Pacific Oak Strategic Opportunity REIT, Inc. [PCOK] Filings

10-Q 1 pacoaksor-20230930.htm 10-Q pacoaksor-20230930

Table of Contents

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, 2023


☐			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 000-54382

______________________________________________________

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________________________________________


Maryland		26-3842535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
11766 Wilshire Blvd., Suite 1670
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 ☒

As of November 13, 2023, there were 103,407,427 outstanding shares of common stock of Pacific Oak Strategic Opportunity REIT, Inc.

Table of Contents

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

September 30, 2023

INDEX


PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	2
		Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022	3
		Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022	4
		Consolidated Statements of Cash Flows (unaudited) for the N ine Months Ended September 30, 2023 and 2022	6
		Condensed Notes to Consolidated Financial Statements as of September 30, 2023 (unaudited)	8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4.	Controls and Procedures	39
PART II.	OTHER INFORMATION		40
	Item 1.	Legal Proceedings	40
	Item 1A.	Risk Factors	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
	Item 3.	Defaults upon Senior Securities	42
	Item 4.	Mine Safety Disclosures	42
	Item 5.	Other Information	42
	Item 6.	Exhibits	43
SIGNATURES			44

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)


	September 30, 2023		December 31, 2022
	(unaudited)
Assets
Real estate held for investment, net	$	1,126,798	$	1,216,898
Real estate held for sale, net	—		2,506
Real estate equity securities	26,909		60,153
Total real estate and real estate-related investments, net	1,153,707		1,279,557
Cash and cash equivalents	77,794		97,931
Restricted cash	51,763		61,113
Investments in unconsolidated entities	70,379		70,842
Rents and other receivables, net	21,992		21,518
Prepaid expenses and other assets	25,320		22,848
Goodwill	5,436		5,436
Total assets	$	1,406,391	$	1,559,245
Liabilities and equity
Notes and bonds payable, net	$	1,033,318	$	1,044,709


Accounts payable and accrued liabilities	22,706		25,231
Due to affiliates	6,354		2,799
Other liabilities	70,082		66,967
Redeemable common stock payable	3,469		2,638
Restricted stock payable	508		508
Total liabilities	1,136,437		1,142,852
Commitments and contingencies (Note 10)
Equity
Pacific Oak Strategic Opportunity REIT, Inc. stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 103,439,698 and 103,932,083 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively	1,034		1,039
Additional paid-in capital	901,048		907,044
Cumulative distributions and net loss	(633,070)		(495,782)
Total Pacific Oak Strategic Opportunity REIT, Inc. stockholders’ equity	269,012		412,301
Noncontrolling interests	942		4,092
Total equity	269,954		416,393
Total liabilities and equity	$	1,406,391	$	1,559,245

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, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Revenues:
Rental income	$	31,872	$	31,445	$	96,101	$	89,806
Hotel revenues	1,195		9,182		6,673		27,952
Other operating income	1,094		830		3,299		2,559
Dividend income from real estate equity securities	1,685		2,148		3,795		5,354
Total revenues	35,846		43,605		109,868		125,671
Expenses:
Operating, maintenance, and management	12,102		12,342		34,377		32,560
Real estate taxes and insurance	6,281		5,650		18,541		15,753
Hotel expenses	1,330		5,377		5,275		17,485
Asset management fees to affiliates	3,696		3,630		11,380		9,945
General and administrative expenses	1,952		2,504		8,176		8,486
Foreign currency transaction loss (gain), net	1,123		(6,001)		4,675		(37,100)
Depreciation and amortization	12,399		12,717		36,556		39,379
Interest expense	17,928		12,976		49,747		33,319
Impairment charges on real estate and related intangibles	28,260		11,942		64,849		11,942
Impairment charges on goodwill	—		8,098		—		8,098
Total expenses	85,071		69,235		233,576		139,867
Other (loss) income:
Loss from unconsolidated entities, net	(10,405)		(3,376)		(27,367)		(6,130)
Other interest income	639		61		1,855		155
Loss on real estate equity securities, net	(3,331)		(20,722)		(19,453)		(48,312)
(Loss) gain on sale of real estate	(221)		(75)		32,541		3,273
Gain on extinguishment of debt	—		—		—		2,367
Gain from consolidation of previously unconsolidated entity	—		18,742		—		18,742
Total other loss, net	(13,318)		(5,370)		(12,424)		(29,905)
Net loss before income taxes	(62,543)		(31,000)		(136,132)		(44,101)
Income tax provision	—		—		(3,662)		—
Net loss	(62,543)		(31,000)		(139,794)		(44,101)
Net loss attributable to noncontrolling interests	2,311		881		2,506		844
Net loss attributable to redeemable noncontrolling interest	—		—		—		81
Preferred stock dividends	—		(373)		—		(1,091)
Net loss attributable to common stockholders	$	(60,232)	$	(30,492)	$	(137,288)	$	(44,267)
Net loss per common share, basic and diluted	$	(0.58)	$	(0.29)	$	(1.32)	$	(0.43)
Weighted-average number of common shares outstanding, basic and diluted	103,571,651		104,180,800		103,726,148		103,351,040

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, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended September 30, 2023 and 2022

(unaudited)

