Resource Real Estate Opportunity REIT, Inc. - FORM 10-Q - November 14, 2014

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EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT, Inc.rreo-20140930xex311.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT, Inc.rreo-20140930xex321.htm
EX-10.1 - EXHIBIT 10.1 - Resource Real Estate Opportunity REIT, Inc.exhibit101.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT, Inc.rreo-20140930xex312.htm
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EXCEL - IDEA: XBRL DOCUMENT - Resource Real Estate Opportunity REIT, Inc.Financial_Report.xls
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014
or
¨
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 definition 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 November 7, 2014, there were 68,760,719 outstanding shares of common stock of Resource Real Estate Opportunity REIT, Inc.



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-Q

 
 
PAGE
PART 1
FINANCIAL INFORMATION
 
 
 
 
  Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.
 
 
 
  Item 3.
 
 
 
  Item 4.
 
 
 
PART II
 
 
 
 
 
  Item 2.
 
 
 
  Item 3.
 
 
 
  Item 6.
 
 
 







Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.



PART 1.     FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS (in thousands)
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Investments:
 
 
 
Rental properties, net
$
812,606

 
$
390,373

Loans held for investment, net
1,526

 
1,724

Identified intangible assets, net
3,772

 
5,182

Assets of discontinued operations
—

 
88

 
817,904

 
397,367

 
 
 
 
Cash
117,425

 
270,323

Restricted cash
7,568

 
4,456

Due from related parties
1,346

 
530

Tenant receivables, net
492

 
573

Deposits
197

 
141

Accounts receivable - other
873

 
—

Prepaid expenses and other assets
2,620

 
1,567

Deferred financing costs, net
6,140

 
3,602

Goodwill
1,176

 
—

Total assets
$
955,741

 
$
678,559

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Mortgage notes payable
$
401,837

 
$
111,811

Revolving credit facilities
45,586

 
37,041

Accounts payable
5,921

 
1,417

Accrued expenses and other liabilities
1,918

 
2,745

Accrued real estate taxes
7,734

 
2,117

Due to related parties
1,684

 
1,718

Tenant prepayments
1,183

 
615

Security deposits
2,526

 
1,826

Distribution payable
4,561

 
2,222

Total liabilities
472,950

 
161,512

 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock (par value $.01; 10,000,000 shares authorized, none issued)
—

 
—

Common stock (par value $.01; 1,000,000,000 shares authorized; 68,551,374 and 66,725,241 shares issued, respectively; and 68,353,453 and 66,667,136 shares outstanding, respectively)
684

 
668

Convertible stock (“promote shares”; par value $.01; 50,000 shares authorized, issued and outstanding)
1

 
1

Additional paid-in capital
605,730

 
590,591

Accumulated other comprehensive (loss) income
(205
)
 
20

Accumulated deficit
(132,645
)
 
(74,233
)
Total stockholders’ equity
473,565

 
517,047

Noncontrolling interests
9,226

 
—

Total equity
482,791

 
517,047

Total liabilities and stockholders’ equity
$
955,741

 
$
678,559


The accompanying notes are an integral part of these consolidated statements.
3

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
(Remeasured)
Revenues:
 
 
 
 
 
 
 
Rental income
$
26,812

 
$
11,026

 
$
72,391

 
$
26,335

Gain on foreclosures
—

 
—

 
—

 
3,460

Interest income
63

 
73

 
284

 
188

Total revenues
26,875

 
11,099

 
72,675

 
29,983

 
 
 
 
 
 
 
 
Expenses:
 

 
 

 
 
 
 
Rental operating
15,942

 
7,268

 
41,249

 
17,143

Acquisition costs
2,932

 
3,711

 
9,467

 
6,229

Foreclosure costs
—

 
—

 
—

 
49

Management fees
3,163

 
1,210

 
8,110

 
2,856

General and administrative
2,219

 
1,319

 
7,991

 
3,886

Loss on disposal of assets
2,473

 
—

 
4,121

 
36

Depreciation and amortization expense
11,673

 
5,285

 
36,572

 
11,169

Total expenses
38,402

 
18,793

 
107,510

 
41,368

Loss before other expenses
(11,527
)
 
(7,694
)
 
(34,835
)
 
(11,385
)
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 Net gain on dispositions
7,824

 
—

 
10,365

 
—

Insurance proceeds received in excess of cost
355

 
—

 
355

 
—

Gain on forfeiture/redemption of stock
—

 
7

 
—

 
29

Interest expense
(4,138
)
 
(149
)
 
(10,034
)
 
(396
)
Loss from continuing operations
(7,486
)
 
(7,836
)
 
(34,149
)
 
(11,752
)
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
(Loss) income from discontinued operations
—

 
(24
)
 
2

 
(698
)
Net gain on dispositions
—

 
—

 
—

 
3,173

(Loss) income from discontinued operations, net
—

 
(24
)
 
2

 
2,475

Net loss
(7,486
)
 
(7,860
)
 
(34,147
)
 
(9,277
)
Net loss attributable to noncontrolling interests
215

 
—

 
1,625

 
—

Net loss attributable to stockholders
$
(7,271
)
 
$
(7,860
)
 
$
(32,522
)
 
$
(9,277
)
 
 
 
 
 
 
 
 
Amounts attributable to stockholders
 
 
 
 
 
 
 
Loss from continuing operations
$
(7,271
)
 
$
(7,836
)
 
$
(32,524
)
 
$
(11,752
)
Discontinued operations
—

 
(24
)
 
2

 
2,475

Net loss attributable to stockholders
$
(7,271
)
 
$
(7,860
)
 
$
(32,522
)
 
$
(9,277
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(7,486
)
 
$
(7,860
)
 
$
(34,147
)
 
$
(9,277
)
Other comprehensive loss:
 
 
 
 
 
 
 
Designated derivatives, fair value adjustments
(18
)
 
—

 
(225
)
 
—

Comprehensive loss
(7,504
)
 
(7,860
)
 
(34,372
)
 
(9,277
)
Comprehensive loss attributable to noncontrolling interests
215

 
—

 
1,625

 
—

Total comprehensive loss attributable to stockholders
$
(7,289
)
 
$
(7,860
)
 
$
(32,747
)
 
$
(9,277
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
68,197

 
36,156

 
67,773

 
33,055

 
 
 
 
 
 
 
 
Basic and diluted (loss) income per common share:
 
 
 
 
 
 
 
Continuing operations
$
(0.11
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.36
)
Discontinued operations
—

 
—

 
—

 
0.08

Net loss
$
(0.11
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.28
)

The accompanying notes are an integral part of these consolidated statements.
4

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(in thousands)
(unaudited)

 
Common Stock
 
Convertible Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Noncontrolling
interests
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at
January 1, 2014
66,667

 
$
668

 
50

 
$
1

 
$
590,591

 
$
20

 
$
(74,233
)
 
$
517,047

 
$
—

 
$
517,047

Common stock issued through distribution reinvestment plan
1,493

 
14

 
—

 
—

 
14,167

 
—

 
—

 
14,181

 
—

 
14,181

Syndication costs
—

 
—

 
—

 
—

 
59

 
—

 
—

 
59

 
—

 
59

Distributions of common stock
333

 
3

 
—

 
—

 
3,330

 
—

 
(3,333
)
 
—

 
—

 
—

Distributions declared
—

 
—

 
—

 
—

 
—

 
—

 
(22,604
)
 
(22,604
)
 
—

 
(22,604
)
Share redemptions
(140
)
 
(1
)
 
—

 
—

 
(1,391
)
 
—

 
47

 
(1,345
)
 
—

 
(1,345
)
Designated derivatives, fair value adjustment
—

 
—

 
—

 
—

 
—

 
(225
)
 
—

 
(225
)
 
—

 
(225
)
Noncontrolling interests retained in the Paladin merger
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
18,930

 
18,930

Deconsolidation of noncontrolling interest
—

 
—

 
—

 
—

 
(1,026
)
 
—

 
—

 
(1,026
)
 
(7,960
)
 
(8,986
)
Distributions to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(119
)
 
(119
)
Net loss
—

 
—

 
—

 
—

 
—

 
—

 
(32,522
)
 
(32,522
)
 
(1,625
)
 
(34,147
)
Balance at
September 30, 2014
68,353

 
$
684

 
50

 
$
1

 
$
605,730

 
$
(205
)
 
$
(132,645
)
 
$
473,565

 
$
9,226

 
$
482,791




The accompanying notes are an integral part of these consolidated statements.
5

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
 
 
(Remeasured)
Cash flows from operating activities:
 
 
 
Net loss
$
(34,147
)
 
$
(9,277
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 

 
 

Income from discontinued operations
(2
)
 
(2,475
)
Gain on foreclosures
—

 
(3,460
)
     Loss on disposal of assets
4,121

 
36

Net gain on dispositions
(10,365
)
 
—

Depreciation and amortization
36,572

 
11,169

Amortization of deferred financing costs
880

 
158

Deferred offering costs
—

 
(500
)
Accretion of discount and direct loan fees and costs
(426
)
 
(9
)
Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Restricted cash
(988
)
 
(3,109
)
Tenant receivables, net
(602
)
 
(263
)
Deposits
(306
)
 
(738
)
Prepaid expenses and other assets
(96
)
 
(1,016
)
Due to related parties, net
(1,895
)
 
791

Accounts payable and accrued expenses
6,753

 
4,914

Tenant prepayments
354

 
107

Security deposits
501

 
186

Net cash provided by (used in) operating activities of continuing operations
354

 
(3,486
)
Cash flows from investing activities:
 

 
 

Proceeds from disposal of properties, net closing costs
27,082

 
10,043

Property acquisitions
(252,733
)
 
(168,663
)
Ownership acquisitions, net of cash received
(57,876
)
 
—

Capital expenditures
(27,943
)
 
(20,203
)
Principal payments received on loans
199

 
14

Net cash used in investing activities of continuing operations
(311,271
)
 
(178,809
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
—

 
230,363

Redemptions
(1,342
)
 
—

Payment of deferred financing costs
(3,440
)
 
(247
)
Deferred offering costs
—

 
3,300

Increase in borrowings
247,792

 
8,190

Principal payments on borrowings
(78,876
)
 
(147
)
Distributions paid on common stock
(6,086
)
 
(3,153
)
Distributions to noncontrolling interests
(119
)
 
—

Syndication costs
—

 
(26,788
)
Net cash provided by financing activities of continuing operations
157,929

 
211,518

Net cash (used in) provided by continuing operations
(152,988
)
 
29,223

 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated statements.
6


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
(unaudited)

 
 
 
 
 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
 
 
(Remeasured)
Cash flows from discontinued operations:
 
 
 
Net cash provided by operating activities
90

 
47

Net cash provided by discontinued operations
90

 
47

Net (decrease) increase in cash
(152,898
)
 
29,270

Cash at beginning of period
270,323

 
29,336

Cash at end of period
$
117,425

 
$
58,606


The accompanying notes are an integral part of these consolidated statements.
7
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014
(unaudited)


