Resource Real Estate Opportunity REIT, Inc. - FORM 10-Q/A

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EX-31 - EXHIBIT - Resource Real Estate Opportunity REIT, Inc.	rreo-20130630_ex31x2a.htm
EX-32 - EXHIBIT - Resource Real Estate Opportunity REIT, Inc.	rreo-20130630_ex32x2a.htm
EX-31 - EXHIBIT - Resource Real Estate Opportunity REIT, Inc.	rreo-20130630_ex31x1a.htm
EX-32 - EXHIBIT - Resource Real Estate Opportunity REIT, Inc.	rreo-20130630_ex32x1a.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)


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

For the quarterly period ended June 30, 2013


¨	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 000-54369

Resource Real Estate Opportunity REIT, Inc.

(Exact name of registrant as specified in its charter)



Maryland		27-0331816
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1845 Walnut Street, 18th Floor, Philadelphia, PA 19103
(Address of principal executive offices) (Zip code)

(215) 231-7050
(Registrant's telephone number, including area code)

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

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

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



Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller reporting company	þ

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

As of August 9, 2013, there were 40,734,850 outstanding shares of common stock of Resource Real Estate Opportunity REIT, Inc.

Explanatory paragraph

Resource Real Estate Opportunity REIT, Inc. (the "Company") filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 with the U.S. Securities and Exchange Commission (the "SEC") on August 13, 2013 (the "Original Filing"). The Original Filing included a discussion of the Company's funds from operations ("FFO") and modified funds from operations ("MFFO") in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations." After the Original Filing was made, the Company discovered that it had not included an adjustment for the net gain on the disposition of real estate properties of $3,173,000 to determine FFO for the three and six months ended June 30, 2013. The Original Filing incorrectly reported FFO and FFO per share for the three and six months ended June 30, 2013 of $918,000 and $0.03, respectively, and $(836,000) and $(0.03), respectively. The correct amounts are $(2,255,000) and $(0.07), respectively, and $(4,009,000) and $(0.14), respectively. The Original Filing also incorrectly reported the Company's MFFO and MFFO per share for the three and six months ended June 30, 2013 of $3,672,000 and $0.11, respectively, and $3,941,000 and $0.14, respectively. The correct amounts are $499,000 and $0.02, respectively, and $768,000 and $0.03, respectively.

The Company is amending the Original Filing to correct this error and to add the additional measure of Adjusted Funds from Operations (“AFFO”) and related disclosure to the "Funds from Operations and Modified Funds from Operations" subsection of "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" by restating that subsection in its entirety. The Company is not amending any other part of the Original Filing. This amendment speaks as of the date of the Original Filing.


ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT, Inc. and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2012. As used herein, the terms “we”, “our” and “us” refer to Resource Real Estate Opportunity REIT, Inc., a Maryland corporation, and, as required by context, Resource Real Estate Opportunity OP, LP, a Delaware limited partnership, and to their subsidiaries.

Overview

We have acquired and intend to continue to acquire, a diversified portfolio of discounted U.S. commercial real estate and real estate-related debt that has been significantly discounted due to the effects of recent economic events and high levels of leverage on U.S. commercial real estate, including properties that may benefit from extensive renovations that may increase their long-term values. Following years of unprecedented appreciation in commercial real estate values fueled by readily available and inexpensive credit, the commercial real estate market began a significant decline in late 2007 as a result of the massive contraction in the credit and securitization markets. We believe that this decline has produced an attractive environment to acquire commercial real estate and real estate-related debt at significantly discounted prices. We have a particular focus on operating multifamily assets and we intend to target this asset class while also purchasing interests in other types of commercial property assets consistent with our investment objectives. Our targeted portfolio will consist of commercial real estate assets, principally (i) non-performing or distressed loans, including but not limited to first- and second-priority mortgage loans, mezzanine loans, B-Notes and other loans, (ii) real estate owned by financial institutions, (iii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”), and (iv) discounted investment-grade commercial mortgage-backed securities. However, we are not limited in the types of real estate assets in which we may invest and, accordingly, we may invest in other real estate assets either directly or together with a co-investor or joint venture partner. We currently anticipate holding approximately 55% of our total assets in categories (i) and (ii), 30% of our total assets in category (iii), and 15% of our total assets in category (iv). Also, we may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that Resource Real Estate Opportunity Advisors, LLC, or our Advisor, presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code, as amended, and to maintain our exclusion from regulation as an investment company pursuant to the Investment Company Act of 1940, as amended, our portfolio composition may vary from what we have initially disclosed.