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, June 30, 2023	103,626,096	$	1,036	$	905,046	$	(572,838)	$	333,244	$	3,284	$	336,528
Net loss	—	—		—		(60,232)		(60,232)		(2,311)		(62,543)
Transfers to redeemable common stock, net	—	—		(2,043)		—		(2,043)		—		(2,043)
Redemptions of common stock	(186,398)	(2)		(1,955)		—		(1,957)		—		(1,957)
Noncontrolling interest distribution	—	—		—		—		—		(481)		(481)
Noncontrolling interest contribution	—	—		—		—		—		450		450
Balance, September 30, 2023	103,439,698	$	1,034	$	901,048	$	(633,070)	$	269,012	$	942	$	269,954

	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, June 30, 2022	104,319,092	$	1,043	$	914,463	$	(464,506)	$	451,000	$	10,373	$	461,373
Net loss	—	—		—		(30,492)		(30,492)		(881)		(31,373)
Transfers to redeemable common stock payable, net	—	—		(188)		—		(188)		—		(188)
Redemptions of common stock	(243,135)	(2)		(2,311)		—		(2,313)		—		(2,313)
Stock distributions issued	924	—		—		—		—		—		—
Acquisition of noncontrolling interests	—	—		—		—		—		1,125		1,125
Noncontrolling interests distribution	—	—		(2,431)		—		(2,431)		(8,199)		(10,630)
Noncontrolling interest contribution	—	—		—		—		—		300		300
Balance, September 30, 2022	104,076,881	$	1,041	$	909,533	$	(494,998)	$	415,576	$	2,718	$	418,294

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, INC.

CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED)

For the Nine Months Ended September 30, 2023 and 2022

(unaudited)

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, December 31, 2022	103,932,083	$	1,039	$	907,044	$	(495,782)	$	412,301	$	4,092	$	416,393
Net loss	—	—		—		(137,288)		(137,288)		(2,506)		(139,794)
Transfers to redeemable common stock, net	—	—		(830)		—		(830)		—		(830)
Redemptions of common stock	(492,385)	(5)		(5,166)		—		(5,171)		—		(5,171)
Noncontrolling interests distributions	—	—		—		—		—		(1,094)		(1,094)
Noncontrolling interest contribution	—	—		—		—		—		450		450
Balance, September 30, 2023	103,439,698	$	1,034	$	901,048	$	(633,070)	$	269,012	$	942	$	269,954

	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, December 31, 2021	94,141,251	$	941	$	818,440	$	(347,691)	$	471,690	$	10,369	$	482,059
Net loss	—	—		—		(44,267)		(44,267)		(844)		(45,111)
Transfers to redeemable common stock payable, net	—	—		(883)		—		(883)		—		(883)
Redemptions of common stock	(485,471)	(4)		(4,583)		—		(4,587)		—		(4,587)
Adjustment to value of redeemable noncontrolling interest	—	—		—		(3,946)		(3,946)		—		(3,946)
Stock distribution issued	10,421,101	104		98,990		(99,094)		—		—		—
Acquisition of noncontrolling interest	—	—		—		—		—		1,125		1,125
Noncontrolling interests contributions	—	—		(2,431)		—		(2,431)		(8,232)		(10,663)
Noncontrolling interest contribution	—	—		—		—		—		300		300
Balance, September 30, 2022	104,076,881	$	1,041	$	909,533	$	(494,998)	$	415,576	$	2,718	$	418,294

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, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash Flows from Operating Activities:
Net loss	$	(139,794)	$	(44,101)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Impairment charges on real estate and related intangibles	64,849		11,942
Impairment charges on goodwill	—		8,098
Loss from unconsolidated entities, net	27,367		6,130
Depreciation and amortization	36,556		39,379
Loss on real estate equity securities, net	19,453		48,312
Gain on sale of real estate	(32,541)		(3,273)
Gain from consolidation of previously unconsolidated entity	—		(18,742)
Unrealized gain on interest rate caps	(378)		(1,103)
Deferred rent	(539)		(1,966)
Gain on extinguishment of debt	—		(2,367)
Amortization of above- and below-market leases, net	(306)		(762)
Amortization of deferred financing costs and debt discount and premium, net	7,079		5,953
Foreign currency transaction loss (gain), net	4,675		(37,100)
Changes in assets and liabilities:
Rents and other receivables, net	(104)		2,403
Prepaid expenses and other assets	(3,232)		(3,010)
Accounts payable and accrued liabilities	(983)		(955)
Due to affiliates	3,555		1,201
Other liabilities	3,894		(1,379)
Net cash (used in) provided by operating activities	(10,449)		8,660
Cash Flows from Investing Activities:
Acquisitions of real estate	—		(6,689)
Improvements to real estate	(16,394)		(16,515)
Proceed from sales of real estate, net	40,867		97,933
Cash and restricted cash received upon consolidation of previously unconsolidated entity	—		1,834
Contributions to unconsolidated entities	(28,388)		(23,887)
Distribution of capital from unconsolidated entity	1,144		569
Purchase of interest rate caps	(1,236)		(566)
Advance to affiliate	—		(1,201)
Purchase of foreign currency derivatives	(100,327)		—
Proceeds from disposition of foreign currency derivatives	71,027		—
Proceeds from advances due from affiliates	—		8,227
Proceeds from the sale of real estate equity securities	13,791		—
Escrow deposit for future real estate sale	—		17,000
Proceeds for development obligations	1,855		—
Funding for development obligations	(1,825)		(6,407)
Net cash (used in) provided by investing activities	(19,486)		70,298
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable	93,117		191,667
Principal payments on notes and bonds payable	(77,673)		(190,515)
Payments of deferred financing costs	(5,028)		(4,686)
Payments to redeem common stock	(5,171)		(4,587)
Payments to redeem noncontrolling interests	—		(6,687)
Distributions paid	—		(11,016)
Preferred dividends paid	—		(1,091)
Noncontrolling interests distributions	(1,094)		(10,663)
Noncontrolling interest contribution	450		300
Net cash provided by (used in) financing activities	4,601		(37,278)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(4,153)		(4,418)
Net (decrease) increase in cash, cash equivalents and restricted cash	(29,487)		37,262
Cash, cash equivalents and restricted cash, beginning of period	159,044		105,431
Cash, cash equivalents and restricted cash, end of period	$	129,557	$	142,693