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource Real Estate Opportunity REIT, Inc. (the “Company”) was organized in Maryland on June 3, 2009 to purchase a diversified portfolio of discounted U.S. commercial real estate and real estate-related assets in order to generate gains to stockholders from the potential appreciation in the value of the assets and to generate current income for stockholders by distributing cash flow from the Company’s investments. Resource Real Estate Opportunity Advisor, LLC (the “Advisor”), an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors, manages the day-to-day operations of the Company. 
Through its private and public offerings, which concluded on December 13, 2013, the Company raised aggregate gross offering proceeds of $645.8 million from the issuance of 64,926,311 shares of common stock, including 276,056 shares purchased by the Advisor and 1,161,623 shares sold in the distribution reinvestment plan. The Company additionally issued 1,492,797 shares for $14.2 million pursuant to its distribution reinvestment plan since December 31, 2013. The Company's distribution reinvestment plan offering is ongoing.
The Company has acquired, and intends to continue to acquire, real estate-related debt and equity that has been significantly discounted due to the effects of economic events and high levels of leverage, as well as stabilized properties that may benefit from extensive renovations that may increase their long-term values.  The Company has a particular focus on acquiring and operating multifamily assets, and it has targeted, and intends to continue to target, this asset class while also acquiring interests in other types of commercial property assets consistent with its investment objectives.  The Company’s targeted portfolio consists 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,  subordinate participations in first mortgage loans, or B-Notes, and other loans, (ii) real estate that was foreclosed upon and sold by financial institutions, (iii) multifamily rental properties to which the Company can add value with a capital infusion (“value add properties”), and (iv) discounted investment-grade commercial mortgage-backed securities.  However, the Company is not limited in the types of real estate assets in which it may invest and, accordingly, it may invest in other real estate-related assets either directly or together with a co-investor or joint venture partner.
The Company is organized and conducts its operations in a manner intended to allow it to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended.  The Company also operates its business in a manner intended to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
The consolidated financial statements and the information and tables contained in the notes to the consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The results of operations for the nine months ended September 30, 2014 may not necessarily be indicative of the results of operations for the full year ending December 31, 2014.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary

Apartment Complex

Number
of Units

Property Location
RRE Opportunity Holdings, LLC

N/A

N/A

N/A
Resource Real Estate Opportunity OP, LP

N/A

N/A

N/A
RRE Charlemagne Holdings, LLC
 
N/A
 
N/A
 
N/A
RRE 107th Avenue Holdings, LLC (“107th Avenue”)

107th Avenue

5

Omaha, NE

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


RRE Westhollow Holdings, LLC (“Westhollow”)

Arcadia (b)

N/A

Houston, TX
RRE Crestwood Holdings, LLC (“Crestwood”)

Town Park (a)

N/A

Birmingham, AL
RRE Iroquois, LP (“Vista”)

Vista Apartment Homes

133

Philadelphia, PA
RRE Iroquois Holdings, LLC

N/A

N/A

N/A
RRE Campus Club Holdings, LLC (“Campus Club”)

Campus Club (b)

N/A

Tampa, FL
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
WPL Holdings, LLC

N/A (c)

N/A

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")

One Hundred Chevy Chase Apartments

244

Lexington, KY
RRE Armand Place Holdings, LLC ("Armand")

Ivy at Clear Creek

244

Houston, TX
RRE Autumn Wood Holdings, LLC ("Autumn Wood")

Retreat at Rocky Ridge

196

Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")

Trailpoint at the Woodlands

271

Houston, TX
RRE Nob Hill Holdings, LLC ("Nob Hill")

Affinity at Winter Park

192

Winter Park, FL
RRE Brentdale Holdings, LLC ("Brentdale")

The Westside Apartments

412

Plano, TX
RRE Jefferson Point Holdings, LLC ("Jefferson Point")

Tech Center Square

208

Newport News, VA
RRE Centennial Holdings, LLC ("Centennial")

Verona Apartment Homes

276

Littleton, CO
RRE Pinnacle Holdings, LLC ("Pinnacle")

Skyview Apartment Homes

224

Westminster, CO
RRE Jasmine Holdings, LLC ("Jasmine")

The Nesbit Palisades

437

Alpharetta, GA
RRE River Oaks Holdings, LLC ("River Oaks")

Maxwell Townhomes

314

San Antonio, TX
RRE Nicollet Ridge Holdings, LLC ("Nicollet Ridge")

Meridian Pointe

339

Burnsville, MN
RRE Addison Place, LLC ("Addison Place")
 
Addison Place
 
403
 
Alpharetta, GA
PRIP Coursey, LLC ("Evergreen at Coursey Place")
 
Evergreen at Coursey Place
 
352
 
Baton Rouge, LA
PRIP 3700, LLC ("Champion Farms")
 
N/A (d)
 
N/A
 
N/A
PRIP 10637, LLC ("Fieldstone")
 
N/A (d)
 
N/A
 
N/A
PRIP 500, LLC ("Pinehurst")
 
Pinehurst
 
146
 
Kansas City, MO
PRIP 1102, LLC ("Pheasant Run")
 
Pheasant Run
 
160
 
Lee's Summit, MO
PRIP 11128, LLC ("Retreat at Shawnee")
 
Retreat at Shawnee
 
342
 
Shawnee, KS
PRIP 6700, LLC ("Hilltop Village")
 
N/A (b)
 
N/A
 
N/A
PRIP 3383, LLC ("Conifer Place")
 
N/A (d)
 
N/A
 
N/A
PRIP Stone Ridge, LLC ("Stone Ridge")
 
N/A (d)
 
N/A
 
N/A
PRIP Pines, LLC ("Pines of York")
 
N/A (d)
 
N/A
 
N/A
PRIP 5060/6310, LLC ("Governor Park")
 
N/A (b)
 
N/A
 
N/A
RRE Chisholm Place Holdings LLC ("Chisholm Place")
 
Chisholm Place
 
142
 
Plano, TX
RRE Berkeley Run Holdings, LLC ("Berkley Run")
 
Berkeley Run
 
194
 
Atlanta, GA
RRE Berkeley Trace Holdings LLC ("Berkley Trace")
 
Berkeley Trace
 
165
 
Atlanta, GA
RRE Merrywood LLC ("Merrywood")
 
Merrywood
 
228
 
Katy, TX
RRE Sunset Ridge Holdings, LLC ("Sunset Ridge")
 
Sunset Ridge
 
324
 
San Antonio, TX
RRE Parkridge Place Holdings, LLC ("Parkridge Place")
 
Parkridge Place
 
536
 
Irving, TX
RRE Spring Hill Holdings, LLC ("Spring Hill")
 
N/A
 
N/A
 
N/A
 
N/A - Not Applicable
(a) - Discontinued operations

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


(b) - Sold in 2014
(c) - Subsidiary holds a portion of the Williamsburg parking lot    
(d) - Wholly-owned subsidiary of RRE Charlemagne Holdings, LLC
All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” and accordingly consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it has been determined that the Company holds a variable interest in a VIE, management performs a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and re-evaluate the requirement to consolidate them. Noncontrolling interests are presented and disclosed as a separate component of stockholders' equity (not as a liability or other item outside of stockholders' equity). Consolidated net income (loss) includes the noncontrolling interests’ share of income (loss). All changes in the Company’s ownership interest in a subsidiary are accounted for as stockholders' equity transactions if the Company retains its controlling financial interest in the subsidiary. The portions of these entities that the Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. The consolidated financial statements include the accounts of the Company's majority-owned and/or controlled subsidiaries as follows:
Subsidiary
 
Ownership %
 
Apartment Complex
 
Number
of Units
 
Property Location
Springhurst Housing Partners, LLC ("Champion Farms")
 
70.0%
 
Champion Farms
 
264
 
Louisville, KY
Glenwood Housing Partners I, LLC ("Fieldstone")
 
83.0%
 
Fieldstone
 
266
 
Woodlawn, OH
FPA/PRIP Conifer, LLC ("Conifer Place")
 
42.5%
 
Conifer Place
 
420
 
Norcross, GA
DT Stone Ridge, LLC ("Stone Ridge")
 
77.7%
 
Stone Ridge
 
191
 
Columbia, SC
FP-1, LLC ("Pines of York")
 
90.0%
 
Pines of York
 
248
 
Yorktown, VA
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
Rental Properties
The Company records acquired rental properties at fair value. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates using the straight line method.  The Company anticipates the estimated useful lives of its assets by class as follows:
Buildings
27.5 years
Building improvements
3.0 to 27.5 years
Tenant improvements
Shorter of lease term or expected useful life

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for permanent impairment.  This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition.  The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of a property to be held and used.  For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset.  For the nine months ended September 30, 2013, the Company recorded a $539,000 impairment charge for one of its loans held for investment (see Note 8 regarding the Heatherwood Note). There were no impairment charges during the three and nine months ended September 30, 2014 or during the three months ended September 30, 2013. The impairment charge is reflected in Income from Discontinued Operations, as the Company sold the Heatherwood Apartments in April 2013.
Loans Held for Investment, Net
The Company records acquired performing loans held for investment at cost and reviews them for potential impairment at each balance sheet date.  The Company considers a loan to be impaired if one of two conditions exists.  The first condition is if, based on current information and events, management believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  A TDR may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and/or guarantees made by the borrowers.
The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or, as a practical expedient, the fair value of the collateral.  If a loan is deemed to be impaired, the Company records a reserve for loan losses through a charge to income for any shortfall.    
Interest income from performing loans held for investment is recognized based on the contractual terms of the loan agreement.  Fees related to any buy down of the interest rate are deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income.  The initial investment made in a purchased performing loan includes the amount paid to the seller plus fees.  The initial investment frequently differs from the related loan’s principal amount at the date of the purchase.  The difference is recognized as an adjustment of the yield over the life of the loan.  Closing costs related to the purchase of a performing loan held for investment are amortized over the term of the loan and accreted as an adjustment to interest income.
The Company may acquire real estate loans at a discount due to the credit quality of such loans and the respective borrowers under such loans.  Revenues from these loans are recorded under the effective interest method.  Under this method, an effective interest rate (“EIR”) is applied to the cost basis of the real estate loan held for investment.  The EIR that is calculated when the loan held for investment is acquired remains constant and is the basis for subsequent impairment testing and income recognition.  However, if the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate receivable on the cost recovery method.  Under the cost recovery method of accounting, no income is recognized until the basis of the loan held for investment has been fully recovered.
Allocation of the Purchase Price of Acquired and Foreclosed Assets
The cost of rental properties acquired directly as fee interests and through foreclosing on a loan are allocated to net tangible and intangible assets based on their relative fair values.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and to identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships. Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports along with the aforementioned information available to the Company's management is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


In allocating the purchase price, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period.  Management also estimates costs to execute similar leases, including leasing commissions and legal and other related expenses, to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.  The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.    
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant.  Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis).  Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant.  Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the average remaining term of the respective leases.  The value of customer relationship intangibles are amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles associated with that tenant would be charged to expense in that period.
The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables.  The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.  Initial purchase price allocations are subject to change until all information is finalized, which is generally within one year of the acquisition date.
Goodwill