We commenced the public offering of our common stock on June 16, 2010 after having completed a private offering of our common stock on June 9, 2010, both of which have provided our initial capitalization. We describe these offerings further in “Liquidity and Capital Resources” below.

Results of Operations

We were formed on June 3, 2009. We commenced active real estate operations on September 7, 2010 when we raised the minimum offering amount in our initial public offering. As of June 30, 2013, we have acquired 12 multifamily properties, eight non-performing promissory notes (of which we have foreclosed on seven, and negotiated a discounted payoff for one) and three performing promissory notes (including seller financing we provided to a purchaser in conjunction with the sale of a property). Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.

Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

The following table sets forth the results of our operations for the three months ended June 30, 2013 and 2012 (in thousands):



	Three Months Ended
	June 30,
	2013			2012
Revenues:
Rental income	$	8,512		$	2,805
Gain on foreclosures	—			364
Interest income	61			52
Total revenues	8,573			3,221

Expenses:
Rental operating	5,260			2,026
Acquisition costs	1,831			1,791
Foreclosure costs	10			—
Management fees - related parties	870			331
General and administrative	1,654			786
Loss on disposal of assets	4			—
Depreciation and amortization expense	3,116			857
Total expenses	12,745			5,791
Loss before other (expense) income	(4,172		)	(2,570		)

Other (expense) income:
Interest expense	(122		)	(112		)
Loss from continuing operations	(4,294		)	(2,682		)

Discontinued operations:
(Loss) income from discontinued operations	(95		)	364
Net gain on disposition	3,173			—
Income from discontinued operations	3,078			364

Net loss and comprehensive loss	$	(1,216	)	$	(2,318	)

Revenues: During the three months ended June 30, 2013, our income was primarily from rents from our multifamily properties. The increase in rental income is due to the increased number of operating properties we owned from nine at June 30, 2012 to 17 at June 30, 2013. During the three months ended June 30, 2012, we recorded adjustments to gains for both the excess of fair market value at one of our foreclosed properties over our cost basis and a subsequent payment for a personal guarantee.

Expenses. Our rental operating expenses increased for the three months ended June 30, 2013 primarily due to an increase in the number of operating properties we owned. Accordingly, we incurred increased management fees, and depreciation and amortization expense.


•	General and administrative expenses increased from $786,000 during the three months ended June 30, 2012 to $1.7 million during the three months ended June 30, 2013 primarily related to the following:


◦	General and administrative expenses at the property level increased from $820,000 during the three months ended June 30, 2012 to $1.0 million during the three months ended June 30, 2013 due to the operation of 10 additional properties we acquired directly or through foreclosure subsequent to June 30, 2012, offset by the disposition of two properties.


◦	General and administrative expenses at the company level during the three months ended June 30, 2013, consisted primarily of $363,000 of third-party professional fees incurred for due diligence on potential acquisitions.


◦	Other company general and administrative expenses decreased due primarily to a $68,000 decrease in travel expenses.


◦	In addition, we incurred $116,000 in fees related to the disposition of two properties during the three months ended June 30, 2013.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

The following table sets forth the results of our operations for the six months ended June 30, 2013 and 2012 (in thousands):



	Six Months Ended
	June 30,
	2013			2012
Revenues:
Rental income	$	15,309		$	4,333
Gain on foreclosures	67			364
Interest income	115			103
Total revenues	15,491			4,800

Expenses:
Rental operating	9,875			3,078
Acquisition costs	2,518			2,871
Foreclosure costs	49			—
Management fees - related parties	1,646			586
General and administrative	2,567			1,607
Loss on disposal of assets	36			—
Depreciation and amortization expense	5,884			1,322
Total expenses	22,575			9,464
Loss before other (expense) income	(7,084		)	(4,664		)

