
Real estate taxes and insurance	(6,279		)	(5,774		)	(3,302		)	(3,435		)	(11,762		)
Total expenses	(19,586		)	(18,832		)	(10,260		)	(11,006		)	(40,872		)
Gross profit	21,568			23,334			10,933			12,802			47,760
Fair value adjustment of investment properties, net	(9,461		)	(1,967		)	(3,402		)	2,534			17,111
Loss on extinguishment of debt	(856		)	—			—			—			(494		)
Provision for loss on debt investments	—			—			—			—			(2,500		)
Equity in income (loss) of joint venture	649			447			(124		)	22			17,469
Asset management fees to affiliate	(3,861		)	(4,043		)	(1,970		)	(2,218		)	(8,525		)
General and administrative expenses	(1,759		)	(2,495		)	(1,088		)	(1,182		)	(4,929		)
Operating profit	6,280			15,276			4,349			11,958			65,892
Finance income	1,132			1,305			546			403			1,798
Finance income (loss) from financial assets at fair value through profit or loss	17,578			(4,842		)	4,637			10,064			(12,579		)
Finance expenses	(14,417		)	(14,410		)	(7,249		)	(7,819		)	(31,054		)
Foreign currency transaction adjustments, net	(5,290		)	9,114			(2,474		)	10,111			10,141
Net income (loss)	$	5,283		$	6,443		$	(191	)	$	24,717		$	34,198
Net income attributable to Owner	$	6,870		$	6,838		$	323		$	24,958		$	41,320
Net loss attributable to non-controlling interests	(1,587		)	(395		)	(514		)	(241		)	(7,122		)
Net income (loss)	$	5,283		$	6,443		$	(191	)	$	24,717		$	34,198

The accompanying notes are an integral part of the interim consolidated financial statements.

3

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Six months ended June 30,						Three months ended June 30,						Year ended December 31,
	2019			2018			2019			2018			2018
	Unaudited												Audited
	U.S. dollars in thousands
Net income (loss)	$	5,283		$	6,443		$	(191	)	$	24,717		$	34,198
Total comprehensive income (loss)	$	5,283		$	6,443		$	(191	)	$	24,717		$	34,198
Total comprehensive income attributable to Owner	$	6,870		$	6,838		$	323		$	24,958		$	41,320
Total comprehensive loss attributable to non- controlling interests	(1,587		)	(395		)	(514		)	(241		)	(7,122		)
Total comprehensive income (loss)	$	5,283		$	6,443		$	(191	)	$	24,717		$	34,198

The accompanying notes are an integral part of the interim consolidated financial statements.

‑ 4 ‑

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Owner contributions (distributions)		Retained earnings		Paid-in Capital resulting from transactions with non-controlling interests		Owner's net equity		Non- controlling interests			Total equity
	Unaudited
Balance at January 1, 2019 (audited)	$	413,087	$	202,331	$	41,631	$	657,049	$	22,597		$	679,646
Net income (loss)	—		6,870		—		6,870		(1,587		)	5,283
Total comprehensive income (loss)	—		6,870		—		6,870		(1,587		)	5,283
Non-controlling interests contributions	—		—		—		—		12			12
Distributions to noncontrolling interests	—		—		—		—		(1,824		)	(1,824		)
Balance at June 30, 2019	$	413,087	$	209,201	$	41,631	$	663,919	$	19,198		$	683,117

	Owner contributions (distributions)		Retained earnings			Paid-in Capital resulting from transactions with non-controlling interests		Owner's net equity			Non- controlling interests			Total equity
	Unaudited
Balance at January 1, 2018 (audited)	$	413,087	$	332,811		$	41,631	$	787,529		$	28,957		$	816,486
Net income (loss)	—		6,838			—		6,838			(395		)	6,443
Total comprehensive income (loss)	—		6,838			—		6,838			(395		)	6,443
Dividends to Owner	—		(114,500		)	—		(114,500		)	—			(114,500		)
Non-controlling interest contributions	—		—			—		—			742			742
Balance at June 30, 2018	$	413,087	$	225,149		$	41,631	$	679,867		$	29,304		$	709,171

The accompanying notes are an integral part of the interim consolidated financial statements.