The Company records the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment at a level of reporting referred to as a reporting unit during the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents.  The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period in which the related expenses are incurred.
The specific timing of a sale is measured against various criteria related to the terms of the transaction and any continuing involvement associated with the property.  If the criteria for gain recognition under the full-accrual method are not met, the Company defers gain recognition and accounts for the continued operations of the property by applying the percentage-of-completion, reduced profit, deposit, installment or cost recovery methods, as appropriate, until the appropriate criteria are met.
The future minimum rental payments to be received from noncancelable operating leases are $52.4 million and $363,000 for the 12 month periods ending September 30, 2015 and 2016, respectively, and none thereafter.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Tenant Receivables
Tenant receivables are stated in the financial statements as amounts due from tenants net of an allowance for uncollectible receivables.  Payment terms vary and receivables outstanding longer than the payment terms are considered past due.  The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the general economy and the industry as a whole.  The Company writes off receivables when they become uncollectible.  At September 30, 2014 and December 31, 2013, there were allowances for uncollectible receivables of $56,000 and $86,000, respectively.
Income Taxes
To maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests.  Accordingly, the Company generally will not be subject to corporate U.S. federal income taxes to the extent that it annually distributes at least 90% of its taxable net income to its stockholders.  If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it fails its REIT qualification.  Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends-paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements.  Generally, taxable income differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, the Company’s TRSs may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business.  A TRS is subject to U.S. federal, state and local corporate income taxes.  As of September 30, 2014 and December 31, 2013, the Company had no TRSs.
The Company evaluates the benefits from tax positions taken or expected to be taken in its tax return. Only the largest amount of benefits from tax positions that will more likely than not be sustainable upon examination are recognized by the Company.  The Company does not have any unrecognized tax benefits, nor interest and penalties, recorded in its consolidated financial statements and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next 12 months.
The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations.  The Company is not currently undergoing any examinations by taxing authorities.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period.  Diluted earnings per share take into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock.  Due to reported losses for the periods presented, none of the 50,000 convertible shares (discussed in Note 15) are included in the diluted earnings per share calculations as their effect would be anti-dilutive.  For the purposes of calculating earnings per share, all common shares and per common share information in the financial statements have been adjusted retroactively for the effect of seven 1.5% stock distributions, two 0.75% stock distributions, one 0.585% stock distribution and two 0.5% stock distributions issued to stockholders. Common stock shares issued on the Consolidated Balance Sheets have also been adjusted retroactively for the effect of these 12 distributions.
Adoption of New Accounting Standard
The Company early adopted the following accounting standard during 2014 which had a material impact on its presentation of its consolidated financial position, results of operations and cash flows:

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


In April 2014, the Financial Accounting Standards Board, or FASB, issued authoritative guidance to change the criteria for reporting discontinued operations. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. The Company has early adopted this guidance and such guidance became effective for the Company as of January 1, 2014.
Accounting Standards Issued But Not Yet Effective
In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services.  The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning January 1, 2017, including interim periods in 2017, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this guidance on the Company’s consolidated financial position, results of operations and cash flows.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental cash flow information (in thousands):
 
Nine Months Ended
 
September 30,
 
2014
 
2013
 
 
 
(Remeasured)
Non-cash financing and investing activities:
 
 
 
Property and intangibles received on foreclosure of loans held for investment
$
—

 
$
10,150

Financing provided for disposed property
—

 
800

Mortgage refinancing
16,000

 
—

Stock issued from the distribution reinvestment plan
14,181

 
6,258

Stock distributions issued
3,333

 
5,896

Cash distributions on common stock declared but not yet paid
4,561

 
1,536

Investor contributions held in escrow which have converted to common stock
—

 
1,700

Deferred financing costs and escrow deposits funded directly by mortgage note and revolving credit facility
3,767

 
865

Debt assumed
138,327

 
—

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
8,420

 
$
216

NOTE 4 - RENTAL PROPERTIES, NET
The Company’s investments in rental properties consisted of the following (in thousands):
 
September 30,
2014
 
December 31,
2013
Land
$
129,362

 
$
62,859

Building and improvements
690,046

 
325,412

Furniture, fixtures and equipment
23,565

 
17,051

Construction in progress
5,538

 
827

 
848,511

 
406,149

Less: Accumulated depreciation
(35,905
)
 
(15,776
)
 
$
812,606

 
$
390,373


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Depreciation expense for the three and nine months ended September 30, 2014 was $9.0 million and $23.4 million, respectively. Deprecation expense for the three and nine months ended September 30, 2013 was $3.1 million and $7.1 million, respectively.
NOTE 5 - LOANS HELD FOR INVESTMENT, NET
On March 15, 2011, the Company purchased, at a discount, two non-performing promissory notes and two performing promissory notes (the “Notes”), each of which was secured by a first priority mortgage on the respective multifamily rental apartment communities.  The contract purchase price for the Notes was a total of $3.1 million, excluding closing costs.  On August 2, 2011, the borrower of one of the non-performing promissory notes entered into a forbearance agreement with the Company and, on September 23, 2011, paid the Company a negotiated amount in satisfaction of the note in full.  On August 18, 2011, the Company was the successful bidder at a foreclosure sale of the property collateralizing the second non-performing note, the Heatherwood Note.  Possession of the Heatherwood Apartments was obtained in February 2012 and the property was subsequently sold in April 2013 (see Note 8). On April 18, 2013, in connection with the sale of the Heatherwood Apartments, the Company originated an $800,000 mortgage loan to the purchaser of the Heatherwood Apartments on the same date.
The face value of the performing notes as of both September 30, 2014 and December 31, 2013 was $1.9 million. The performing notes were purchased net of discounts and the unamortized accretable discounts totaled $273,000 and $292,000 at September 30, 2014 and December 31, 2013, respectively.
On December 31, 2011, the Peterson Note matured with an unpaid balance of $238,000.  Accordingly, the Company and the borrower under this note entered into a forbearance agreement in January 2012 which expired on December 31, 2013.  The borrower did not pay the outstanding balance at the expiration of the forbearance period, which caused the borrower under the Peterson Note to be in default of such agreement. This forbearance agreement was considered a troubled debt restructuring.  On February 27, 2014, the Company was the successful bidder at a foreclosure sale of the property collateralizing the Peterson Note. On April 6, 2014, the Company sold its interest in the sheriff's deed for the Peterson Apartments for $195,000.
    
The following table provides the aging of the Company’s loans held for investment (dollars in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
 
Amount
 
Percent
 
Amount
 
Percent
Current
 
$
1,526

 
100%
 
$
1,529

 
89%
 
 
 
 
 
 
 
 
 
Delinquent:
 
 

 
 
 
 

 
 
30−89 days
 
—

 
—%
 
195

 
11%
90−180 days
 
—

 
—%
 
—

 
—%
Greater than 180 days
 
—

 
—%
 
—

 
—%
 
 
$
1,526

 
100%
 
$
1,724

 
100%

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


The following table provides information about the credit quality of the Company’s loans held for investment, net (in thousands):
 
September 30,
2014
 
December 31,
2013
Loans:
 
 
 
Performing
$
1,526

 
$
1,529

Nonperforming
—

 
195

Total
$
1,526

 
$
1,724

The following table provides information about the terms of the Company's loans held for investment (dollars in thousands):
 
 
Trail Ridge
Note
 
Heatherwood
Note
Face value
 
$
1,058

 
$
800

Maturity date
 
10/28/2021

 
5/17/2016

Interest rate
 
7.5
%
 
4.0
%
Average monthly payment
 
$
8

 
$
11

The Company has individually evaluated each loan for impairment and determined that, as of September 30, 2014, the two loans held for investment were not impaired. 
There were no charge-offs for the nine months ended September 30, 2014.
NOTE 6 - ACQUISITIONS AND FORECLOSURES
Real Estate Investments
As of September 30, 2014, the Company owned interests in 38 properties, including nine of the 11 properties purchased on January 28, 2014 as part of the Paladin acquisition, discussed below. The Company recognized goodwill as the excess of purchase price over the fair value of the property acquired. The Company estimated the fair values of certain of the acquired assets and liabilities based on preliminary valuations at the date of purchase. The Company has received final appraisals for all recent acquisitions.
The table below summarizes the Company's wholly-owned acquisitions and the respective fair values assigned (dollars in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Multifamily
Community Name
 
City and State
 
Date of
Acquisition
 
Purchase
Price (1)
 
 
Land

 
Building and
Improvements
 
Furniture, Fixture and Equipment
 
Intangible Assets
 
Other Assets
 
Other
Liabilities
 
Fair Valued
Assigned
Parkridge Place
 
Irving, TX
 
9/29/2014
 
$
48,500

(2) 
 
$
6,707

 
$
39,543

 
$
825

 
$
1,425

 
$
—

 
$
—

 
$
48,500

Sunset Ridge
 
San Antonio, TX
 
9/4/2014
 
35,000

(2) 
 
15,425

 
18,615

 
514

 
931

 
764

 
(24,179
)
 
12,070

Pinehurst
 
Kansas City, MO
 
7/1/2014
 
3,588

(3) 
 
1,250

 
8,241

 
200

 
290

 
142

 
(4,544
)
 
5,579

Pheasant Run
 
Lee's Summit, MO
 
7/1/2014
 
4,277

(3) 
 
800

 
10,798

 
300

 
317

 
172

 
(6,559
)
 
5,828

Retreat at Shawnee
 
Shawnee, KS
 
7/1/2014
 
5,369

(3) 
 
3,200

 
14,550

 
500

 
608

 
186

 
(14,064
)
 
4,980

Merrywood
 
Katy, TX
 
6/26/2014
 
32,300

 
 
5,831

 
25,247

 
307

 
915

 
62

 
(377
)
 
31,985

Berkeley Trace
 
Atlanta, GA
 
5/19/2014
 
22,250

 
 
4,002

 
17,600

 
194

 
453

 
25

 
(110
)
 
22,164

Berkeley Run
 
Atlanta, GA
 
5/19/2014
 
29,500

 
 
4,723

 
23,969

 
219

 
588

 
32

 
(156
)
 
29,375

Chisholm Place
 
Plano, TX
 
5/5/2014
 
15,000

 
 
1,981

 
12,383

 
198

 
438

 
36

 
(31
)
 
15,005

Evergreen at Coursey
 
Baton Rouge, LA
 
3/31/2014
 
15,613

(4) 
 
3,430

 
38,041

 
530

 
1,080

 
680

 
(28,799
)
 
14,962

Addison Place
 
Alpharetta, GA
 
3/28/2014
 
70,500

 
 
6,353

 
62,249

 
509

 
1,389

 
55

 
(392
)
 
70,163

Meridian Pointe
 
Burnsville, MN
 
12/20/2013
 
33,149

 
 
4,134

 
26,992

 
1,016

 
1,008

 
36

 
(107
)
 
33,079

Maxwell Townhomes
 
San Antonio, TX
 
12/16/2013
 
22,500

 
 
3,830

 
17,510

 
491

 
669

 
48

 
(63
)
 
22,485

The Nesbit Palisades
 
Alpharetta, GA
 
10/25/2013
 
25,050

 
 
7,582

 
16,023

 
587

 
859

 
37

 
(161
)
 
24,927

Verona Apartment Homes
 
Littleton,
CO
 
9/30/2013
 
30,600


 
5,702

 
23,609

 
198

 
1,090

 
24

 
(190
)
 
30,433

Skyview Apartment Homes
 
Westminster,
CO
 
9/30/2013
 
24,250


 
2,923

 
20,301

 
97

 
928

 
20

 
(147
)
 
24,122

Tech Center Square
 
Newport News,
VA
 
9/9/2013
 
18,250


 
3,951

 
13,048

 
584

 
667

 
23

 
(59
)
 
18,214

The Westside Apartments
 
Plano,
TX
 
7/25/2013
 
32,200


 
5,785

 
24,418

 
798

 
1,199

 
52

 
(317
)
 
31,935

Affinity at Winter Park
 
Winter Park,
FL
 
6/27/2013
 
10,100


 
2,512

 
6,459

 
523

 
606

 
50

 
(61
)
 
10,089

Trailpoint at the Woodlands
 
Houston,
TX
 
6/24/2013
 
27,200


 
3,785

 
22,014

 
697

 
704

 
40

 
(170
)
 
27,070

Retreat at Rocky Ridge
 
Hoover,
AL
 
4/18/2013
 
8,500

 
 
1,616

 
6,418

 
30

 
436

 
2

 
(89
)
 
8,413

Ivy at Clear Creek
 
Houston,
TX
 
3/28/2013
 
11,750


 
1,877

 
9,175

 
28

 
670

 
8

 
(127
)
 
11,631

One Hundred Chevy Chase Apartments
 
Lexington,
KY
 
3/13/2013
 
6,850

 
 
1,323

 
4,981

 
41

 
505

 
7

 
(101
)
 
6,756

Deerfield (1)
 
Hermantown
MN
 
3/21/2012
 
10,300

(6) 
 