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, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2023	2022
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $2,729 and $1,703 for the nine months ended September 30, 2023 and 2022, respectively	44,488	29,839
Supplemental Disclosure of Significant Noncash Transaction:
Accrued improvements to real estate	1,565	6,389
Redeemable common stock payable	3,469	1,567
Assets acquired in the consolidation of previously unconsolidated entity	—	137,569
Liabilities assumed in the consolidation of previously unconsolidated entity	—	85,096
Distributions paid to common stockholders through common stock issuances	—	99,094
Accrued preferred dividends	—	225
PPP notes forgiveness	—	2,367

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, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(unaudited)

1.ORGANIZATION

Pacific Oak Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through Pacific Oak SOR (BVI) Holdings, Ltd. (“Pacific Oak SOR BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, Pacific Oak SOR BVI issued one certificate containing 10,000 common shares with no par value to Pacific Oak Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in, the Operating Partnership. Pacific Oak Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.

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, 2022. 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, 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”).

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board 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, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, Pacific Oak SOR BVI and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest and variable interest entities (“VIEs”) in which the Company is the 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, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

Liquidity

The Company generally finances its real estate investments using notes payable that are typically structured as non-recourse secured mortgages with maturities of approximately three to five years, with short term extension options available upon the Company meeting certain debt covenants. Each reporting period, management evaluates the Company’s ability to continue as a going concern by evaluating conditions and events, including assessing the liquidity needs to satisfy upcoming debt obligations and the ability to satisfy debt covenant requirements. Through the normal course of operations, the Company has $288.4 million of debt obligations scheduled to mature over the period from October 1, 2023 through 12 months from the date of issuance of these financial statements. In order to satisfy obligations as they mature, management will evaluate its options and may seek to utilize extension options available in the respective loan agreements, may make partial loan paydowns to meet debt covenant requirements, may seek to refinance certain debt instruments, may sell real estate equity securities to convert to cash to make principal payments, may market one or more properties for sale or may negotiate a turnover of one or more secured properties back to the related mortgage lender and remit payment for any associated loan guarantee. Historically, the Company has successfully refinanced debt instruments or utilized extension options in order to satisfy debt obligations as they come due and has not negotiated a turnover of a secured property back to a lender, though the Company may utilize such option if necessary. Based upon these plans, management believes it will have sufficient liquidity to satisfy its obligations as they come due and to continue as a going concern. There can be no assurance as to the certainty or timing of any of management’s plans. Refer to Note 5 for further discussion.

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.

Segments

The Company operates in three reportable business segments: opportunistic real estate and real estate-related investments, residential homes, and hotel, which is how the Company’s management manages the business. In general, the Company intends to hold its investments in opportunistic real estate and real estate-related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and 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 real estate-related assets as similar investments and aggregates them into one reportable business segment. The Company owned residential homes in 18 markets, which are all aggregated into one reportable business segment due to the homes being stabilized, having high occupancy rates and having similar economic characteristics. Additionally, as of September 30, 2023, the Company owned one hotel, which is a separate reportable business segment due to the nature of the hotel business with short-term stays.

Square Footage, Occupancy and Other Measures

Any references to square footage, acreage, 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.

Recently Issued Accounting Standards Updates

There have been no other recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the nine months ended September 30, 2023 that are of significance or potential significance to the Company.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

3. REAL ESTATE HELD FOR INVESTMENT

As of September 30, 2023, the Company owned ten office properties, encompassing, in the aggregate, approximately 3.2 million rentable square feet and these properties were 70% occupied. In addition, the Company owned one residential home portfolio consisting of 2,449 residential homes and encompassing approximately 3.5 million rental square feet and two apartment properties, containing 609 units and encompassing approximately 0.5 million rentable square feet, which were 95% and 92% occupied, respectively. The Company also owned one hotel property with 196 rooms, four investments in undeveloped land with approximately 696 developable acres and one office/retail development property. The following table summarizes the Company’s real estate held for investment as of September 30, 2023 and December 31, 2022, respectively (in thousands):


	September 30, 2023		December 31, 2022
Land	$	256,796	$	267,634
Buildings and improvements	1,013,444		1,062,822
Tenant origination and absorption costs	18,157		27,996
Total real estate, cost	1,288,397		1,358,452
Accumulated depreciation and amortization	(161,599)		(141,554)
Total real estate held for investment, net	$	1,126,798	$	1,216,898

Operating Leases

Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2023, the leases, excluding options to extend, apartment leases and residential home leases, which have terms that are generally one year or less, had remaining terms of up to 11.8 years with a weighted-average remaining term of 3.0 years. Some of the leases have provisions to extend the lease agreements, options for early termination 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 tenants 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 leases and the creditworthiness of the tenant, but generally are not significant amounts. 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 and assumed in real estate acquisitions related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets totaled $5.9 million and $6.5 million as of September 30, 2023 and December 31, 2022, respectively.