Other (expense) income:
Gain on redemption of stock	22			—
Interest expense	(247		)	(143		)
Insurance proceeds in excess of cost basis	—			5
Loss from continuing operations	(7,309		)	(4,802		)

Discontinued operations:
(Loss) income from discontinued operations	(674		)	931
Net gain on disposition	3,173			—
Income from discontinued operations	2,499			931

Net loss and comprehensive loss	$	(4,810	)	$	(3,871	)

Revenues: During the six months ended June 30, 2013, we recorded income primarily from rents from our multifamily properties. The increase in rental income is due to the increased number of operating properties we owned from nine at June 30, 2012 to 17 at June 30, 2013. During the six months ended June 30, 2013, we recorded an adjustment to gains on foreclosure for the excess of market value over our fair value at one foreclosed property. During the six months ended June 30, 2012, we also recorded adjustments to gains for both the excess of fair market value at two of our foreclosed properties over our cost basis and a subsequent payment for a personal guarantee.

Expenses. Our rental operating expenses increased for the six months ended June 30, 2013 primarily due to an increase in the number of operating properties we owned. Accordingly, we incurred increased management fees, and depreciation and amortization expense.


•	General and administrative expenses increased from $1.6 million during the six months ended June 30, 2012 to $2.6 million during the six months ended June 30, 2013 primarily related to the following:


◦	General and administrative expenses increased at the property level from $653,000 during the six months ended June 30, 2012 to $1.6 million during the six months ended June 30, 2013 due to the operation of 10 additional properties we acquired directly or through foreclosure subsequent to June 30, 2012 and the disposition of two properties.


◦	General and administrative expenses at the company level during the six months ended June 30, 2013, consisted primarily of $378,000 of third-party professional fees incurred for due diligence on potential acquisitions.


◦	Other company level general and administrative expenses decreased, primarily related to a $190,000 decrease in payroll expense allocated to us by our Advisor.


•	Acquisition costs for the six months ended June 30, 2013 were $2.5 million (related to the acquisition of five properties and the origination of one loan with an aggregate value of $64.4 million) as compared to acquisition costs of $2.9 million for the six months ended June 30, 2012 (related to the acquisition of one loan and two properties with an aggregate value of $74.6 million).


•	The $104,000 increase in interest expense is due to draw downs on our line of credit and our entry into a mortgage note in April 2012.


•	The asset carrying value for one operating property, which was subsequently sold, was determined to exceed its estimated fair value and, therefore, we recorded a $539,000 loss on impairment during the six months ended June 30, 2013, which is included in (loss) income from discontinued operations.


•	We had an insurance claim on one of our properties during the six months ended June 30, 2012, and we received insurance proceeds in excess of the property's basis.

Liquidity and Capital Resources

We derive the capital required to purchase real estate investments and conduct our operations from the proceeds of our private and public offerings, any future offerings we may conduct, and from secured or unsecured financings from banks.

We intend to allocate a portion of the funds we raise, as necessary, to preserve capital for our investors by supporting the maintenance and viability of the properties we have acquired and those properties that we may acquire in the future. If these allocated amounts and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds upon acceptable terms when we need them.

Capital Expenditures. We deployed a total of $13.3 million in capital during the six months ended June 30, 2013 for capital expenditures as follows: (a) $4.0 million at the Williamsburg Apartments to complete unit rehabilitations ($3.5 million is still budgeted to complete this project); (b) $1.1 million at The Vista Apartment Homes for deferred maintenance, unit rehabilitations, renovations to the exterior of the buildings, and updates to common areas ($600,000 is still budgeted to complete this project); (c) $2.2 million at the Alcove for renovations which includes exterior painting, roofing and unit rehabilitations ($0.7 million is still budgeted to complete these renovations); (d) $0.6 million at Deerfield for unit rehabilitations; (e) $1 million at Kenwick & Canterbury for unit rehabilitations ($2.6 million is still budgeted to complete these renovations); (f) $0.5 million at Armand Place for unit rehabilitation ($3.0 million is still budgeted to complete these renovations); and (g) the majority of the remaining amounts deployed for capital expenditures were related to turnover at our existing older properties. An additional $10.8 million in capital is budgeted to be deployed over the next two years for the three properties we acquired during the three months ended June 30, 2013.