1,660

 
11,110

 
500

 
423

 
1

 
(4
)
 
13,690

The Alcove
 
Houston,
TX
 
12/21/2012
 
5,500

 
 
1,202

 
3,865

 
20

 
413

 
54

 
(13
)
 
5,541

Cityside Crossing
 
Houston,
TX
 
12/19/2012
 
14,425


 
1,949

 
11,676

 
37

 
763

 
49

 
(68
)
 
14,406

The Reserve at
Mount Moriah
 
Memphis,
TN
 
12/7/2012
 
2,275

 
 
775

 
1,124

 
39

 
337

 
16

 
(90
)
 
2,201

Mosaic
 
Oklahoma City,
OK
 
12/6/2012
 
2,050


 
1,000

 
2,609

 
30

 
123

 
14

 
(14
)
 
3,762

Williamsburg
Apartments
 
Cincinnati,
OH
 
6/20/2012
 
41,250

 
 
3,223

 
35,111

 
1,007

 
1,909

 
49

 
(274
)
 
41,025


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Cannery Lofts (5)
 
Dayton,
OH
 
5/13/2011
 
7,100

(7) 
 
160

 
7,913

 
200

 
609

 
35

 
—

 
8,917

The Redford
 
Houston,
TX
 
3/27/2012
 
11,400

 
 
4,073

 
5,235

 
262

 
1,558

 
272

 
—

 
11,400

Vista Apartment
Homes (5)
 
Philadelphia,
PA
 
6/17/2011
 
12,000

(8) 
 
1,163

 
9,913

 
—

 
535

 
530

 
(141
)
 
12,000

107th Avenue
 
Omaha,
NE
 
8/18/2010
 
225

 
 
25

 
196

 
—

 
4

 
—

 
—

 
225

 
(1)
Purchase price excludes closing costs and acquisition expenses. For properties acquired through foreclosure, the purchase price reflects the contract purchase price of the note.
(2)
Asset valuations are based on preliminary valuations at the date of purchase. The Company has obtained appraisals to finalize the valuations. The Company has up to 12 months from the dates of acquisition to finalize the valuations.
(3)
The Company originally acquired a 97.5% interest in the joint venture that owned Pinehurst, Pheasant Run and Retreat at Shawnee. On July 1, 2014, the Company purchased the remaining 2.5% ownership interest of its joint venture partner, bringing the Company's ownership percentage to 100%.
(4)
The Company originally acquired a 51.7% interest in the joint venture that owned Evergreen at Coursey. On March 31, 2014, the Company purchased the remaining 48.3% ownership interest of its joint venture partner, bringing the Company's ownership percentage to 100.0%.
(5)
The date of acquisition reflects the date the Company acquired the note secured by the property listed.
(6)
Deerfield originally served as the collateral for a non-performing note that the Company purchased on March 21, 2012. On July 19, 2012, the Company was the successful bidder at a foreclosure sale and formally received title to the property on January 22, 2013.
(7)
Cannery Lofts originally served as the collateral for a non-performing note that the Company purchased on May 13, 2011. On December 21, 2011, the Company entered into a settlement agreement with the borrower and, subsequently, the Company foreclosed and formally received title to the property on June 6, 2012.
(8)
Vista Apartment Homes, formerly known as Iroquois Apartments, originally served as the collateral for a non-performing promissory note that the Company purchased on June 17, 2011. On August 2, 2011, the Company was the successful bidder at a sheriff's sale and formally received title to the property.
Acquisitions
The Company acquired interests in 18 properties during the nine months ended September 30, 2014 including the 11 joint venture interests comprising the Paladin acquisition. In order to finalize the fair values of the acquired assets and liabilities, the Company obtained third-party appraisals for all of the properties acquired. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property. All valuations have been finalized as of September 30, 2014.
Paladin Acquisition
On July 18, 2013, Resource Real Estate Opportunity OP, LP (the “Operating Partnership”), the operating partnership of the Company, entered into an Agreement and Plan of Merger with RRE Charlemagne Holdings, LLC, a wholly-owned subsidiary of the Operating Partnership (“Merger Sub”), Paladin Realty Income Properties, Inc. (“Paladin”), and Paladin Realty Income Properties, L.P. (“Paladin OP”), whose sole general partner was Paladin, pursuant to which Paladin OP was to merge with and into Merger Sub (the “Merger”), with Merger Sub surviving as a wholly-owned subsidiary of the Operating Partnership.
On January 28, 2014, the parties completed the Merger resulting in the acquisition by the Operating Partnership of interests in 11 joint ventures that owned a total of 10 multifamily communities with more than 2,500 rentable units and two office properties that contained more than 75,000 rentable square feet. The Operating Partnership also acquired, as part of the Merger, a promissory note in the principal amount of $3.5 million issued by a consolidated joint venture which is eliminated in consolidation. This promissory note is secured by the co-venturer’s interests in such joint venture. The consideration for the Merger was $51.2 million, exclusive of transaction costs.    
On March 6, 2014, the Company, through a wholly-owned subsidiary, sold its 47.65% membership interest in one of the Paladin joint ventures, FPA/PRIP Governor Park, LLC ("Governor Park"), to FPA Governor Park Associates, LLC for $456,000. The sale price approximated the fair value, therefore no gain or loss was recognized on the transaction.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


The allocation of the purchase price for the interests in the 11 Paladin joint ventures, which was completed during the nine months ended September 30, 2014, is included below (in thousands):
Multifamily
Community Name
 
City
and
State
 
Ownership % at Date of Acquisition
 
Land
 
Building
and
Improvements
 
Intangible
Assets
 
Fair Value
of
Property
 
Other Net
Assets
(Liabilities)
 
Non-controlling interest
 
Total
Company
Equity
 
Goodwill
 
Allocation of
Purchase
Price
Champion Farms
 
Louisville, KY
 
70.0
%
 
$
3,168

 
$
23,464

 
$
579

 
$
27,211

 
$
(16,440
)
 
$
(3,231
)
 
$
7,540

 
$
164

 
$
7,704

Fieldstone
 
Woodlawn, OH
 
83.0
%
 
1,420

 
18,472

 
648

 
20,540

 
(15,801
)
 
(806
)
 
3,933

 
124

 
4,057

Pinehurst
 
Kansas City, MO
 
97.5
%
 
1,250

 
8,241

 
290

 
9,781

 
(4,216
)
 
(139
)
 
5,426

 
69

 
5,495

Pheasant Run
 
Lee's Summit, MO
 
97.5
%
 
800

 
10,798

 
317

 
11,915

 
(6,088
)
 
(145
)
 
5,682

 
73

 
5,755

Retreat at Shawnee
 
Shawnee, KS
 
97.5
%
 
3,200

 
14,550

 
608

 
18,358

 
(13,378
)
 
(124
)
 
4,856

 
112

 
4,968

Hilltop Village
 
Kansas City, MO
 
49.0
%
 
800

 
4,289

 
195

 
5,284

 
(4,366
)
 
(468
)
 
450

 
33

 
483

Conifer Place
 
Norcross, GA
 
42.5
%
 
5,040

 
28,712

 
1,007

 
34,759

 
(27,994
)
 
(3,886
)
 
2,879

 
209

 
3,088

Stone Ridge
 
Columbia, SC
 
68.5
%
 
1,300

 
4,612

 
326

 
6,238

 
807

 
(2,218
)
 
4,827

 
39

 
4,866

Evergreen at Coursey Place
 
Baton Rouge, LA
 
51.7
%
 
3,430

 
38,041

 
1,080

 
42,551

 
(27,587
)
 
(7,223
)
 
7,741

 
256

 
7,997

Pines of York
 
Yorktown, VA
 
90.0
%
 
4,464

 
16,340

 
715

 
21,519

 
(14,628
)
 
(690
)
 
6,201

 
130

 
6,331

 
 
 
 
 
 
$
24,872

 
$
167,519

 
$
5,765

 
$
198,156

 
$
(129,691
)
 
$
(18,930
)
 
$
49,535

 
$
1,209

 
$
50,744

Governor Park (sold March 6, 2014)
 
47.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
456

Total purchase price
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
51,200

On March 31, 2014, the Company purchased the remaining 48.3% ownership interest in Evergreen at Coursey Place ("Coursey Place") from its joint venture partner for $7.5 million. A summary of the transaction is as follows (in thousands):
Purchase price
 
$
7,500

 
 
 
Noncontrolling interest assumed
 
$
7,223

Losses attributable to noncontrolling interest
 
(191
)
Distribution to noncontrolling interest
 
(116
)
Other costs
 
(33
)
 
 
6,883

Adjustment to additional paid in capital
 
$
(617
)
    
On July 1, 2014, the Company purchased the remaining 2.5% ownership interest in Pinehurst, Pheasant Run and Retreat at Shawnee from its joint venture partner for a total of $1.1 million. A summary of the transactions is as follows (in thousands):
 
 
Pinehurst
 
Pheasant Run
 
Retreat at Shawnee
Purchase price
 
$
570

 
$
515

 
$
15

 
 
 
 
 
 
 
Noncontrolling interests assumed
 
139

 
145

 
124

Losses attributable to noncontrolling interests
 
(7
)
 
(8
)
 
(15
)
Adjusted noncontrolling interest balance
 
132

 
137

 
109

Adjustment to additional paid in capital
 
$
(438
)
 
$
(378
)
 
$
94


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)



In July 2014, the Company contributed $1.1 million to the joint venture partnership that owns Stone Ridge. The joint venture partner did not contribute its pro-rata share, which resulted in a reduction of its partnership interest. As a result, the Company obtained an additional 9.2% interest in the joint venture, increasing its ownership interest to 77.7% at September 30, 2014.
The table below summarizes the total revenues, net losses, and acquisition costs of the Company's 2014 acquisitions, during the three and nine months ended September 30, 2014 (dollars in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
Multifamily Community
 
2014
 
2014
Parkridge Place
 
 
 
 
     Total Revenues
 
$33
 
$33
     Net Loss
 
(703)
 
(703)
     Acquisition Costs
 
(1,290)
 
(1,290)
Sunset Ridge
 
 
 
 
     Total Revenues
 
$299
 
$299
     Net Loss
 
(772)
 
(772)
     Acquisition Costs
 
(969)
 
(969)
Merrywood
 
 
 
 
     Total Revenues
 
$874
 
$914
     Net Loss
 
(445)
 
(538)
     Acquisition Costs
 
—
 
(832)
Berkeley Trace
 
 
 
 
     Total Revenues
 
$483
 
$703
     Net Loss
 
(523)
 
(623)
     Acquisition Costs
 
—
 
(606)
Berkeley Run
 
 
 
 
     Total Revenues
 
$609
 
$885
     Net Loss
 
(671)
 
(776)
     Acquisition Costs
 
—
 
(748)
Chisholm Place
 
 
 
 
     Total Revenues
 
$458
 
$752
     Net Loss
 
(450)
 
(705)
     Acquisition Costs
 
(25)
 
(494)
Addison Place
 
 
 
 
     Total Revenues
 
$1,576
 
$3,111
     Net Loss
 
(2,082)
 
(2,832)
     Acquisition Costs
 
—
 
(1,720)
Paladin Properties
 
 
 
 
     Total Revenues
 
$6,119
 
$16,706
     Net Loss
 
(2,295)
 
(8,512)
     Acquisition Costs
 
(648)
 
(2,780)
    

NOTE 7 - MEASUREMENT PERIOD ADJUSTMENTS
The Company obtains third party appraisals for all of its acquisitions. If the appraisals are not finalized in the period in which the property or interest was acquired, a measurement period adjustment is recorded. The measurement period adjustment for the Deerfield acquisition was finalized during the three months ended December 31, 2013. For the Addison Place acquisition, which was completed in the three months ended March 31, 2014, the measurement period adjustments was finalized during the