During the three and nine months ended September 30, 2023, the Company recognized deferred rent expense of $1.0 million and deferred rent income of $0.5 million, both net of lease incentive amortization, respectively. As of September 30, 2023 and December 31, 2022, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $19.2 million and $18.3 million, respectively, and is included in rents and other receivables on the accompanying consolidated balance sheets. The cumulative deferred rent balance included $2.3 million and $2.8 million of unamortized lease incentives as of September 30, 2023 and December 31, 2022, respectively.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

As of September 30, 2023, the future minimum rental income from the Company’s properties, excluding apartment and residential home leases, which generally have initial terms of 12 months or less, under non-cancelable operating leases was as follows (in thousands):



October 1, 2023 through December 31, 2023	$	15,632
2024	58,322
2025	49,012
2026	36,116
2027	28,563
Thereafter	62,502
	$	250,147

As of September 30, 2023, the Company’s commercial real estate properties were leased to approximately 300 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:


Industry	Number of Tenants	Annualized Base Rent (1) (in thousands)		Percentage of Annualized Base Rent
Professional, Scientific, and Technical Services	38	$	6,932	11.3	%
Public Administration	14	6,831		11.2	%
Computer Systems Design and Related Services	29	6,830		11.2	%
		$	20,593	33.7	%

_____________________

(1) Annualized base rent represents annualized contractual base rental income as of September 30, 2023, 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.

Geographic Concentration Risk

As of September 30, 2023, the Company’s real estate investments in California and Georgia represented 19.1% and 11.0%, respectively, of the Company’s total assets. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California and Georgia real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Hotel Properties

The following table provides detailed information regarding the Company’s hotel revenues for its hotel property (the Springmaid Beach Resort was sold on September 1, 2022) during the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Hotel revenues:
Room	$	988	$	7,223	$	5,794	$	21,423
Food, beverage and convention services	123		217		568		807
Campground	—		984		—		3,379
Other	84		758		311		2,343
Hotel revenues	$	1,195	$	9,182	$	6,673	$	27,952

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

Contract Liabilities

The following table summarizes the Company’s contract liabilities, which are comprised of: hotel advanced deposits, deferred proceeds received from the buyers of the Park Highlands land sales, and value of Park Highlands land that was contributed to a master association, which are included in other liabilities in the accompanying consolidated balance sheets, as of September 30, 2023 and December 31, 2022 (in thousands):


	September 30, 2023		December 31, 2022
Contract liabilities	$	27,526	$	23,904
Revenue recognized in the period from:
Amounts included in contract liabilities at the beginning of the period	$	1,032	$	9,215

Real Estate Sales

In May 2023, the Company sold a vacant building within the Madison Square property in Phoenix, Arizona (“Madison Square School”) for proceeds of $6.4 million, before closing costs and credits. The Company recognized a gain on sale of $3.3 million related to the disposition of the Madison Square School, net of closing costs and adjustments. The purchaser is not affiliated with the Company nor the Advisor. As a result of the sale of the Madison Square School, certain assets were reclassified to held for sale on the consolidated balance sheets as of December 31, 2022. Subsequent to the sale, the Madison Square property had three office buildings remaining.

In February 2023, the Company sold approximately 71 developable acres of undeveloped land in North Las Vegas, Nevada (“Park Highlands”) for proceeds of $34.5 million, net of closing costs and credits of $1.9 million for future development obligations. The Company recognized a pre-tax gain on sale of real estate of $29.5 million related to the disposition within the consolidated statements of operations. The purchaser is not affiliated with the Company or the Advisor.

In addition, the land parcels were held and sold through one of the Company’s taxable REIT subsidiaries (“TRS”) for certain tax planning purposes and to ensure preservation of the Company’s REIT status. For purposes of the determination of U.S. federal and state income taxes, the Company’s TRS record current or deferred income taxes based on differences (both permanent and timing) between the determination of their taxable income and net income under GAAP. In connection with the Park Highlands sales, the Company recorded an income tax provision of $3.7 million at the TRS level. There were no state taxes related to this disposition. The U.S. federal statutory and effective income tax rate for the transaction’s taxable gain is 21%.

Impairment of Real Estate

The evolving office rental business environment and slowdown in economic growth due to rising interest rates led the Company to reassess its real estate and related intangibles. During the three and nine months ended September 30, 2023, the Company recorded impairment charges on real estate and related intangibles in the amounts of $28.3 million and $64.8 million, respectively, to write down the carrying value of three strategic opportunistic properties to their estimated fair values due to increases in the discount and terminal cap rate assumptions, decreases in projected cash flows, and changes in sales comparisons. During the three and nine months ended September 30, 2022, the Company recorded impairment charges on real estate and related intangibles in the amount of $11.9 million, to write down the carrying value of three strategic opportunistic properties to their estimated fair value due to a change in the projected hold period and related decrease in projected cash flows and sales price.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

4. REAL ESTATE EQUITY SECURITIES

The following summarizes the portion of loss for the period related to real estate equity securities held during the three and nine months ended September 30, 2023 and 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Loss on real estate equity securities, net	$	(3,331)	$	(20,722)	$	(19,453)	$	(48,312)
Less net gain recognized during the period on real estate equity securities sold during the period	93		—		5,901		—
Unrealized loss recognized during the reporting period on real estate equity securities held at the end of the period	$	(3,424)	$	(20,722)	$	(25,354)	$	(48,312)