‑ 5 ‑

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Owner contributions (distributions)		Retained earnings		Paid-in Capital resulting from transactions with non-controlling interests		Owner's net equity		Non- controlling interests			Total equity
	Unaudited
Balance at April 1, 2019	$	413,087	$	208,878	$	41,631	$	663,596	$	19,797		$	683,393
Net income (loss)	—		323		—		323		(514		)	(191		)
Total comprehensive income (loss)	—		323		—		323		(514		)	(191		)
Distributions to noncontrolling interests	—		—		—		—		(85		)	(85		)
Balance at June 30, 2019	$	413,087	$	209,201	$	41,631	$	663,919	$	19,198		$	683,117

	Owner contributions (distributions)		Retained earnings			Paid-in Capital resulting from transactions with non-controlling interests		Owner's net equity			Non- controlling interests			Total equity
	Unaudited
Balance at April 1, 2018	$	413,087	$	311,191		$	41,631	$	765,909		$	28,811		$	794,720
Net income (loss)	—		24,958			—		24,958			(241		)	24,717
Total comprehensive income (loss)	—		24,958			—		24,958			(241		)	24,717
Dividends to Owner	—		(111,000		)	—		(111,000		)	—			(111,000		)
Non-controlling interest contributions	—		—			—		—			734			734
Balance at June 30, 2018	$	413,087	$	225,149		$	41,631	$	679,867		$	29,304		$	709,171

	Owner contributions (distributions)		Retained earnings			Paid-in Capital resulting from transactions with non-controlling interests		Owner's net equity			Non- controlling interests			Total equity
	Audited
Balance at January 1, 2018	$	413,087	$	332,811		$	41,631	$	787,529		$	28,957		$	816,486
Net income (loss)	—		41,320			—		41,320			(7,122		)	34,198
Total comprehensive income (loss)	—		41,320			—		41,320			(7,122		)	34,198
Dividends to Owner	—		(171,800		)	—		(171,800		)	—			(171,800		)
Non-controlling interest contributions	—		—			—		—			762			762
Balance at December 31, 2018	$	413,087	$	202,331		$	41,631	$	657,049		$	22,597		$	679,646

The accompanying notes are an integral part of the interim consolidated financial statements.