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


three months ended June 30, 2014. For the Paladin acquisition, which was completed in the three months ended March 31, 2014, the measurement period adjustments were finalized during the three months ended September 30, 2014.
On January 22, 2013, the Company took title to Deerfield after foreclosing on the Deerfield Note, which was originally acquired by the Company for $10.3 million.      
In completing the accounting for the acquisition of Deerfield, the Company determined that the fair value of the net assets acquired exceeded the fair value of the consideration paid for this acquisition. Accordingly, the Company retrospectively adjusted the provisional amounts with respect to the Deerfield acquisition that were recognized at the acquisition date to reflect new information from the completed third party appraisal report that, if known at the acquisition date, would have affected the measurement of the amounts recognized as of that date.  The final purchase price adjustment recorded during the measurement period resulted in a gain on foreclosure of $3.4 million on the Deerfield acquisition.  Those changes are reflected in the table below (in thousands):
Deerfield
 
January 22, 2013
(As initially reported)
 
Measurement
period adjustment
 
January 22, 2013
(As adjusted)
Land
$
1,028

 
$
632

 
$
1,660

Building
8,592

 
2,518

 
11,110

Personal property
—

 
500

 
500

Intangible assets
680

 
(257
)
 
423

Identifiable net assets
10,300

 
3,393

 
13,693

Gain on foreclosure
—

 
(3,393
)
 
—

Total net identifiable net assets
$
10,300

 
$
—

 
$
13,693

Changes in the Paladin and Addison Place acquisitions are reflected in the tables below (in thousands):
Paladin
 
January 28, 2014
(As initially reported)
 
Measurement
period adjustment (1)
 
January 28, 2014
(As adjusted)
Land
$
44,292

 
$
(19,420
)
 
$
24,872

Building
149,155

 
18,364

 
167,519

Personal property
—

 
3,530

 
3,530

Intangible assets
5,861

 
(96
)
 
5,765

Goodwill
6,412

 
(5,203
)
 
1,209

Other net assets (liabilities)
(137,739
)
 
4,518

 
(133,221
)
Total net identifiable net assets
$
67,981

 
$
1,693

 
$
69,674

 
(1)
Remaining balance ($1.7 million) of measurement period adjustments adjusted the noncontrolling interest balance.      

The results of operations for the three months ended June 30, 2014 include an additional $867,000 of depreciation and amortization that would have been included in the three months ended March 31, 2014 had the final appraisals for the Paladin properties been received and recorded during that period.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Addison Place
 
March 31, 2014
(As initially reported)
 
Measurement
period adjustment
 
March 31, 2014
(As adjusted)
Land
$
18,137

 
$
(11,784
)
 
$
6,353

Building
51,843

 
10,406

 
62,249

Personal property
—

 
509

 
509

Intangible assets
520

 
869

 
1,389

Total net identifiable net assets
$
70,500

 
$
—

 
$
70,500

The measurement period adjustment for Addison Place had no impact on depreciation and amortization for the three months ended March 31, 2014.
NOTE 8 - DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS
In accordance with new accounting guidance for discontinued operations (see Note 2), the Company included the net gains on dispositions of assets in loss from continuing operations on the consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2014.
The Company sold the Campus Club Apartments on June 16, 2014 for $10.5 million and recognized a gain of approximately $2.6 million on the disposition.
The Company sold its 49% interest in one of the Paladin joint ventures, Parkhill Partners I, LLC ("Hilltop Village"), on July 1, 2014 to its joint venture partner for no consideration and recognized a loss on the sale of $500,860.
The Company sold the Arcadia at Westheimer Apartments on September 19, 2014 for $18.1 million and recognized a gain of approximately $8.3 million on the disposition.
The Company reported its property dispositions as discontinued operations under prior accounting guidance. Assuming no significant continuing involvement by the Company after the sale, the sale of property was considered a discontinued operation.  Included in discontinued operations for the three and nine months ended September 30, 2013 are the operating results of the Heatherwood Apartments and the Town Park Apartments, both discussed below.
      The Company sold the Heatherwood Apartments, which were originally obtained through foreclosure, for $1.0 million on April 18, 2013 and recognized a loss on disposition of $31,000. The Company provided the purchaser with financing for $800,000 and the purchaser paid cash of $200,000 in connection with the disposition.
The Company sold the Town Park Apartments on April 30, 2013 for $10.3 million and recognized a gain of approximately $3.2 million on disposition.    
    The results of discontinued operations are summarized for the three and nine months ended September 30, 2014 and 2013 as follows (in thousands): 

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
—

 
$
—

 
$
3

 
$
1,081

Total revenues
 
—

 
—

 
3

 
1,081

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 
 
 
Rental operating
 
—

 
23

 
1

 
812

Management fees
 
—

 
—

 
—

 
62

General and administrative
 
—

 
1

 
—

 
225

Loss on property impairment
 
—


—

 
—

 
539

Depreciation and amortization expense
 
—

 
—

 
—

 
141

Total expenses
 
—

 
24

 
1

 
1,779

(Loss) income from discontinued operations
 
—

 
(24
)
 
2

 
(698
)
Net gain on dispositions
 
—

 
—

 
—

 
3,173

(Loss) income from discontinued operations
 
$
—

 
$
(24
)
 
$
2

 
$
2,475

 
 
 
 
 
 


 
 
Weighted average common shares outstanding
 
68,197

 
36,156

 
67,773


33,055

 
 
 
 
 
 
 
 
 
Basic and diluted income per common share
 
$
—

 
$
—

 
$
—

 
$
0.08

NOTE 9 - IDENTIFIED INTANGIBLE ASSETS, NET AND GOODWILL
Identified intangible assets, net, consist of rental and antennae leases and leasing commissions. The value of the acquired in-place leases totaled $3.8 million and $5.2 million as of September 30, 2014 and December 31, 2013, respectively, net of accumulated amortization of $24.8 million and $11.5 million, respectively.  The weighted-average remaining life of the existing rental leases was 13.6 months and 11.6 months as of September 30, 2014 and December 31, 2013, respectively.  Expected amortization for the antennae leases at the Vista Apartment Homes is $16,000 annually through 2025.  Amortization of the rental and antennae leases for the three and nine months ended September 30, 2014 was $2.7 million and $13.3 million, respectively. Amortization of the rental and antennae leases for the three and nine months ended September 30, 2013 was $2.2 million and $4.1 million, respectively.
Expected amortization for the rental and antennae leases for the next five years ending September 30, and thereafter, is as follows (in thousands): 
2015
$
3,607

2016
16

2017
16

2018
16

2019
16

Thereafter
101

 
$
3,772



    

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


The table below presents a rollforward of the activity in goodwill for the nine months ended September 30, 2014:
Balance, January 1, 2014
$
—

Acquisition of Paladin joint venture interests
6,412

Measurement period adjustments
(5,203
)
Disposition of Hilltop
(33
)
Balance, September 30, 2014
$
1,176



NOTE 10 - MORTGAGE NOTES PAYABLE
The following is a summary of the mortgage notes payable (in thousands, except percentages):
 
 
 
 
Fair Value Adjustment
 
Net Book Value
 
Net Book Value
 
Maturity
Date
 
Annual
Interest Rate
 
 
 
 
Face Value
 
 
 
 
 
 
Average
Monthly Debt
Service
Collateral
 
September 30, 2014
 
December 31, 2013
 
 
 
Vista Apartment Homes
 
$
8,693

 
$
—

 
$
8,693

 
$
8,846

 
5/1/2017
 
2.77%
(1) 
$
38

Cannery Lofts
 
8,190

 
—

 
8,190

 
8,190

 
9/1/2020
 
3.46%
(1) 
35

Deerfield
 
10,530

 
—

 
10,530

 
10,530

 
11/1/2020
 
4.66%
(2) 
52

Ivy at Clear Creek
 
8,586

 
—

 
8,586

 
8,586

 
11/1/2023
 
2.57%
(1) 
44

Trailpoint at the Woodlands
 
19,362

 
—

 
19,362

 
19,362

 
11/1/2023
 
2.57%
(1) 
100

Verona Apartment Homes
 
22,952

 
—

 
22,952

 
23,235

 
1/1/2019
 
3.60%
(2) 
106

Skyview Apartment Homes
 
18,533

 
—

 
18,533

 
18,762

 
1/1/2019
 
3.60%
(2) 
85

The Nesbit Palisades
 
20,298

 
—

 
20,298

 
—

 
7/1/2024
 
2.11%
(1) 
108

Maxwell Townhomes
 
14,148

 
—

 
14,148

 
14,300

 
1/1/2022
 
4.32%
(2) 
71

Champion Farms
 
16,350

 
329

 
16,679

 
—

 
7/1/2016
 
6.14%
(2) 
85

Fieldstone
 
15,921

 
—

 
15,921

 
—

 
6/26/2016
 
2.56%
(1) 
73

Pinehurst
 
4,236

 
13

 
4,249

 
—

 
1/1/2017
 
5.58%
(2) 
39

Pheasant Run
 
6,250

 
182

 
6,432

 
—

 
10/1/2018
 
5.95%
(2) 
31

Retreat of Shawnee
 
13,324

 
278

 
13,602

 
—

 
2/1/2019
 
5.58%
(2) 
99

Conifer Crossing
 
27,650

 
280

 
27,930

 
—

 
9/1/2016
 
5.96%
(2) 
171

Coursey Place
 
28,074

 
153

 
28,227

 
—

 
8/1/2021
 
5.07%
(2) 
154

Pines of York
 
15,588

 
(445
)
 
15,143

 
—

 
12/1/2021
 
4.46%
(2) 
80

Addison Place
 
50,000

 
—

 
50,000

 
—

 
7/1/2020
 
3.38%
(2) 
195

Chisholm Place
 
11,587

 
—

 
11,587

 
—

 
6/1/2024
 
2.67%
(1) 
41

Berkeley Trace
 
14,279

 
—

 
14,279

 
—

 
7/1/2019
 
3.42%
(2) 
64

Berkeley Run
 
18,092

 
—

 
18,092

 
—

 
7/1/2019
 
3.42%
(2) 
81

Merrywood
 
24,225

 
—

 
24,225

 
—

 
10/1/2021
 
4.34%
(2) 
120

Sunset Ridge 1
 
20,626

 
428

 
21,054

 
—

 
10/1/2020
 
4.58%
(2) 
113

Sunset Ridge 2
 
3,067

 
58

 
3,125

 
—

 
10/1/2020
 
4.54%
(2) 
16

 
 
$
400,561

 
$
1,276

 
$
401,837

 
$
111,811

 
 
 
 
 
 

(1)
Variable rate based on one-month LIBOR of 0.1565% (as of September 30, 2014).
(2)
Fixed rate.