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

5. NOTES AND BONDS PAYABLE

As of September 30, 2023 and December 31, 2022, the Company’s notes and bonds payable consisted of the following (dollars in thousands):


	Book Value as of September 30, 2023		Book Value as of December 31, 2022		Contractual Interest Rate as of September 30, 2023 (1)	Effective Interest Rate at September 30, 2023 (1)	Payment Type (2)	Maturity Date (3)
Richardson Portfolio Mortgage Loan	$	16,199	$	18,844	SOFR + 2.50%	7.82%	Principal & Interest	11/1/2023 (4)
Park Centre Mortgage Loan (5)	—		26,233		(5)	(5)	(5)	(5)
1180 Raymond Mortgage Loan (5)	—		31,070		(5)	(5)	(5)	(5)
Pacific Oak SOR BVI Series B Debentures (6)	305,253		331,213		3.93%	3.93%	(6)	01/31/2026
Pacific Oak SOR BVI Series C Bonds (6)	89,211		—		9.00%	9.00%	(6)	06/30/2026
Crown Pointe Mortgage Loan	54,738		53,758		SOFR + 2.30%	7.62%	Interest Only	04/01/2025
The Marq Mortgage Loan (5)	—		60,796		(5)	(5)	(5)	(5)
Eight & Nine Corporate Centre Mortgage Loan (7)	—		47,945		(7)	(7)	(7)	(7)
Georgia 400 Center Mortgage Loan	40,313		44,129		SOFR + 1.55%	6.87%	Interest Only	05/22/2024
PORT Mortgage Loan 1	51,304		51,302		4.74%	4.74%	Interest Only	10/01/2025
PORT Mortgage Loan 2	10,523		10,523		4.72%	4.72%	Interest Only	03/01/2026
PORT MetLife Loan	60,000		60,000		3.90%	3.90%	Interest Only	04/10/2026
PORT II Metlife Loan	93,443		93,701		3.99%	3.99%	Interest Only	04/10/2026
Q&C Hotel Mortgage Loan	24,628		24,784		SOFR + 3.50%	8.82%	Principal & Interest	01/31/2024
Lincoln Court Mortgage Loan (8)	33,310		35,314		SOFR + 3.25%	8.57%	Interest Only	08/07/2025
Lofts at NoHo Commons Mortgage Loan	68,451		71,536		SOFR + 2.18% (8)	7.50%	Interest Only	09/09/2024
Oakland City Center Mortgage Loan (5)	—		87,000		(5)	(5)	(5)	(5)
Madison Square Mortgage Loan	17,962		17,964		4.63%	4.63%	Interest Only	10/07/2024
Four Pack Mortgage Loan (5)(8)	187,336		—		BSBY + 2.75%	8.18%	Principal & Interest	09/01/2026
Total Notes and Bonds Payable principal outstanding	1,052,671		1,066,112
Deferred financing costs and debt discount and premium, net (10)	(19,353)		(21,403)
Total Notes and Bonds Payable, net	$	1,033,318	$	1,044,709

_____________________

(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2023. The effective interest rate is calculated as the actual interest rate in effect as of September 30, 2023 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at September 30, 2023, where applicable.

(2) Represents the payment type required under the loan as of September 30, 2023. Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.

(3) Represents the initial maturity date or the maturity date as extended as of September 30, 2023; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

(4) Subsequent to September 30, 2023, the Company extended the maturity date of this loan to November 1, 2024.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

(5) The Company refinanced and consolidated four of its mortgage loans to one loan with an outstanding principal balance of $188.0 million (the “Four Pack Mortgage Loan”) and is cross-collateralized by the associated properties: Park Centre, 1180 Raymond, The Marq, and Oakland City Center. The Four Pack Mortgage Loan has an initial maturity of September 1, 2026 with two 1-year extension options, monthly amortization payments of $0.7 million, and two $10.0 million paydowns due December 1, 2023 and 2024.

(6) See “Israeli Financing” below.

(7) This loan was paid off during the nine months ended September 30, 2023.

(8) The Company’s notes and bonds payable are generally non-recourse. These mortgage loans have guarantees over certain balances whereby the Company would be required to make guaranteed payments in the event that the Company turned the property over to the lender. As of September 30, 2023, the guaranteed amount in the aggregate was $18.8 million.

(9) The variable rate is at the higher of one-month SOFR or 1.75%, plus 2.18%.

(10) Represents the unamortized financing costs and discount/premium on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The financing costs and discount/premium is amortized over the remaining life of the notes and bonds payable.

During the three and nine months ended September 30, 2023, the Company incurred $17.9 million and $49.7 million, respectively, of interest expense. Included in interest expense during the three and nine months ended September 30, 2023 was $2.5 million and $7.1 million, respectively, of amortization of deferred financing costs and debt discount and premium, net. Additionally, during the three and nine months ended September 30, 2023, the Company capitalized $1.0 million and $2.7 million, respectively, of interest related to its investments in undeveloped land.

During the three and nine months ended September 30, 2022, the Company incurred $13.0 million and $33.3 million, respectively, of interest expense. Included in interest expense for the three and nine months ended September 30, 2022 was $2.0 million and $3.9 million, respectively, of amortization of deferred financing costs and debt discount and premium, net. Additionally, during the three and nine months ended September 30, 2022, the Company capitalized $0.7 million and $1.7 million, respectively, of interest related to its investments in undeveloped land.