Ongoing Public Offering. Pursuant to our ongoing public offering, we are offering up to 75.0 million shares of common stock, $0.01 par value per share, at $10.00 per share. We are also offering up to 7.5 million shares of common stock to be issued pursuant to our distribution reinvestment plan.

On May 30, 2013 we filed a registration statement to register a follow-on offering, in which we are proposing to offer up to $350.0 million of common stock in a primary offering. We also propose to offer up to $35.0 million of common stock pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares. We expect this follow-on offering to commence in the fourth quarter of 2013.

Gross offering proceeds. As of June 30, 2013, an aggregate of 35,896,959 shares of our $0.01 par value common stock have been issued as follows (dollars in thousands):



	Shares Issued	Gross Proceeds
Shares issued through private offering	1,263,727	$	12,500
Shares issued through primary public offering	32,773,588	326,000
Shares issued through stock distributions	1,356,594	—
Shares issued through distribution reinvestment plan	487,550	4,600
Shares issued in conjunction with the Advisor's initial investment, net of 4,500 share conversion	15,500	200
Total	35,896,959	$	343,300

Revolving Credit Facility. On December 2, 2011, through our operating partnership, we entered into a secured revolving credit facility, or the Credit Facility, with Bank of America, N.A. Under the Credit Facility as amended on May 23, 2013, we may borrow up to $50.0 million, or the Facility Amount. The interest rate on borrowings is the one-month London InterBank Offered Rate, or LIBOR (0.195% at June 30, 2013) plus 3.0%. Draws under the Credit Facility are secured by certain multifamily properties directly owned by our subsidiaries. The proceeds of the Credit Facility may be used for working capital, property improvements and other general corporate purposes. We incurred certain closing costs in connection with the Credit Facility, including loan fees totaling $318,750. As of June 30, 2013, we had outstanding borrowings of $760,000 under the Credit Facility.

The Credit Facility matures on May 23, 2017, and may be extended to May 23, 2019 subject to satisfaction of certain terms and conditions and payment of an extension fee equal to 0.2% of the amount committed under the Credit Facility at the time of such extension. We are required to make monthly interest-only payments. We also may prepay the Credit Facility in whole or in part at any time without premium or penalty.

Our operating partnership’s obligations with respect to the Credit Facility are guaranteed by us, pursuant to the terms of a guaranty dated as of December 2, 2011, or the Guaranty. The Credit Facility and the Guaranty contain restrictive covenants for maintaining a certain tangible net worth and a certain level of liquid assets, and for restricting the securing of additional debt as follows:


•	we must maintain a minimum tangible net worth equal to the greater of (i) 200% of the outstanding principal amount of the Credit Facility and (ii) $20.0 million;


•	we must also maintain unencumbered liquid assets with a market value of not less than $5.0 million; and


•	we may not incur any additional secured or unsecured debt without Bank of America’s prior written consent and approval, which consent and approval is not to be unreasonably withheld.

We were in compliance with all such covenants as of June 30, 2013. Although we expect to remain in compliance with these covenants for the duration of the term of the Credit Facility, depending upon our future operating performance, capital raising success, property and financing transactions and general economic conditions, we cannot assure you that we will continue to be in compliance.

Mortgage Debt. On April 3, 2012, we entered into a mortgage loan, or the Iroquois Mortgage Loan, with Berkadia Commercial Mortgage, LLC for $9.2 million. The Iroquois Mortgage Loan matures on May 1, 2017 and bears interest at one-month LIBOR plus 2.61%.

The Iroquois Mortgage Loan requires monthly payments of principal and interest. The amount outstanding may be prepaid in full after the first year of its term with payment of a prepayment premium in the amount of 1% of the principal being repaid, and with no prepayment premium during the last three months of its term. The Iroquois Mortgage Loan is secured by a first mortgage lien on the assets of the Vista Apartment Homes (formerly Iroquois Apartments), including the land, fixtures, improvements, leases, rents and reserves.