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


        
The following is a summary of the interest expense (1) related to the Company's mortgage notes payable (in thousands):

    
 
 
Three Months Ended
September 30,
 
Nine Months Ended 
 September 30,
Collateral
 
2014
 
2013
 
2014
 
2013
Vista Apartment Homes
 
$62
 
$63
 
$185
 
$191
Cannery Lofts
 
72
 
32
 
215
 
32
Deerfield
 
125
 
N/A
 
372
 
N/A
Ivy at Clear Creek
 
56
 
N/A
 
167
 
N/A
Trailpoint at the Woodlands
 
127
 
N/A
 
377
 
N/A
Verona Apartment Homes
 
211
 
N/A
 
630
 
N/A
Skyview Apartment Homes
 
171
 
N/A
 
509
 
N/A
The Nesbit Palisades
 
114
 
N/A
 
114
 
N/A
Maxwell Townhomes
 
156
 
N/A
 
466
 
N/A
Champion Farms
 
257
 
N/A
 
683
 
N/A
Fieldstone
 
114
 
N/A
 
525
 
N/A
Pinehurst
 
79
 
N/A
 
160
 
N/A
Pheasant Run
 
95
 
N/A
 
253
 
N/A
Retreat of Shawnee
 
190
 
N/A
 
508
 
N/A
Conifer Crossing
 
422
 
N/A
 
1,126
 
N/A
Coursey Place
 
364
 
N/A
 
973
 
N/A
Pines of York
 
178
 
N/A
 
475
 
N/A
Addison Place
 
422
 
N/A
 
441
 
N/A
Chisholm Place
 
75
 
N/A
 
122
 
N/A
Berkeley Trace
 
125
 
N/A
 
130
 
N/A
Berkeley Run
 
159
 
N/A
 
165
 
N/A
Merrywood
 
15
 
N/A
 
15
 
N/A
Sunset Ridge 1
 
71
 
N/A
 
71
 
N/A
Sunset Ridge 2
 
10
 
N/A
 
11
 
N/A

(1) Excludes the amortization of the premium related to the fair value adjustments which is amortized to interest expense over the term of the related debt as well as the amortization of deferred finance costs.
As of September 30, 2014 and December 31, 2013, the Company had $7.6 million and $4.5 million of restricted cash related to escrow deposits held by mortgage lenders for real estate taxes and capital reserve accounts.
Annual principal payments on the mortgage notes payable, excluding the amortization of the fair value adjustments for the debt secured by the properties included in the Paladin acquisition, for each of the next five years ending September 30, and thereafter, are as follows (in thousands):
2015
 
$
4,937

2016
 
66,505

2017
 
15,115

2018
 
19,400

2019
 
49,462

Thereafter
 
245,142

 
 
$
400,561

The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. The Company has guaranteed the mortgage notes by executing a guarantee

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


with respect to the properties.  These exceptions are referred to as “carveouts.”  In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents.  The exceptions also require the Company to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary. The Company has also guaranteed the completion and payment of costs of completion of no less than $7.0 million of renovations to Addison Place by July 1, 2018.
For the Fieldstone mortgage, beginning with the calendar quarter ended December 31, 2014, the property must maintain a certain level of debt service coverage.
NOTE 11 - CREDIT FACILITIES
The following is a summary of the credit facilities (in thousands, except percentages):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Expense
for the
 
 
Balance
Outstanding at
 
Current
Availability at
 
Balance
Outstanding at
 
Maturity
Date
 
Interest Rate Basis (1)
 
Current
Interest Rate
 
Three months ended September 30,
 
Nine Months Ended 
 September 30,
Lender
 
September 30, 2014
 
December 31, 2013
 
 
 
 
2014
 
2013
 
2014
 
2013
Bank of America
 
$
10,086

 
$
30,000

 
$
1,541

 
5/23/2017
 
LIBOR plus 3%
 
3.16
%
 
$
167

 
$
6

 
$
202

 
$
15

US Bank
 
23,000

 
—

 
23,000

 
12/27/2017
 
LIBOR plus 1.95%
 
2.11
%
 
126

 
—

 
373

 
—

PNC Bank
 
12,500

 
—

 
12,500

 
12/20/2018
 
LIBOR plus 2%
 
2.16
%
 
69

 
—

 
204

 
—

 
 
$
45,586

 
$
30,000

 
$
37,041

 
 
 
 
 
 
 
$
362

 
$
6

 
$
779

 
$
15


(1)
Variable rate based on one-month LIBOR of 0.1565% (as of September 30, 2014).
On December 2, 2011, the Company, through its operating partnership, entered into a secured revolving credit facility (the “Bank of America Credit Facility”) with Bank of America, N.A. (“Bank of America”).  On May 23, 2013 the Company amended the Bank of America Credit Facility to increase the amount it may borrow under the Bank of America Credit Facility from $25.0 million to $50.0 million (the “Facility Amount”). Draws under the Bank of America Credit Facility are secured by certain of the Company's properties with an aggregate value of $87.5 million and are guaranteed by the Company.  
      The Bank of America Credit Facility, as amended, matures on May 23, 2017, and may be extended to May 23, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Bank of America Credit Facility.  The Company is required to make monthly interest-only payments.  The Company also may prepay the Bank of America Credit Facility in whole or in part at any time without premium or penalty.
The operating partnership's obligations with respect to the Bank of America Credit Facility are guaranteed by the Company, pursuant to the terms of a guaranty dated as of December 2, 2011, or the Guaranty.  The Bank of America 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:
•
the Company must maintain a minimum tangible net worth equal to at least (i) 200% of the outstanding principal amount of the Bank of America Credit Facility and (ii) $20.0 million;
•
the Company must also maintain unencumbered liquid assets with a market value of not less than the greater of (i) $5.0 million or (ii) 20% of the outstanding principal amount of the Bank of America Credit Facility; and
•
the Company 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.
The Company was in compliance with all such covenants at September 30, 2014.  

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


On December 20, 2013, the Company, through a wholly-owned subsidiary, entered into a secured credit facility, ("Jefferson Point Credit Facility") with PNC Bank, National Association, or PNC, for $15 million.  Draws under the Jefferson Point Credit Facility are secured by the assets of Tech Center Square Apartments (formerly known as the Jefferson Point Apartments). The Company provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance.) The Company paid certain closing costs in connection with the Jefferson Point Credit Facility, including loan fees totaling $75,000.
The Jefferson Point Credit Facility includes both a debt service coverage covenant and a tangible net worth covenant. In November 2014, the Company amended the Jefferson Point Credit Facility. In accordance with the amendment, the debt service coverage covenant is only required to be complied with as of December 31, 2015 and periods thereafter. The Company was in compliance with all covenants at September 30, 2014.
On December 27, 2013, the Company, through a wholly-owned subsidiary, entered into a secured credit facility ("Brentdale Credit Facility") with U.S. Bank National Association for $29.7 million.  Draws under the Brentdale Credit Facility are secured by the assets of The Westside Apartments (formerly known as the Brentdale Apartments). The Company provided a $6.5 million repayment guarantee. The Brentdale Credit Facility matures on December 27, 2017, and may be extended to December 27, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Brentdale Credit Facility. The Company paid certain closing costs in connection with the Brentdale Credit Facility, including loan fees totaling $222,000.
The Brentdale Credit Facility includes both a guarantor net worth, liquidity and leverage covenant and a property debt service coverage covenant. The Company was in compliance with the guarantor requirements at September 30, 2014. The property debt service coverage covenant is only required to be met after January 1, 2015.
NOTE 12 - DEFERRED FINANCING COSTS
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt.  Accumulated amortization as of September 30, 2014 and December 31, 2013 was approximately $1.3 million and $419,000, respectively.  Estimated amortization of the existing deferred financing costs for the next five years ending September 30, and thereafter, are as follows (in thousands):
2015
$
1,402

2016
1,319

2017
1,108

2018
782

2019
601

Thereafter
928

 
$
6,140

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the changes in each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2014 (in thousands):
 
Net unrealized gain (loss)
on derivatives
January 1, 2014
$
20

Unrealized loss on designated derivative
(225
)
September 30, 2014
$
(205
)

NOTE 14 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has ongoing relationships with several related parties. 

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Relationship with RAI
Substantially all of the receivables from related parties represents escrow funds held by RAI for self insurance. The Company's properties participate in insurance pools with other properties directly and indirectly managed by RAI for both property insurance and general liability. RAI holds the escrow funds related to the insurance pool on its books. The insurance pool covers losses up to $2.5 million for property losses and $750,000 for general liability losses. Catastrophic insurance would cover property losses in excess of the insurance pool up to $85.0 million. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results.
Relationship with the Advisor
In September 2009, the Company entered into an advisory agreement (the “Advisory Agreement”) pursuant to which the Advisor provides the Company with investment management, administrative and related services.  The Advisory Agreement was amended in January 2010 and further amended in January 2011.  The Advisory Agreement has a one-year term and renews for an unlimited number of successive one-year terms upon the approval of the conflicts committee of the Company's board of directors.  The Company renewed the Advisory Agreement for another year on September 15, 2014. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:
Acquisition fees. The Company pays the Advisor an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments. 
Asset management fees. The Company pays the Advisor a monthly asset management fee equal to one-twelfth of 1.0% of the higher of the cost or the independently appraised value of each asset, without deduction for depreciation, bad debts or other non-cash reserves.  The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all or a majority of an asset and does not manage or control the asset.  
Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.75% of the contract sales price.
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its ongoing distribution reinvestment plan offering.  This includes all organization and offering costs of up to 2.5% of gross offering proceeds.
Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out of pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment.  However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.
Relationship with Resource Real Estate Opportunity Manager
Resource Real Estate Opportunity Manager, LLC (the “Manager”), an affiliate of the Advisor, manages the Company's real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns 4.5% of the gross receipts from our properties, provided that for properties that are less than 75% occupied, the manager receives a minimum fee for the first 12 months of ownership, for performing certain property management and leasing activities. 
Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.  
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company. 
Relationship with Resource Securities
Resource Securities, Inc. (“Resource Securities”), an affiliate of the Advisor, served as the Company’s dealer-manager and was responsible for marketing the Company’s shares in the primary portion of its public offering.  Pursuant to the terms of the dealer-manager agreement with Resource Securities, the Company paid Resource Securities a selling commission of up to 7% of gross primary offering proceeds and a dealer-manager fee of up to 3% of gross primary offering proceeds.
Resource Securities reallowed all selling commissions earned and up to 1% of the dealer-manager fee as a marketing fee to participating broker-dealers.  No selling commissions or dealer-manager fees are earned by Resource Securities in connection with sales under the distribution reinvestment plan.  Additionally, the Company could reimburse Resource Securities for bona fide due diligence expenses.
Relationship with Other Related Parties
The Company has also made payment for legal services to the law firm of Ledgewood P.C. (“Ledgewood”).  Until 1996, the Chairman of RAI was of counsel to Ledgewood.  In connection with the termination of his affiliation with Ledgewood and its redemption of his interest, the Chairman continues to receive certain payments from Ledgewood.  Until March 2006, a current executive of RAI was the managing member of Ledgewood.  This executive remained of counsel to Ledgewood through June 2007, at which time he became an Executive Vice President of RAI.  In connection with his separation, this executive was entitled to receive payments from Ledgewood through 2013. 
The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), whose principal owner is the father of RAI’s Chief Financial Officer.  
The fees earned/expenses paid and the amounts payable to such related parties are summarized in the following tables (in thousands):
 
September 30,
2014
 
December 31,
2013
Receivables from related parties:
 
 
 
RAI and affiliates - insurance funds held in escrow
$
1,346

 
$
530

 
 
 
 
Payables to related parties:
 
 
 
Advisor:
 
 
 
Expense reimbursements
$
725

 
$
775

 
 
 
 
Resource Real Estate Opportunity Manager, LLC:
 
 
 
Property management fees
349

 
266

Operating expense reimbursements
586

 
500

 
 
 
 
Resource Securities, Inc.
 