‑ 6 ‑

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended June 30,						Three months ended June 30,						Year ended December 31,
	2019			2018			2019			2018			2018
	Unaudited												Audited
	U.S. dollars in thousands
Cash flows from operating activities:
Net income (loss)	$	5,283		$	6,443		$	(191	)	$	24,717		$	34,198
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Equity in (income) loss of joint venture	(649		)	(447		)	124			(22		)	(17,469		)
Fair value adjustment on investment properties, net	9,461			1,967			3,402			(2,534		)	(17,111		)
Loss on extinguishment of debt	856			—			—			—			494
Provision for loss on debt investments	—			—			—			—			2,500
Deferred rent	(2,230		)	(1,670		)	(960		)	(925		)	(4,736		)
Bad debt expense (recovery)	16			(218		)	118			148			161
Finance expense, net	14,417			14,410			7,249			7,819			31,054
Finance income	(1,132		)	(1,305		)	(546		)	(403		)	(1,798		)
Finance (income) loss from financial assets at fair value through profit or loss	(17,578		)	4,842			(4,637		)	(10,064		)	12,579
Interest income from debt instruments, net	(369		)	(1,012		)	—			(511		)	(2,018		)
Foreign currency transaction adjustments	5,290			(9,114		)	2,474			(10,111		)	(10,141		)
	13,365			13,896			7,033			8,114			27,713
Changes in assets and liabilities:
Restricted cash	(315		)	(372		)	(1,309		)	165			2,272
Rents and other receivables	166			(1,445		)	357			(471		)	(705		)
Prepaid expenses and other assets	(554		)	(1,299		)	(49		)	(312		)	(1,007		)
Accounts payable and accrued liabilities	(2,531		)	(204		)	1,639			1,041			3,008
Rental security deposits	261			885			329			334			(603		)
Other liabilities	(667		)	(537		)	(124		)	20			73
Lease incentive additions	(684		)	(221		)	(667		)	(204		)	(1,109		)
	(4,324		)	(3,193		)	176			573			1,929
Net cash provided by operating activities	9,041			10,703			7,209			8,687			29,642
Cash flows from investing activities:
Acquisitions of investment properties	(90,266		)	(312,348		)	(90,266		)	(74,178		)	(312,348		)
Improvements to investment properties	(20,387		)	(15,024		)	(10,654		)	(9,355		)	(37,423		)
Proceeds from sales of investment properties, net	17,894			1,943			—			25			248,834
Deferred proceeds related to sale of real estate	—			281			—			—			1,390
Reimbursement of construction costs	—			1,636			—			1,636			1,636
Repayment of debt investments	7,750			—			—			—			4,500
Proceeds from insurance claims	438			—			438			—			—
Distributions of capital from investment in joint venture	7,800			—			—			—			—
Investment in joint venture	—			(1,320		)	—			(1,320		)	(1,320		)
Investments in financial assets at fair value through profit or loss, net	(15		)	(15,851		)	—			(888		)	(30,609		)
Distributions from financial assets at fair value through profit or loss	251			1,345			251			906			2,627
Proceeds from the sale of investments in financial assets at fair value through profit or loss, net	24,076			—			—			—			27,786
Purchase of interest rate cap	(28		)	(163		)	(28		)	(163		)	(163		)
Interest income received	1,857			2,101			642			795			3,713
Dividend income received from financial assets at fair value through profit or loss	2,279			2,244			343			1,209			6,176
Funding of development obligations	(88		)	(818		)	(88		)	(271		)	(1,170		)
Due from Owner	4,500			—			—			—			(4,500		)
Net cash used in investing activities	(43,939		)	(335,974		)	(99,362		)	(81,604		)	(90,871		)

The accompanying notes are an integral part of the interim consolidated financial statements.

‑ 7 ‑

KBS SOR (BVI) HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six months ended June 30,						Three months ended June 30,						Year ended December 31,
	2019			2018			2019			2018			2018
	Unaudited												Audited
	U.S. dollars in thousands
Cash flows from financing activities:
Proceeds from notes and bonds payable	84,268			184,351			81,660			95,351			223,425
Principal payments on notes and bond payable	(62,508		)	(5,711		)	(8,242		)	(4,854		)	(152,516		)
Payments of deferred financing costs	(1,102		)	(2,702		)	(1,095		)	(1,450		)	(3,390		)
Interest paid	(13,156		)	(12,247		)	(4,029		)	(3,787		)	(27,029		)
Release of restricted cash for debt service obligations	276			—			—			—			—
Non-controlling interest contributions	12			742			—			734			762
Distributions to non-controlling interests	(1,824		)	—			(85		)	—			—
Dividends to Owner	—			(114,500		)	—			(111,000		)	(171,800		)
Other financing proceeds, net	1,822			—			—			—			—
Net cash provided by (used in) financing activities	7,788			49,933			68,209			(25,006		)	(130,548		)
Effect of exchange rate changes on cash and cash equivalents	1,651			—			1			(1		)	(229		)
Net decrease in cash and cash equivalents	(25,459		)	(275,338		)	(23,943		)	(97,924		)	(192,006		)
Cash and cash equivalents, beginning of period	127,680			319,686			126,164			142,272			319,686
Cash and cash equivalents, end of period	$	102,221		$	44,348		$	102,221		$	44,348		$	127,680
Supplemental disclosure of non-cash investing and financing activities:
Accrual improvements to real estate	$	5,286		$	4,982		$	5,286		$	4,982		$	3,363

The accompanying notes are an integral part of the interim consolidated financial statements.