As of September 30, 2023 and December 31, 2022, the Company’s interest payable was $7.6 million and $9.1 million, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of September 30, 2023 (in thousands):



October 1, 2023 through December 31, 2023	$	28,471
2024	271,333
2025	249,503
2026	503,364
2027	—
Thereafter	—
	$	1,052,671

All the Company’s debt obligations are generally non-recourse, subject to certain limited guaranty payments, as outlined in the table above, except for the Company’s Series B Debentures and Series C Bonds. The Company plans to utilize available extension options or refinance the notes payable. The Company may also choose to market the properties for sale or may negotiate a turnover of the secured properties back to the related mortgage lender.

The Company’s notes payable contains financial debt covenants, including minimum equity requirements and liquidity ratios. As of September 30, 2023, the Company was in compliance with all of these debt covenants with the exception that the Richardson Portfolio Mortgage Loan, Q&C Hotel Mortgage Loan and Lincoln Court Mortgage Loan were not in compliance with the debt service coverage requirement. As a result of such non-compliance, the Company is required to provide a cash sweep for the Lincoln Court Mortgage Loan, and the remaining loans are at-risk of cash sweeps and/or principal pay downs if in consecutive non-compliance.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

Israeli Financing

On February 16, 2020, Pacific Oak SOR BVI issued 254.1 million Israeli new Shekels of Series B debentures (the “Series B Debentures”) to Israeli investors pursuant to a public offering registered with the Israel Securities Authority. The Series B Debentures have principal installment payments equal to 33.33% of the face amount of the Series B Debentures on January 31st of each year from 2024 to 2026. Pacific Oak SOR BVI issued additional Series B Debentures subsequent to the initial issuance and as of September 30, 2023, 1.2 billion Israeli new Shekels (approximately $305.3 million as of September 30, 2023) were outstanding. The additional Series B Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series B Debentures without any right of precedence or preference between any of them.

In July 2023, Pacific Oak SOR BVI issued 340.3 million Israeli new Shekels (approximately $89.2 million as of September 30, 2023) of Series C bonds (the “Series C Bonds”) to Israeli investors pursuant to offerings registered with the Israeli Securities Authority. Of the proceeds, 61.8 million Israeli new Shekels (approximately $16.2 million as of September 30, 2023) were held on deposit for obligations related to the Series B Debentures. The Series C Bonds have an equal level of security, pari passu, amongst themselves and between them and the initial Series C Bonds without any right of precedence or preference between any of them. The Series C Bonds are collateralized by real estate held for investment (specified lands in Park Highlands and Richardson).

The deeds of trust that govern the terms of the Series B Debentures and Series C Bonds contain various financial covenants. As of September 30, 2023, the Company was in compliance with these financial covenants.

6. FAIR VALUE DISCLOSURES

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2023 and December 31, 2022, which carrying amounts do not approximate the fair values (in thousands):


	September 30, 2023						December 31, 2022
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial liabilities (Level 3):
Notes payable	$	658,207	$	653,313	$	686,606	$	734,899	$	728,433	$	716,813
Financial liabilities (Level 1):
Pacific Oak SOR BVI Series B Debentures	$	305,253	$	294,551	$	275,995	$	331,213	$	316,276	$	304,758
Pacific Oak SOR BVI Series C Bonds	$	89,211	$	85,454	$	90,070	$	—	$	—	$	—

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. 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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

As of September 30, 2023, the Company measured the following assets at fair value (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	$	26,909	$	26,909	$	—	$	—
Asset derivative - interest rate caps (1)	$	2,268	$	—	$	2,268	$	—
Liability derivative - foreign currency collar (1)	$	3,119	$	—	$	3,119	$	—
Nonrecurring Basis:
Impaired real estate held for investment, net (2)	$	193,529	$	—	$	—	$	193,529

_____________________

(1) Interest rate caps and foreign currency collars are included in prepaid expenses and other assets and other liabilities, respectively, on the consolidated balance sheets.

(2) Amounts represent the fair value for real estate assets impacted by impairment charges during the nine months ended September 30, 2023, as of the date that the fair value measurement was made. The carrying value for the real estate asset may have subsequently increased or decreased from the fair value reflected due to activity that has occurred since the measurement date.

During the nine months ended September 30, 2023, three of the Company’s real estate properties were measured at the estimated fair values. Two of the real estate properties were measured based on an income approach with the significant unobservable inputs used in evaluating the estimated fair value of these properties, which are discount rates between 8.75% to 9.0% and terminal cap rates between 8.0% to 8.25%, and one real estate property was measured at its estimated value based on a sales comparison approach. Certain of the real estate properties were not measured as of September 30, 2023.

Additionally, during the nine months ended September 30, 2023, one investment in unconsolidated entity was measured at the estimated value of the Company’s ownership calculated based on a hypothetical liquidation of the net assets, discounted for lack of marketability and control. The Company used a discount rate of 8.75% and a cap rate of 7.0% to estimate the fair value of the real estate, an interest rate adjustment of 0.15% to estimate the fair value of the debt, a discount rate of 20% for lack of marketability, and a discount rate of 20% for lack of control. The one investment in unconsolidated entity was not measured as of September 30, 2023.