 
 
Selling commissions and dealer manager fees
—

 
174

 
 
 
 
  Other
24

 
3

 
$
1,684

 
$
1,718


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Fees earned / expenses paid to related parties:
 
 
 
 
 
 
 
Advisor:
 
 
 
 
 
 
 
Acquisition fees (1)
$
2,585

 
$
2,468

 
$
8,189

 
$
4,300

Asset management fees (2)
$
2,001

 
$
717

 
$
5,041

 
$
1,640

Disposition fees (3)
$
271

 
$
—

 
$
421

 
$
116

Debt financing fees (4)
$
250

 
$
41

 
$
1,396


$
41

Organization and offering costs (5)
$
—

 
$
71

 
$
—

 
$
274

Overhead allocation (6)
$
641

 
$
131

 
$
1,556

 
$
329

 
 
 
 
 
 
 
 
Resource Real Estate Opportunity Manager LLC:
 
 
 
 
 
 
 
Property management fees (2)
$
1,021

 
$
482

 
$
2,565

 
$
1,256

Construction management fees (7)
$
530

 
$
233

 
$
1,206

 
$
640

Debt servicing fees (2)
$
1

 
$
2

 
$
7

 
$
4

 
 
 
 
 
 
 
 
Resource Securities, Inc.:
 
 
 
 
 
 
 
Selling commissions and dealer manager fees (5)
$
—

 
$
10,031

 
$
—

 
$
21,887

 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
Ledgewood
$
43

 
$
56

 
$
143

 
$
138

Graphic Images
$
4

 
$
120

 
$
37

 
$
340


(1)    Included in Acquisition costs on the consolidated statements of operations and comprehensive loss.
(2)    Included in Management fees on the consolidated statements of operations and comprehensive loss.
(3)    Included in Net gain on dispositions on the consolidated statements of operations and comprehensive loss.
(4)    Included in Deferred financing costs, net on the consolidated balance sheets.
(5)    Included in Stockholders' equity on the consolidated balance sheets.
(6)    Included in General and administrative costs on the consolidated statements of operations and comprehensive loss.
(7)    Included in Rental Properties, net on the consolidated balance sheets.

NOTE 15 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10.0 million shares of its $0.01 par value preferred stock.  As of September 30, 2014 and December 31, 2013, no shares of preferred stock were issued and outstanding.
Common Stock
As of September 30, 2014, the Company had issued an aggregate of 68,551,374 shares, of its $0.01 par value common stock as follows (dollars in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


 
 
Shares Issued
 
Gross Proceeds
Shares issued through private offering

1,263,727


$
12,582

Shares issued through primary public offering

62,485,461


622,077

Shares issued through stock distributions

2,132,266


—

Shares issued through distribution reinvestment plan

2,654,420


25,217

Shares issued in conjunction with the Advisor's initial investment,
net of 4,500 share conversion

15,500


155

    Total
 
68,551,374

 
$
660,031

Convertible Stock
As of September 30, 2014 and December 31, 2013, the Company had 50,000 shares of $0.01 par value convertible stock outstanding of which the Advisor and affiliated persons own 49,063 shares and outside investors own 937 shares.  The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 10% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on the 31st trading day after listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold.
Redemption of Securities
During the three months ended September 30, 2014, the Company redeemed its shares as follows:
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price
Paid per Share
 
Cumulative Number of
Shares Purchased
as Part of a
Publicly Announced
Plan or Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
July 2014
 
15,163
 
$8.76
 
188,275
 
(2)
August 2014
 
—
 
$—
 
188,275
 
(2)
September 2014
 
9,749
 
$8.75
 
198,024
 
(2)
 
(1)
All redemptions of equity securities by the Company in the three months ended September 30, 2014 were made pursuant to the Company's share redemption program.
(2)
The Company currently limits the dollar value and number of shares that may be redeemed under the program as described below.
All redemption requests tendered were honored during the three and nine months ended September 30, 2014.
The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. The Company's board of directors will determine at least quarterly whether it has sufficient excess cash to repurchase shares. Generally, the cash available for redemptions will be limited to proceeds from the Company's distribution reinvestment plan plus, if the Company has positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.
The Company's Board of Directors, in its sole discretion, may suspend, terminate or amend the Company's share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in the Company's best interest. The Company's board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund the Company's share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


Distributions
For the nine months ended September 30, 2014, the Company paid aggregate distributions of $20.3 million, including $6.1 million of distributions paid in cash and $14.2 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):
Record Date
 
Per Common
Share
 
Distribution Date
 
Distributions
Invested in
Shares of
Common Stock
 
Aggregate
Cash
Distribution
 
Total
Aggregate
Distribution
December 31, 2013
 
$
0.03333

 
January 2, 2014
 
$
1,566

 
$
656

 
$
2,222

January 31, 2014
 
0.03333

 
February 3, 2014
 
1,575

 
663

 
2,238

February 28, 2014
 
0.03333

 
March 2, 2014
 
1,571

 
670

 
2,241

March 31, 2014
 
0.03333

 
April 1, 2014
 
1,576

 
672

 
2,248

April 30, 2014
 
0.03333

 
May 1, 2014
 
1,574

 
679

 
2,253

May 30, 2014
 
0.03333

 
June 2, 2014
 
1,578

 
680

 
2,258

June 30, 2014
 
0.03333

 
July 1, 2014
 
1,576

 
687

 
2,263

July 31, 2014
 
0.03333

 
August 1, 2014
 
1,583

 
686

 
2,269

August 31, 2014
 
0.03333

 
September 2, 2014
 
1,582

 
693

 
2,275

 
 
 
 
 
 
$
14,181

 
$
6,086

 
$
20,267

On July 16, 2014, the Company's Board of Directors authorized cash distributions of $0.03333 per common share to stockholders of record as of the close of business on September 30, 2014 and October 31, 2014 to be paid on October 1, 2014 and November 3, 2014, respectively. Both distributions, aggregating $4.6 million, are included in the consolidated balance sheets in Distributions payable at September 30, 2014. On October 6, 2014, the Company's Board of Directors amended the October dividend record date, distribution date and the amount per share. The Board of Directors increased the cash distribution to $0.05 per common share to stockholders of record as of the close of business on October 30, 2014 to be paid on October 31, 2014.
Since its formation, the Company's Board of Directors has declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of its common stock outstanding. In connection with these stock distributions, the Company had increased its accumulated deficit by $21.3 million as of September 30, 2014.
NOTE 16 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. 
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


The determination of where an asset or liability falls in the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, the Company expects that changes in classifications between levels will be rare.
Rental properties obtained through a foreclosed note are measured at fair value on a non-recurring basis.  The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.
Derivatives (interest rate caps) which are reported at fair value in the consolidated balance sheets are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2)
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$
—

 
$
130

 
$
—

 
$
130

 
$
—

 
$
130

 
$
—

 
$
130

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$
—

 
$
290

 
$
—

 
$
290

 
$
—

 
$
290

 
$
—

 
$
290

The carrying and fair values of the Company’s loans held for investment, net, mortgage note payable and revolving credit facilities were as follows (in thousands):
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Loans held for investment, net
$
1,526

 
$
1,526

 
$
1,724

 
$
1,724

 
 
 
 
 
 
 
 
Mortgage notes payable
$
(401,837
)
 
$
(394,184
)
 
$
(111,811
)
 
$
(110,413
)
 
 
 
 
 
 
 
 
Revolving credit facilities
$
(45,586
)
 
$
(45,586
)
 
$
(37,041
)
 
$
(37,041
)
The fair value of the loans held for investment, net, was estimated by comparing the recorded amount of the loan to the fair value of the collateral. On February 27, 2014, the Company foreclosed on the property securing the Peterson Note. On March 3, 2014, an offer to purchase the property was presented to the Company for $24,000 less than the carrying amount of the note. On April 10, 2014, the Company sold its interest in the sheriff's deed for the Peterson Apartments. Accordingly, the Company had adjusted the carrying amount of the note at December 31, 2013 for such impairment. (Level 3)
The fair value of the mortgage notes payable was estimated using rates available to the Company for debt with similar terms and remaining maturities. (Level 3)
The fair values of the revolving credit facilities equal the carrying amounts because the interest rate of each of the credit facilities is variable. (Level 3)


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


NOTE 17 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also served to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into a total of four interest rate caps that were designated as cash flow hedges during 2013 and 2014. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended September 30, 2014 and the year end December 31, 2013, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2014, the Company did not record any hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
As of September 30, 2014, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
Interest Rate Derivative
 
Number of Instruments
 
Notional
Amount
 
Maturity Dates
Interest Rate Caps
 
4
 
$
59,833

 
July 1, 2018 to November 1, 2018

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in prepaid expenses and other assets on the Balance Sheet as of September 30, 2014 and December 31, 2013 (in thousands):
Asset Derivatives
 
Liability Derivatives
September 30, 2014
 
December 31, 2013
 
September 30, 2014
 
December 31, 2013
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Interest rate caps
 
$
130

 
Interest rate caps
 
$
290

 
—

 
$
—

 
—

 
$
—




RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
SEPTEMBER 30, 2014
(unaudited)


NOTE 18 - OPERATING EXPENSE LIMITATION
Under its charter, the Company must limit its total operating expenses to the lesser of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the conflicts committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.  Operating expenses for the four quarters ended September 30, 2014 were in compliance with the charter imposed limitation.
NOTE 19 - GAIN ON FORECLOSURE
On January 22, 2013, the Company completed the foreclosure of Deerfield. The Company's fair value of the property exceeded the carrying value of the Deerfield Note by $3.4 million. After making adjustments to security deposits totaling $81,000, the Company recorded a net gain on foreclosure of $3.5 million during the nine months ended September 30, 2013.
NOTE 20 - SUBSEQUENT EVENTS
    On October 6, 2014, the Company's Board of Directors authorized cash distributions of $0.05 per common share to stockholders of record as of the close of business on October 30, 2014, November 26, 2014 and December 30, 2014 to be paid on October 31, 2014, November 28, 2014 and December 31, 2014, respectively.
On November 7, 2014, the Company entered into a mortgage loan in the amount of $36.4 million and secured by Parkridge Place. The loan has a fixed interest rate of 3.87% and a term of seven years.
On November 12, 2014, the Company funded $3.5 million out of a total commitment of $5 million for a preferred equity investment in Spring Hill Investors Limited Partner, LLC, which has an indirect ownership of the Spring Hill Apartments, a 606-unit multifamily property located in Dallas, Texas. The Company will earn a preferred equity return of 12% on its investment.
The Company has evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to the consolidated financial statements.


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, 2013. 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 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 consists of commercial real estate assets, principally (i) multifamily rental properties  purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”).  However, we are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate and, accordingly, we may invest in other real estate assets or debt secured by real estate assets.  We currently anticipate holding approximately 50% of our total assets in category (i) and 50% of our total assets in category; (ii) however, that may change depending on market and economic conditions.
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 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 of 1986, as amended (the "Internal Revenue code") and to maintain our exclusion from regulation as an investment company pursuant to the Investment Company Act, our portfolio composition may vary from what we have initially disclosed.
The primary portion of our initial public offering commenced on June 16, 2010 and closed on December 13, 2013. We continue to offer shares to our existing stockholders pursuant to our distribution reinvestment plan. 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 September 30, 2014, we owned interests in a total of 38 multifamily properties. During the three and nine months ended September 30, 2014, we acquired interests in two and 18 multifamily properties, respectively. We also disposed of two and three properties during the three and nine months ended ended September 30, 2014, respectively. 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 September 30, 2014 Compared to the Three Months Ended September 30, 2013
The following table sets forth the results of our operations (in thousands):
 
 
Three Months Ended
 
 
September 30,
 
 
2014
 
2013
 
 
 
 
 
Revenues:
 
 
 
 
Rental income
 
$
26,812

 
$
11,026

Interest income
 
63

 
73

Total revenues
 
26,875

 
11,099

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating
 
15,942

 
7,268

Acquisition costs
 
2,932

 
3,711

Management fees
 
3,163

 
1,210

General and administrative
 
2,219

 
1,319

Loss on disposal of assets
 
2,473

 
—

Depreciation and amortization expense
 
11,673

 
5,285

Total expenses
 
38,402

 
18,793

Loss before other expenses
 
(11,527
)
 
(7,694
)
 
 
 