‑ 8 ‑

KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: GENERAL INFORMATION

a. These financial statements have been prepared in a condensed format as of June 30, 2019 and for the six and three months periods then ended ("interim condensed financial statements"). These interim condensed financial statements should be read in conjunction with the Company's annual financial statements as of December 31, 2018 and for the year then ended and the accompanying notes ("annual financial statements").

b. The Company and its subsidiaries (the "Group") operate in the investment real estate segment in the United States, which includes mainly investment in office and residential real estate and undeveloped lands. In addition, the Company invests in real estate-related loans and real estate equity securities.

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

a. Basis of preparation of the interim consolidated financial statements:

The interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles for the preparation of financial statements for interim periods, as prescribed in IAS 34, "Interim Financial Reporting", and in accordance with the disclosure requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

The accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the annual consolidated financial statements, except the following:

b. Leases:

As described in note 4a to the annual financial statements as to the initial application of IFRS 16, "Leases" ("IFRS 16"), the Company has elected to apply IFRS 16 according to the modified retrospective approach (without a restatement of comparative numbers). The adoption of IFRS 16 on January 1, 2019 did not affect the Company's financial statements.

Regarding the accounting policy implemented until December 31, 2018 related to the classification and revenue recognition of leases - see paragraphs o and k of Note 2 to the annual consolidated financial statements.

9

KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Under IFRS 16, the accounting treatment by lessors remains substantially unchanged. Accordingly, the accounting policy that was applied beginning January 1, 2019 with regards to classification and revenue recognition of leases is as follows:

The criteria for classifying leases as finance or operating leases depend on the substance of the agreements and are made at the inception of the lease in accordance with the following principles as set out in IFRS 16.

The Company as lessor:

Operating leases:

Lease agreements are classified as an operating lease if they do not transfer substantially all the risks and benefits incidental to ownership of the leased asset. Rental income is accounted for on a straight-line basis over the lease term.

Revenue recognition:

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 collectability 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

‑ 10 ‑

KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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 collectability is determined to be probable.

The Company makes a determination of whether the collectability 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 tenant reimbursements and would recognize rental income only if cash is received. Bad debt expense is included in operating, maintenance, and management expense on the statement of profit or loss.

NOTE 3: INVESTMENT IN SIGNIFICANT JOINT VENTURE

The Company does not attach the financial statements of KBS SOR SREF III 110 William, LLC, since its reports are insignificant to the Company's financial statements and do not add more information to the contained below.

Summarized information about the statement of financial position and the statement of profit of KBS SOR SREF III 110 William, LLC (100%) (in thousands) ⁽¹⁾:

	June 30,				December 31,
	2019		2018		2018
	Unaudited				Audited
	U.S. dollars in thousands
Current assets	$	13,765	$	22,768	$	22,976
Non-current assets (investment property)	533,041		479,922		520,105
Current liabilities	7,308		268,146		272,912
Non-current liabilities	285,386		514		568
Equity	$	254,112	$	234,030	$	269,601
Equity attributable to equity holders of the Company (Based on the waterfall mechanism)	$	125,994	$	117,419	$	134,192

⁽¹⁾  The company holds 60% of KBS SOR SREF III 110 William, LLC.

‑ 11 ‑

KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: INVESTMENT IN SIGNIFICANT JOINT VENTURE (Cont.)

	Six months ended June 30,						Three months ended June 30,						Year ended December 31,
	2019			2018			2019			2018			2018
	Unaudited												Audited
	U.S. dollars in thousands
Revenues	$	17,143		$	18,223		$	9,168		$	9,206		$	35,857
Gross profit	9,252			10,171			5,154			5,256			19,296
Operating profit (*)	6,171			10,025			2,073			5,205			54,802
Net (loss) income (*)	(2,489		)	1,529			(2,012		)	812			37,099
Share of (loss) profit from joint venture (Based on the waterfall mechanism)	(398		)	1,393			(556		)	725			18,166
(*) Includes revaluation of investment property	$	(3,081	)	$	(146	)	$	(3,081	)	$	(51	)	$	35,506