The Iroquois Mortgage Loan contains customary affirmative, negative and financial covenants, representations, warranties and borrowing conditions, all as set forth in the Iroquois Mortgage Loan. We are currently in compliance with all such covenants.

Once we have fully invested the proceeds of our public offerings, based on current lending market conditions, we expect that the debt financing we incur, on a total portfolio basis, will not exceed 35% of the cost of our real estate investments if unstabilized and 65% to 70% if stabilized (before deducting depreciation or other non-cash reserves) plus the value of our other assets. We may also increase the amount of debt financing we use with respect to an investment over the amount originally incurred if the value of the investment increases subsequent to our acquisition and if credit market conditions permit us to do so. Our charter limits us from incurring debt such that our total liabilities may not exceed 75% of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets, although we may exceed this limit under certain circumstances. We expect that our primary liquidity source for acquisitions and long-term funding will include the net proceeds from our offerings and, to the extent we co-invest with other entities, capital from any future joint venture partners. We may also pursue a number of potential other funding sources, including mortgage loans, portfolio level credit lines and government financing.

Operating Properties. As of June 30, 2013, we owned the following multifamily properties:



Subsidiary	Apartment Complex	Number of Units	Location
RRE 107th Avenue Holdings, LLC (“107th Avenue”)	107th Avenue	5	Omaha, NE
RRE Westhollow Holdings, LLC (“Westhollow”)	Arcadia	404	Houston, TX
RRE Iroquois, LP (“Vista”)	Vista Apartment Homes	133	Philadelphia, PA
RRE Campus Club Holdings, LLC (“Campus Club”)	Campus Club	64	Tampa, FL
RRE Heatherwood Holdings, LLC (“Heatherwood”)	Heatherwood	184	Inkster, MI
RRE Bristol Holdings, LLC (“Bristol”)	The Redford	856	Houston, TX
RRE Cannery Holdings, LLC (“Cannery”)	Cannery Lofts	156	Dayton, OH
RRE Williamsburg Holdings, LLC (“Williamsburg”)	Williamsburg	976	Cincinnati, OH
RRE Skyview Holdings, LLC ("Skyview")	Cityside Crossing	360	Houston, TX
RRE Park Forest Holdings, LLC ("Park Forest")	Mosaic	216	Oklahoma City, OK
RRE Foxwood Holdings, LLC ("Foxwood")	The Reserve at Mt. Moriah	220	Memphis, TN
RRE Flagstone Holdings, LLC ("Flagstone")	The Alcove	292	Houston, TX
RRE Deerfield Holdings, LLC ("Deerfield")	Deerfield	166	Hermantown, MN
RRE Kenwick Canterbury Holdings, LLC ("Kenwick & Canterbury")	Kenwick & Canterbury	244	Lexington, KY
RRE Armand Place Holdings, LLC ("Armand")	Armand Place	244	Houston, TX
RRE Autumn Wood Holdings, LLC ("Autumn Wood")	Autumn Wood	196	Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")	Village Square	271	Houston, TX
RRE Nob Hill Holdings, LLC ("Nob Hill")	Nob Hill	192	Winter Park, FL
	Total Units	5,179

We have also acquired a portfolio of small bank loans of which we still own two remaining performing notes that are secured by multifamily properties located in Michigan and Indiana.

Organization and Offering Costs. Our Advisor has advanced funds to us for certain organization and offering costs. We reimburse the Advisor for all of the expenses paid or incurred by our Advisor or its affiliates on our behalf or in connection with the services provided to us in relation to our ongoing public offering. This includes all organization and offering costs of up to 2.5% of gross offering proceeds, but only to the extent that such reimbursement will not cause organization and offering expenses (other than selling commissions and the dealer manager fee) to exceed 2.5% of gross offering proceeds as of the date of such reimbursement. As of June 30, 2013 and December 31, 2012, a total of $130,000 and $0, respectively, of these advances from our Advisor for organization and offering costs were unpaid and due to our Advisor. As of June 30, 2013 and December 31, 2012, we had directly paid for organization and offering costs totaling $5.8 million and $3.7 million, respectively.