The fair value of the Company's real estate was measured using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 which included discounted cash flows, terminal capitalization rates, and discount rates.

As of December 31, 2022, the Company measured the following assets at fair value (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	$	60,153	$	60,153	$	—	$	—
Asset derivative - interest rate caps	$	2,267	$	—	$	2,267	$	—
Liability derivative - foreign currency collar	$	3,115	$	—	$	3,115	$	—
Nonrecurring Basis:
Impaired real estate	$	212,800	$	—	$	—	$	212,800
Impaired goodwill	$	5,436	$	—	$	—	$	5,436

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

7. RELATED PARTY TRANSACTIONS

Pacific Oak Capital Advisors, LLC

As described further below, the Company has entered into agreements with certain affiliates pursuant to which they provide services to the Company. Keith D. Hall and Peter McMillan III control and indirectly own Pacific Oak Holding Group, LLC (“Pacific Oak Holding”), the Company’s sponsor since November 1, 2019. Pacific Oak Holding is the sole owner of Pacific Oak Capital Advisors, LLC (the “Advisor”), the Company’s advisor since November 1, 2019. Messrs. Hall and McMillan are also two of the Company’s executive officers and directors.

Subject to certain restrictions and limitations, the business of the Company is externally managed by the Advisor pursuant to an advisory agreement (the “Advisory Agreement”). The Advisory Agreement was effective through November 1, 2023; however, the Company or the Advisor may terminate the Advisory Agreement without cause or penalty upon providing 60 days’ written notice. The Company is in the process of finalizing the extension of the Advisory Agreement with the Advisor. The Advisor conducts the Company’s operations and manages its portfolio of real estate and other real estate-related investments.

Pacific Oak Residential Advisors, LLC

Effective September 1, 2022, the Company’s wholly-owned subsidiary, Pacific Oak Residential Trust, Inc. (“PORT”), entered into an advisory agreement with Pacific Oak Residential Advisors, LLC (“PORA”) (the “PORT Advisory Agreement”) pursuant to which PORA will act as a product specialist with respect to the Company’s residential homes portfolio, held through PORT. The PORT Advisory Agreement has an initial two-year term and may be renewed for additional one-year terms. Pursuant to the PORT Advisory Agreement, PORT will pay PORA: (1) an acquisition fee equal to 1.0% of the cost of each asset which consists of the price paid for the asset plus any amounts funded or budgeted at the time of acquisition for capital expenditures; and (2) a quarterly asset management fee equal to 0.25% (1.0% annually) on the aggregate value of the Company’s residential homes portfolio assets, as determined in accordance with PORT’s valuation guidelines, as of the end of each quarter. In the case of investments made through a joint venture, the acquisition fee will be based on PORT’s proportionate share of the joint venture. For substantial assistance in connection with the sale of properties or other investments related to the Company’s residential homes portfolio, PORT also pays PORA or its affiliates 1.0% of the contract sales price with a limit to not exceed commission paid to unaffiliated third parties.

In connection with the PORT Advisory Agreement, the Company amended and restated its advisory agreement with the Advisor, also effective September 1, 2022, which was subsequently renewed as of November 1, 2022. Under the Advisory Agreement, the Company does not pay acquisition fees, asset management fees or disposition fees to the Advisor with respect to the Company’s residential homes portfolio. The Company’s residential homes portfolio will still be considered when computing any potential incentive fees due to the Advisor under the Advisory Agreement.

DMH Realty, LLC

Effective September 1, 2022, PORT entered into a property management agreement with DMH Realty, LLC (“DMH Realty”), an affiliate of PORA and the Advisor (the “PORT Property Management Agreement”) for the Company’s residential homes portfolio. The PORT Property Management Agreement has an initial two-year term and may be renewed for additional one-year terms. Pursuant to the PORT Property Management Agreement, PORT will pay DMH Realty a property management fee equal to the following: (a) 8% of Collected Rental Revenues, as defined below, up to $50.0 million per annum; (b) 7% of Collected Rental Revenues in excess of $50.0 million per annum, but less than or equal to $75.0 million per annum; and (c) 6% of Collected Rental Revenues in excess of $75.0 million per annum, “Collected Rental Revenues” means the amount of rental revenue actually collected for each property per the terms of the lease pertaining to each property (including lease breakage fees) or pursuant to any early termination buyouts, but excluding other income items, fees or revenue collected by DMH Realty, including but not limited to: application fees, insufficient funds fees, late fees, move-in fees, pet fees, and security deposits (except to the extent applied to rent per the terms of the lease pertaining to any property).

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

Pacific Oak Capital Markets, LLC

On September 9, 2022, PORT commenced a private offering of up to $500 million of common stock in a primary offering and up to $50 million of common stock under its distribution reinvestment plan (the “Private Offering”). PORT engaged Pacific Oak Capital Markets, LLC (“POCM”), an affiliate of the Advisor, PORA, and DMH Realty, to be the dealer manager for the Private Offering, pursuant to a dealer manager agreement effective as of September 9, 2022, which was subsequently amended and restated as of January 13, 2023 to reflect the creation of a $5 million escrow arrangement (the “PORT Dealer Manager Agreement”). Pursuant to the PORT Dealer Manager Agreement, with respect to Class A shares, PORT will generally pay POCM: (1) selling commissions equal to up to 6.0% of the net asset value (“NAV”) of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; (2) a dealer manager fee equal to up to 1.5% of the NAV of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; and (3) a placement agent fee equal to up to 1.5% of the NAV of each share sold in the primary offering. With respect to Class T shares, PORT will generally pay POCM: (1) selling commissions equal to up to 3.0% of the NAV of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; (2) a dealer manager fee equal to up to 0.75% of the NAV of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; and (3) a placement agent fee equal to up to 0.75% of the NAV of each share sold in the primary offering. PORT will not pay any selling commissions, dealer manager or placement agent fees in connection with the sale of shares under the distribution reinvestment plan. The Advisor is the sponsor for the Private Offering and as the sponsor, they will incur reimbursable organization and offering costs on behalf of PORT. PORT will ratably reimburse the Advisor over a 60-month period following the first anniversary of the commencement of the offering. PORT will incur an organization and offering expense fee equal to 0.5% of the NAV of each share sold in the Private Offering to help fund the reimbursement to the sponsor.