110 William Street Refinancing:

On March 7, 2019, the 110 William Joint Venture closed on refinancing of the 110 William Street existing loans (the “Refinancing”). The 110 William Joint Venture repaid $268.0 million of principal related to the existing 110 William Street loans. The Refinancing is comprised of a mortgage loan with Invesco CMI Investments, L.P., an unaffiliated lender, for borrowings of up to $261.4 million, which is secured by 110 William Street (the “110 William Street Mortgage Loan”) and a mezzanine loan with Invesco CMI Investments, L.P., an unaffiliated lender, for borrowings of up to $87.1 million (the “110 William Street Mezzanine Loan”). The 110 William Street Mortgage Loan is comprised of a senior mortgage loan of $215.5 million (the “Senior Mortgage Loan”) and an amended and restated building loan of $45.9 million (the “Building Loan”) to be use for future tenant improvements, leasing commissions and capital expenditures.

The 110 William Street Mortgage Loan and the 110 William Street Mezzanine Loan mature on April 9, 2021, with three one-year extension options. The 110 William Street Mortgage Loan bears interest at a rate of the greater of (a) 3.5% or (b) 150 basis points over one-month LIBOR. The 110 William Street Mezzanine Loan bears interest at a rate of the greater of (a) 6.9% or (b) 490 basis points over one-month LIBOR. The 110 William Joint Venture entered into an interest rate cap that effectively limits one-month LIBOR at 3.75% on $348.5 million, effective March 7, 2019 through March 15, 2021. The 110 William Street Mortgage Loan and the 110 William Street Mezzanine Loan have monthly payments that are interest-only with the entire unpaid principal balance and all outstanding interest and fees due at maturity. The 110 William Joint Venture has the right to prepay the loans at any time in whole, but not in part, subject to a prepayment fee if prepaid prior to May 9, 2020 and subject to certain other conditions contained in the loan documents. At closing, $210.8 million of the Senior Mortgage Loan and $70.3 million of the 110 William Street Mezzanine Loan was funded with $4.7 million of the Senior Mortgage Loan, $45.9 million of the Building Loan and $16.8 million of the 110 William Street Mezzanine Loan available for future funding, subject to certain terms and conditions contained in the loan documents.

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KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: INVESTMENT IN SIGNIFICANT JOINT VENTURE (Cont.)

During the six months ended June 30, 2019, the 110 William Joint Venture made a $7.8 million distribution to the Company and a $5.2 million distribution to the 110 William joint venture partner funded with proceeds from the 110 William Street refinancing.

NOTE 4: FINANCIAL INSTRUMENTS

The fair value of non-current notes payables as of June 30, 2019 is not materially different from its fair value as presented in the annual consolidated financial statements as of December 31, 2018. The fair value of the debentures payable as of June 30, 2019 was approximately $221.8 million (791.7 million NIS).

The change in fair value of foreign currency collar that is not designated as a cash flow hedge is recorded as foreign currency transaction gains or losses in the accompanying consolidated statements of profit or loss. During the six months ended June 30, 2019, the Company recognized a net loss of $5.3 million derived from a $9.5 million of foreign currency transaction loss related to exchange differences of the debentures, which is shown net against a $4.2 million gain related to the foreign currency collar. During the three months ended June 30, 2019, the Company recognized a net loss of $2.5 million derived from a $3.7 million of foreign currency transaction loss related to exchange differences of the debentures, which is shown net against a $1.2 million gain related to the foreign currency collar. The gains are shown in the accompanying consolidated statements of operations as foreign currency transaction adjustments. As of June 30, 2019, the Company used Level 2 inputs to measure the foreign currency collar fair value at $0.2 million, which is shown in other liabilities on the accompanying consolidated statements of financial position.