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor and the dealer-manager of our public offerings, which is an affiliate of our Advisor. During our offering stage, these payments include selling commissions and the dealer manager fee as well as payments to the dealer manager and our Advisor for reimbursement of organization and offering expenses. However, our Advisor has agreed to reimburse us to the extent that selling commissions, the dealer manager fee and other organization and offering expenses incurred by us exceed 15% of our gross offering proceeds. During our acquisition and development stage, we expect to make payments to our Advisor in connection with the acquisition of real estate investments. In addition, we expect to continue to make payments to our Advisor for the management of our assets and costs incurred by our Advisor in providing services to us. We describe these payments in more detail in Note 12 of the Notes to our Consolidated Financial Statements.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended June 30, 2013 did not exceed the charter imposed limitation.

Distributions

Our Board of Directors declared four cash dividends of $0.025 per share of common stock to stockholders of record as of the close of business on January 31, 2013, February 28, 2013, April 1, 2013 and April 30, 2013. In addition, our Board of Directors declared cash dividends of $0.033 per share of common stock to stockholders of record as of the close of business on May 31, 2013, June 28, 2013, July 31, 2013, August 30, 2013 and September 30, 2013. A portion of the cash distributions that have been paid to date were reinvested in shares of our common stock pursuant to the distribution reinvestment plan.

Because we intend to fund cash distributions from cash flow and strategic financings, at this time we cannot guaranty that our board of directors will declare distributions on a set monthly or quarterly basis. Rather, the board of directors will declare distributions from time to time based on cash flow from our investments and our investment and financing activities. As such, we can also give no assurances as to the timing, amount or notice with respect to any other future distribution declarations.

For the six months ended June 30, 2013, we paid aggregate distributions of $5.5 million, including $1.9 million of distributions paid in cash and $3.6 million of distributions reinvested through our distribution reinvestment plan. Our net loss for the six months ended June 30, 2013 was $4.8 million and net cash flow used in operations was $0.2 million. For the six months ended June 30, 2013, 52.7% of our distributions was funded from cash flow from operations received during the first three months of 2013 and 47.3% of our distributions was funded from proceeds from debt financing. Our cumulative distributions and net loss from inception through June 30, 2013 are $21.0 million and $26.1 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flow from operations and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities or gains from asset sales, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

Our Board of Directors had also declared seven stock distributions (four in 2011 and three in 2012) each for 0.015 shares, or 1.5%, for each outstanding share of common stock. In addition, our Board of Directors declared two stock distributions of 0.0075 shares, or 0.75%, for each outstanding share of common stock held of record on December 31, 2012 and March 29, 2013, respectively, that were distributed on January 15, 2013 and April 15, 2013, respectively. Finally, on May 10, 2013 our Board of Directors declared a quarterly stock distribution of 0.00585 shares, or 0.5856% for each outstanding share of common stock held of record on June 28, 2013.

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

Funds from operations, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but are not limited to, commercial real estate assets, principally (i) non-performing or distressed loans, including but not limited to first- and second-priority mortgage loans, mezzanine loans, B-Notes and other loans, (ii) real estate that was foreclosed upon and sold by financial institutions, (iii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”), and (iv) discounted investment-grade commercial mortgage-backed securities.

Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations or MFFO, as defined by the Investment Program Association, or IPA. MFFO excludes from FFO the following items:


(1)	acquisition fees and expenses;


(2)	straight-line rent amounts, both income and expense;


(3)	amortization of above- or below-market intangible lease assets and liabilities;


(4)	amortization of discounts and premiums on debt investments;


(5)	impairment charges;


(6)	gains or losses from the early extinguishment of debt;


(7)	gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;


(8)	gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;


(9)	gains or losses related to consolidation from, or deconsolidation to, equity accounting;


(10)	gains or losses related to contingent purchase price adjustments; and


(11)	adjustments related to the above items for unconsolidated entities in the application of equity accounting.

We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our offering and acquisition stages are complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired. Although MFFO includes other adjustments, the exclusion of acquisition expenses is the most significant adjustment to us at the present time, as we are currently in our offering and acquisition stages. Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.

As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations. Many of the adjustments in arriving at MFFO are not applicable to us. Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:

•

Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed. Both of these acquisition costs have been and will continue to be funded from the proceeds of our offering and not from operations. We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition expenses include those paid to our Advisor or third parties.