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, 2023 and 2022, respectively, and any related amounts payable as of September 30, 2023 and December 31, 2022 (in thousands):



	Incurred during the three months ended September 30,				Incurred during the nine months ended September 30,				Payable as of
Expensed	2023		2022		2023		2022		September 30, 2023		December 31, 2022
Asset management fees	$	3,696	$	3,630	$	11,380	$	9,945	$	5,051	$	2,618
Property management fees (1)	700		294		2,223		552		409		181
Disposition fees	—		637		420		744		—		—
Capitalized
Reimbursable offering costs (2)	—		—		894		—		894		—
Acquisition fees on real estate	—		67		—		67		—		—
	$	4,396	$	4,628	$	14,917	$	11,308	$	6,354	$	2,799

_____________________

(1) Property management fees related to DMH Realty are recorded as operating, maintenance, and management expenses on the Company’s consolidated statements of operations.

(2) Reimbursable offering costs to the Advisor related to the Private Offering are capitalized and recorded as prepaid expenses and other assets on the Company’s consolidated balance sheet.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2023

(unaudited)

Pacific Oak Opportunity Zone Fund I

As of September 30, 2023, the Company’s investment balance in the Pacific Oak Opportunity Zone Fund I, LLC (“Pacific Oak Opportunity Zone Fund I”) is $26.7 million, which is included in investments in unconsolidated entities on the consolidated balance sheets. The Advisor is entitled to certain fees in connection with the fund. Pacific Oak Opportunity Zone Fund I will pay an acquisition fee equal to 1.5% of the purchase price of each asset (including any debt incurred or assumed and significant capital improvement costs budgeted as of the date of 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 incurred (reduced by any financing fee previously paid with respect to indebtedness being refinanced). In the case of investments made through joint ventures, the fees above will be determined based on the Company’s proportionate share of the investment. The Advisor is also entitled to certain distributions paid by the Pacific Oak Opportunity Zone Fund I after the Class A Members have received their preferred return. These fees and distributions have been waived for the Company’s investment. In addition, side letter agreements between the Advisor and Pacific Oak Opportunity Zone Fund I were executed on February 28, 2020 and stipulate that any asset management fees allocable to the Company and waived by the Advisor for Pacific Oak Opportunity Zone Fund I would be distributed to the Company.

110 William Joint Venture

In July 2023, the 110 William Joint Venture entered into debt and equity restructuring agreements (the “Restructuring Agreements”) and as a result, the Company committed to funding up to $105.0 million (“Capital Commitments”) to the 110 William Joint Venture in exchange for 77.5% of preferred interest. Additionally, Pacific Oak SOR Properties, LLC, an indirect subsidiary of the Company entered into various guarantee agreements as part of the Restructuring Agreements. Refer to Notes 8 and 10 for further discussion.

8. INVESTMENTS IN UNCONSOLIDATED ENTITIES

As of September 30, 2023 and December 31, 2022, the Company’s investments in unconsolidated entities were composed of the following (in thousands):


	Number of Properties as of September 30, 2023			Investment Balance as of
Joint Venture		Location	Ownership %	September 30, 2023			December 31, 2022
110 William Joint Venture	1	New York, New York	(1)	$	43,659	(1)	$	—
353 Sacramento Joint Venture	1	San Francisco, California	55.0%	—		(2)	45,173
Pacific Oak Opportunity Zone Fund I (3)	3	Various	46.0%	26,720			25,669
				$	70,379		$	70,842

_____________________

(1) The Company exercises significant influence over the operations, financial policies and decision making with respect to the 110 William Joint Venture but significant decisions require approval from each member. During the nine months ended September 30, 2023, the Company made capital contributions in the 110 William Joint Venture of $28.4 million, of which $25.3 million funded the Capital Commitments. As part of the Restructuring Agreements, the Company resumed the equity method of accounting. The Company holds common and preferred interests in the 110 William Joint Venture and is entitled to profit participation interests based on a tiered waterfall calculation which may not be reflective of the Company's economic interest in the entity.

(2) The Company suspended the equity method of accounting and will not record the Company's share of losses and will not record the Company's share of any subsequent income for the 353 Sacramento Joint Venture until the Company’s share of net income once gain recorded exceeds Company’s share of the net losses not recognized during the period the equity method was suspended. Additionally, during the nine months ended September 30, 2023, the Company impaired the investment in the 353 Sacramento Joint Venture. See below and Note 6 for further discussion.

(3) The maximum exposure to loss as a result of the Company’s investment in the Pacific Oak Opportunity Zone Fund I is limited to the carrying amount of the investment.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)