As of June 30, 2019, the Company had a working capital shortfall, excluding held for sale, amounting to $63.5 million, primarily attributed to loans maturing in the year following the date of the statement of financial position. The Company intends to refinance loans as they come due and does not anticipate any challenges in refinancing such loans given the relatively low leverage of the Company’s properties, the Company’s relationship with third-party lenders and its past experience placing debt on its properties. Accordingly, the Company does not view the working capital shortfall as a liquidity problem.

NOTE 5: SIGNIFICANT EVENTS DURING THE REPORTING PERIOD

Disposition of 424 Bedford:

On January 11, 2019, the 424 Bedford joint venture sold 424 Bedford to a purchaser unaffiliated with the Company or the Advisor, for $41.6 million net of closing costs and credits. In connection with the disposition of 424 Bedford, the buyer assumed the mortgage loan secured by 424 Bedford with an outstanding principal balance of $23.7 million at the time of the sale. The sale resulted in a $2.2 million loss (resulting mainly because of closing costs) recorded as fair value adjustment of investment properties, net in the accompanying consolidated statements of profit or loss.

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KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)

Real Estate Equity Securities

During the six months ended June 30, 2019, the Company sold 1,686,734 shares of common stock of Whitestone REIT (NYSE Ticker: WSR) for an aggregate sale price of $24.1 million.

Investments in Debt Instruments, Net

On March 20, 2019, the Company, through an indirect wholly owned subsidiary, entered into a redemption agreement for the Battery Point Series B Preferred Units. The redemption agreement resulted in the redemption of 13,000 Series B Preferred Units with a per-unit price of $1,000. The Company received $8.6 million, of which $0.9 million relates to accrued interest and an exit fee. In addition, the Company received 210,000 shares of Battery Point Series A-3 Preferred Units with a per-unit price of $25.

The following summarizes the activity related to real estate debt securities for the six months ended June 30, 2019 (in thousands):

Debt investments, net - December 31, 2018	$	10,859
Principal repayment of Series B Preferred units	(7,750		)
Redemptions of Series B Preferred units in exchange for Series A-3 Preferred units	(2,992		)
Receipt of deferred interest receivable	(130		)
Deferred interest receivable	4
Accretion of commitment fee, net of closing costs	9
Debt investments, net - June 30, 2019	$	—

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KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)

Financial Assets at Fair Value through Profit or Loss

Battery Point Series A-3 Preferred Units

Beginning October 28, 2016, the Company invested in Battery Point Series B Preferred Units which were classified as Investments in Debt Instruments, Net on the Company’s accompanying statements of financial position. On March 20, 2019, the Company, through an indirect wholly owned subsidiary, entered into a redemption agreement for the Battery Point Series B Preferred Units. The redemption agreement resulted in the redemption of the Company’s entire investment of 13,000 Series B Preferred Units with a per-unit price of $1,000 with an aggregate outstanding principal balance of $13 million. The Company received a principal paydown of $7.7 million plus accrued interest and an exit fee. In addition, the Company received 210,000 shares of Battery Point Series A-3 Preferred Units with a per-unit price of $25 with an aggregate face amount of $5.3 million. The Battery Point Series A-3 Preferred Units are entitled to a monthly dividend based on an annual rate of 7.5%.

The annual dividend rate increases to 10% for the Battery Point Series A-3 Preferred Units not redeemed by February 28, 2020 and to 11% for the Battery Point Series A-3 Preferred Units not redeemed by February 28, 2021. On each monthly dividend payment date, Battery Point Trust, Inc. (“Battery Point”) has the obligation to use 20% of the net proceeds of any and all future equity capital raising to redeem the Series A-3 Preferred Units. The Battery Point Series A-3 Preferred Units are redeemable at any time by Battery Point and holders of Series A-3 Preferred Shares may elect to redeem their units beginning on February 28, 2021, subject to Battery Point’s board of directors’ determination that the company has sufficient cash.

The Company does not have a unilateral right to redeem the Battery Point Series A-3 Preferred Units on a stated redemption date, therefore the Company classified the Series A-3 Preferred Units as a financial asset at fair value through profit or loss. The Battery Point Series A-3 Preferred Units as of June 30, 2019, had a carrying value of $3.0 million. 