•

Adjustments for straight-line rents and amortization of discounts and premiums on debt investments. In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.

•

Adjustments for amortization of above or below market intangible lease assets. Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.

•

Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments. Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance. As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.

•

Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price. Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations. By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.

By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our offering and acquisition stages are completed. We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry. MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisition stages are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments. However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering and acquisition stages are completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.

As an opportunity REIT, a core element of our investment strategy and operations is the acquisition of distressed and value-add properties and the rehabilitation and renovation of such properties in an effort to create additional value in such properties. As part of our operations, we intend to realize gains from such value-add efforts through the strategic disposition of such properties after we have added value through the execution of our business plan. As we do not intend to hold any of our properties for a specific amount of time, we intend to take advantage of opportunities to realize gains from our value-add efforts on a regular basis during the course of our operations as such opportunities become available, in all events subject to the rules regarding "prohibited transactions" of real estate investment trusts of the Internal Revenue Code of 1986, as amended, as disclosed in the prospectus for our initial public offering. Therefore, we also use adjusted funds from operations, or AFFO, in addition to FFO and MFFO. We calculate AFFO by adding (subtracting) gains (losses) realized on sales of our properties from MFFO. We believe that AFFO presents useful information that assists investors and analysts in the assessment of our operating performance as it is reflective of the impact that regular, strategic property dispositions has on our continuing operations.

Core to our business plan is the acquisition of distressed assets at deep discounts. These assets are operationally distressed at the time of purchase. Such assets often require substantial investments of capital and increased operating costs after acquisition to convert these assets into stable, cash flowing properties. These capital expenditures are central to our revitalization strategy and are critical to creating value and restoring assets to their optimal performance. These planned expenditures are necessary primarily during the first 12 to 24 months after we take operating control of an asset and often result in negative, or reduced, net operating income and AFFO during this turnaround stage. We believe that the presentation of the AFFO attributed to our stabilized assets and the AFFO attributed to our unstabilized assets and our corporate overhead allows investors to better understand the operating performance of our stabilized assets as compared to those assets for which we have yet to complete the stabilization process.

Stabilized assets during the three and six months ended June 30, 2013 included: 107th Avenue, Arcadia, Vista Apartment Homes, Campus Club, Cannery Lofts, Williamsburg, The Redford, Cityside Crossing, Deerfield, Armand Place, Autumn Wood, Village Square, Nob Hill and Town Park (which was sold in April 2013). Unstabilized assets during the three and six months ended June 30, 2013 included: Mosaic, The Reserve at Mt. Moriah, The Alcove, Kenwick & Canterbury and Heatherwood (which was sold in April 2013). The calculation of AFFO attributed to unstabilized assets includes non-property assets and corporate overhead, which consists primarily of general and administrative expenses at the company level.

Stabilized assets during the three and six months ended June 30, 2012 included: 107th Avenue, Arcadia, Vista Apartment Homes, Campus Club, Cannery Lofts, Williamsburg, Town Park (which was sold in April 2013) and Heatherwood (which was sold in April 2013). Unstabilized assets during the three and six months ended June 30, 2012 consisted of The Redford. The calculation of AFFO attributed to unstabilized assets includes non-property assets and corporate overhead, which consists primarily of general and administrative expenses at the company level.

Neither FFO, MFFO nor AFFO should be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor is either indicative of funds available to fund our cash needs, including our ability to fund distributions. In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments that are increases to MFFO and AFFO are, and may continue to be, a significant use of cash. Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements. Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs.

The following section presents our calculation of FFO, MFFO and AFFO and provides additional information related to our operations (in thousands, except per share amounts). As a result of the timing of the commencement of our public offering and our active real estate operations, FFO, MFFO and AFFO are not relevant to a discussion comparing operations for the two periods presented. We expect revenues and expenses to increase in future periods as we raise additional offering proceeds and use them to acquire additional investments.



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net loss – GAAP	$	(1,216	)	$	(2,318	)	$	(4,810	)	$	(3,871	)
Net gain on disposition	(3,173		)	—			(3,173		)	—
Depreciation expense	2,134			337			3,974			601
FFO	(2,255		)	(1,981		)	(4,009		)	(3,270		)
Adjustments for straight-line rents	(59		)	(9		)	(123		)	22
Impairment charge	—			—			539			—
Gain relating to fair value	—			—			(67		)	—
Amortization of intangible lease assets	982			520			1,910			721
Acquisition costs	1,831			1,791			2,518			2,871
MFFO	$	499		$	321		$	768		$	344
Net gain on disposition	3,173			—			3,173			—
AFFO	$	3,672		$	321		$	3,941		$	344

Basic and diluted loss per common share - GAAP	$	(0.04	)	$	(0.18	)	$	(0.17	)	$	(0.34	)
FFO per share	$	(0.07	)	$	(0.14	)	$	(0.14	)	$	(0.26	)
MFFO per share	$	0.02		$	0.04		$	0.03		$	0.06
AFFO per share	$	0.11		$	0.03		$	0.14		$	0.03

Weighted average shares outstanding	32,408			12,671			28,894			11,231



	Three Months Ended June 30,
	2013									2012
	AFFO Attributed to Stabilized Assets			AFFO Attributed to Unstabilized Assets and Corporate Overhead			Total			AFFO Attributed to Stabilized Assets			AFFO Attributed to Unstabilized Assets and Corporate Overhead				Total
Net income (loss)	$	2,371		$	(3,587	)	$	(1,216	)	$	(872	)	$	(1,446	)		$	(2,318	)
Net (gain) loss on disposition	(3,199		)	26			(3,173		)	—			—				—
Depreciation expense	1,903			231			2,134			253			84				337
FFO	1,075			(3,330		)	(2,255		)	(619		)	(1,362		)		(1,981		)
Adjustments for straight-line rents	(59		)	—			(59		)	(9		)	—				(9		)
Amortization of intangible lease assets	644			338			982			309			211				520
Acquisition costs	560			1,271			1,831			1,566			225				1,791
MFFO	$	2,220		$	(1,721	)	$	499		$	1,247		$	(926	)		$	321
Net gain (loss) on disposition	3,199			(26		)	3,173			—			—			—	—
AFFO	$	5,419		$	(1,747	)	$	3,672		$	1,247		$	(926	)		$	321



	Six Months Ended June 30,
	2013									2012
	AFFO Attributed to Stabilized Assets			AFFO Attributed to Unstabilized Assets and Corporate Overhead			Total			AFFO Attributed to Stabilized Assets			AFFO Attributed to Unstabilized Assets and Corporate Overhead			Total
Net loss	$	(322	)	$	(4,488	)	$	(4,810	)	$	(947	)	$	(2,924	)	$	(3,871	)
Net (gain) loss on disposition	(3,199		)	26			(3,173		)	—			—			—
Depreciation expense	3,638			336			3,974			513			88			601
FFO	117			(4,126		)	(4,009		)	(434		)	(2,836		)	(3,270		)
Adjustments for straight-line rents	(123		)	—			(123		)	22			—			22
Impairment charge	—			539			539			—			—			—
Gain relating to fair value	(67		)	—			(67		)	—			—			—
Amortization of intangible lease assets	1,300			610			1,910			510			211			721
Acquisition costs	2,433			85			2,518			2,049			822			2,871
MFFO	3,660			(2,892		)	768			2,147			(1,803		)	344
Net gain (loss) on disposition	3,199			(26		)	3,173			—			—			—
AFFO	$	6,859		$	(2,918	)	$	3,941		$	2,147		$	(1,803	)	$	344

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2012 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”

Off-Balance Sheet Arrangements

As of June 30, 2013 and December 31, 2012, we did not have any off-balance sheet arrangements or obligations.

EXHIBIT INDEX



	Exhibit No.		Description
	31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1		Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2		Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

August 16, 2013	By:	/s/ Alan F. Feldman
		ALAN F. FELDMAN
		Chief Executive Officer
		(Principal Executive Officer)

August 16, 2013	By:	/s/ Steven R. Saltzman
		STEVEN R. SALTZMAN
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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Resource Real Estate Opportunity REIT, Inc. Reports

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