On March 20, 2019, Pacific Oak Battery Point Holdings, LLC, a real estate asset management company formed in 2019, and its family of companies (collectively, “Pacific Oak”), acquired all the common equity interests in BPT Holdings, LLC (“Battery Point Holdings”). Battery Point Holdings owns (a) the common stock in Battery Point, (b) all the service entities that provide advisory, servicing and property management services to Battery Point Holdings generally named “DayMark”, and (c) 40% of additional DayMark entities that purchase, renovate, lease and sell single-family residential homes to Battery Point. As owner of Battery Point Holdings, Pacific Oak will be responsible for funding the ongoing operations of Battery Point Holdings and its subsidiaries. The affiliated DayMark service entities will be paid annual asset management fees equal to 1.5% of the gross asset value of Battery Point, annual property management fees equal to 8% of tenants’ rents received by Battery Point, and acquisition fees of 1% of the gross purchase price of properties acquired. The affiliated DayMark service entities will also receive fees from tenants upon execution of leases and a 1% commission from sellers of properties into the program, if it acts as the broker for the seller.

Pacific Oak is a group of companies founded and owned by Keith D. Hall, the Company’s Chief Executive Officer and a director, and Peter McMillan III, the Company’s President and Chairman of the Board of Directors.

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KBS SOR (BVI) HOLDINGS LTD.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)

Debentures

On March 1, 2019, the Company paid the first principal installment payment of 194.0 million Israeli new Shekels (approximately $53.6 million as of March 1, 2019).

Acquisition and Financing of Georgia 400 Center:

On May 23, 2019, the Company, through an indirect wholly owned subsidiary (the “Buyer”), acquired an office property consisting of three buildings containing an aggregate of 416,463 rentable square feet located on an aggregate of 24.4 acres of land in Alpharetta, Georgia (“Georgia 400 Center”). The seller is not affiliated with the Company or the Company’s external advisor. Georgia 400 Center was built between 1998 and 2001 and was 85% leased to 31 tenants at acquisition.

The purchase price of Georgia 400 Center was $90.3 million, including closing credits and costs. The Company recognized $1.2 loss related to acquisition fees and expenses recorded as fair value adjustment of investment properties, net in the accompanying consolidated statements of operations. The Company funded the purchase of Georgia 400 Center with its available sources and from the Georgia 400 Center Mortgage Loan (defined below).

On May 23, 2019, in connection with the acquisition of Georgia 400 Center, the Buyer entered into a loan agreement with an unaffiliated lender (the “Lender”) for borrowings of up to $68.3 million, secured by Georgia 400 Center (the “Georgia 400 Center Mortgage Loan”). At closing, $59.7 million of the Georgia 400 Center Mortgage Loan was funded. The remaining $8.6 million available under the Georgia 400 Center Mortgage Loan 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.

The Georgia 400 Center Mortgage Loan matures on March 22, 2023, with a 12-month extension option, subject to certain terms and conditions contained in the loan documents and the payment of an extension fee. The Georgia 400 Center Mortgage Loan bears interest at a floating rate of 1.55% over one-month LIBOR. In addition, the Company entered into an interest rate cap that effectively limits one-month LIBOR on $51.3 million of the outstanding loan balance at 4.0% effective June 21, 2019 through May 22, 2023. Monthly payments are interest only during the initial term with the entire unpaid principal balance and all outstanding interest and fees due at maturity.

NOTE 6: SUBSEQUENT EVENTS

Disposition of the Burbank Collection

On July 19, 2019, the Burbank Collection joint venture sold the Burbank Collection to a purchaser unaffiliated with the Company or the Advisor, for $25.9 million before closing costs (which was approximately book value). On July 19, 2019, in connection with the disposition of the Burbank Collection, the Burbank Collection joint venture repaid $10.6 million of the outstanding principal balance due under the Burbank Collection mortgage loan.

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