 
 
Other (expense) income:
 
 

 
 

Net gain on dispositions
 
7,824

 
—

Insurance proceeds received in excess of cost
 
355

 
—

Gain on forfeiture/redemption of stock
 
—

 
7

Interest expense
 
(4,138
)
 
(149
)
Loss from continuing operations
 
(7,486
)
 
(7,836
)
 
 
 
 
 
Discontinued operations:
 
 
 
 
Loss from discontinued operations
 
—

 
(24
)
Income from discontinued operations, net
 
—

 
(24
)
Net loss
 
(7,486
)
 
(7,860
)
Net loss attributable to noncontrolling interest
 
215

 
—

Net loss attributable to stockholders
 
$
(7,271
)
 
$
(7,860
)
Revenues: During the three months ended September 30, 2014 and 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 in which we owned interests from 21 at September 30, 2013 to 38 at September 30, 2014.
Expenses.  Our rental operating expenses increased for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 primarily due to an increase in the number of operating properties in which we owned interests. Accordingly, we incurred increased management fees, general and administrative expenses, and depreciation and amortization expenses.  
◦
General and administrative expenses increased by $900,000 from $1.3 million for the three months ended September 30, 2013 to $2.2 million for the three months ended September 30, 2014, primarily related to a $598,000 increase in salary and benefits allocated to us by our Advisor due to the increased properties under management. We owned an average of 19 properties during the three months ended September 30, 2013 which increased to 37 properties during for the three months ended September 30, 2014.
◦
Acquisition costs for the three months ended September 30, 2014 were $2.9 million (primarily related to the acquisition of interests in two properties with an aggregate purchase price of $83.5 million) as compared to acquisition costs of $3.7 million for the three months ended September 30, 2013 (related to the origination of one loan and the acquisition of four properties with an aggregate value of $105.3 million).  Also included in acquisition costs during the three and nine months ended September 30, 2013 were approximately $750,000 in third-party professional fees


incurred in connection with the Agreement and Plan of Merger by and among us and Paladin Realty Income Properties, Inc. (“Paladin”).
◦
The $2.5 million loss on disposal of assets for the three months ended September 30, 2014 is due to the disposal of fixed assets in the ordinary course of business, primarily at our newly acquired properties that resulted from renovations at such properties.
◦
The $7.8 million net gain on dispositions included in other (expense) income for the three months ended September 30, 2014 reflects the sale of two properties in the period. We sold the Arcadia at Westheimer Apartments on September 19, 2014 for $18.1 million and recognized a gain of approximately $8.3 million on the disposition. In addition, we sold our 49% interest in one of the Paladin joint ventures, Parkhill Partners I, LLC ("Hilltop Village"), on July 1, 2014 to our joint venture partner for no consideration and recognized a loss on the sale of $500,860.
◦
The $4.0 million increase in interest expense is due to draw downs on our line of credit as well as the borrowings under 16 additional mortgage loans into which we entered subsequent to September 30, 2013.
Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013
The following table sets forth the results of our operations (in thousands):
 
 
Nine Months Ended
 
 
September 30,
 
 
2014
 
2013
 
 
 
 
(Remeasured)
Revenues:
 
 
 
 
Rental income
 
$
72,391

 
$
26,335

Gain on foreclosures
 
—

 
3,460

Interest income
 
284

 
188

Total revenues
 
72,675

 
29,983

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating
 
41,249

 
17,143

Acquisition costs
 
9,467

 
6,229

Foreclosure costs
 
—

 
49

Management fees
 
8,110

 
2,856

General and administrative
 
7,991

 
3,886

Loss on disposal of assets
 
4,121

 
36

Depreciation and amortization expense
 
36,572

 
11,169

Total expenses
 
107,510

 
41,368

Loss before other expenses
 
(34,835
)
 
(11,385
)
 
 
 
 
 
Other (expense) income:
 
 

 
 

Net gain on dispositions
 
10,365

 
—

Insurance proceeds received in excess of cost basis
 
355

 
—

Gain on forfeiture/redemption of stock
 
—

 
29

Interest expense
 
(10,034
)
 
(396
)
Loss from continuing operations
 
(34,149
)
 
(11,752
)
 
 
 
 
 
Discontinued operations:
 
 
 
 
Income (loss) from discontinued operations
 
2

 
(698
)
Net gain on dispositions
 
—

 
3,173

Income from discontinued operations, net
 
2

 
2,475

Net loss
 
(34,147
)
 
(9,277
)
Net loss attributable to noncontrolling interests
 
1,625

 
—

Net loss attributable to stockholders
 
$
(32,522
)
 
$
(9,277
)


Revenues: During the nine months ended September 30, 2014 and 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 in which we owned interests from 21 at September 30, 2013 to 38 at September 30, 2014. During the nine months ended September 30, 2013, we recorded a gain on foreclosure of $3.5 million for the excess of market value over carrying value at one foreclosed property.
Expenses.  Our rental operating expenses increased for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013 primarily due to an increase in the number of operating properties we owned. Accordingly, we incurred increased management fees, general and administrative expenses, and depreciation and amortization expenses.  
◦
General and administrative expenses increased by $4.1 million from $3.9 million for the nine months ended September 30, 2013 to $8.0 million for the nine months ended September 30, 2014, primarily related to the following:
◦
General and administrative expenses increased at the property level from $2.5 million for the nine months ended September 30, 2013 to $4.7 million for the nine months ended September 30, 2014 due to the increase of average properties owned from 16 for the nine months ended September 30, 2013 to 35 for the nine months ended September 30, 2014 .
◦
Other company level general and administrative expenses increased, primarily related to a $1.3 million increase in payroll expense allocated to us by our Advisor due to the increase in properties under management.
◦
Acquisition costs for the nine months ended September 30, 2014 were $9.5 million (primarily related to the acquisition of interests in 18 properties with an aggregate purchase price of $304.2 million) as compared to acquisition costs of $6.2 million for the nine months ended September 30, 2013 (related to the origination of one loan and the acquisition of nine properties with an aggregate value of $169.7 million).  
◦
The $4.1 million loss on disposal of assets for the nine months ended September 30, 2014 is due to the disposal of fixed assets in the ordinary course of business due to renovations at our newly acquired properties.
◦
The $10.4 million net gain on dispositions included in other (expense) income for the nine months ended September 30, 2014 reflects the sale of three properties in the period. We sold the Campus Club Apartments on June 16, 2014 for $10.5 million and recognized a gain of approximately $2.6 million on the disposition. We sold the Arcadia at Westheimer Apartments on September 19, 2014 for $18.1 million and recognized a gain of approximately $8.3 million on the disposition. In addition, we sold our 49% interest in Hilltop Village on July 1, 2014 to our joint venture partner for no consideration and recognized a loss on the sale of $500,860.
◦
The $9.6 million increase in interest expense for the nine months ended September 30, 2014 is due to draw downs on our line of credit as well as the borrowings under 16 additional mortgage loans into which we entered subsequent to September 30, 2013.
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 and any future offerings we may conduct, secured or unsecured financings from banks, proceeds from the sale of real estate, and cash flow generated by our real estate and real estate-related investments.
We have allocated a portion of the funds we raised in our initial public offering 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 $27.9 million during the nine months ended September 30, 2014 for capital expenditures primarily related to unit rehabilitations, which included the following (in thousands):


 
 
Capital deployed
during the
nine months ended
 
Remaining capital
budgeted
Property
 
September 30, 2014
 
Maxwell Townhomes
 
$
2,805

 
$
2,548

The Nesbit Palisades
 
2,613

 
$
5,782

The Westside Apartment Homes
 
2,353

 
$
4,185

Trailpoint at The Woodlands
 
2,314

 
$
1,689

SkyView Apartments Homes
 
2,018

 
$
2,020

All other properties
 
15,840

 
 
 
 
$
27,943

 
 
An estimated additional $15.1 million in capital is budgeted to be deployed over the next two years for improvements to Sunset Ridge and Parkridge, which were purchased during the three months ended September 30, 2014.
Initial Public Offering
The primary portion of our initial public offering closed on December 13, 2013, at which time we had raised aggregate gross offering proceeds of $645.8 million, which resulted in the issuance of 64,926,311 shares of our common stock, including 276,056 shares purchased by our Advisor and 1,161,623 shares sold pursuant to our distribution reinvestment plan.  On December 26, 2013, the unsold primary offering shares were deregistered and, on December 30, 2013, the registration of the shares issuable pursuant to the distribution reinvestment plan was continued pursuant to a Registration Statement on Form S-3.
We continue to offer up to 7.5 million shares of common stock pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares at $9.50 per share. 
Gross offering proceeds
As of September 30, 2014, an aggregate of 68,551,374 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

 
$
12,582

Shares issued through primary public offering
 
62,485,461

 
622,077

Shares issued through stock distributions
 
2,132,266

 
—

Shares issued through distribution reinvestment plan
 
2,654,420

 
25,217

Shares issued in conjunction with the Advisor's initial investment,
net of 4,500 share conversion
 
15,500

 
155

    Total
 
68,551,374

 
$
660,031

Credit Facilities
We have $30.0 million currently available to draw and an outstanding balance of $10.1 million on our secured credit facility, or the Bank of America Credit Facility, with Bank of America, N.A., or Bank of America, as of September 30, 2014. Draws under the Bank of America Credit Facility are secured by certain of our properties with an aggregate value of $87.5 million and are guaranteed by us. We were in compliance with all covenants under this facility as of September 30, 2014.
As of September 30, 2014, we had outstanding borrowings of $12.5 million and no current availability under our our $15.0 million secured credit facility, or the Jefferson Point Credit Facility, with PNC Bank, National Association, or PNC Bank. Draws under the Jefferson Point Credit Facility are secured by the assets of Tech Center Square Apartments (formerly known as Jefferson Point Apartments). We provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance.) The Jefferson Point Credit Facility includes both a debt service coverage covenant and a tangible net worth covenant. In November 2014, we amended the Jefferson Point Credit Facility. In accordance with the amendment, the debt service coverage covenant is only required to be complied with as of December 31, 2015 and periods thereafter. We were in compliance with all covenants under this facility at September 30, 2014.
    


As of September 30, 2014, we had outstanding borrowings of $23.0 million and no availability under our $29.7 million secured credit facility, the Brentdale Credit Facility, with U.S. Bank National Association, or US Bank .  Draws under the Brentdale Credit Facility are secured by the assets of The Westside Apartments (formerly known as Brentdale Apartments). We provided a $6.5 million repayment guarantee. We were in compliance with all covenants under this facility as of September 30, 2014.
Mortgage Debt
The following is a summary of our mortgage notes payable (in thousands, except percentages):
 
 
 
 
Fair Value Adjustment
 
Net Book Value
 
Net Book Value
 
Maturity
Date
 
Annual
Interest Rate
 
 
 
 
Face Value
 
 
 
 
 
 
Average
Monthly Debt
Service
Collateral
 
September 30,
2014
 
December 31, 2013
 
 
 
Vista Apartment Homes
 
$
8,693

 
$
—

 
$
8,693

 
$
8,846

 
5/1/2017
 
2.77%
(1) 
$
38

Cannery Lofts
 
8,190

 
—

 
8,190

 
8,190

 
9/1/2020
 
3.46%
(1) 
35

Deerfield
 
10,530

 
—

 
10,530

 
10,530

 
11/1/2020
 
4.66%
(2) 
52

Ivy at Clear Creek
 
8,586

 
—

 
8,586

 
8,586

 
11/1/2023
 
2.57%
(1) 
44

Trailpoint at the Woodlands
 
19,362

 
—

 
19,362

 
19,362

 
11/1/2023
 
2.57%
(1) 
100

Verona Apartment Homes
 
22,952

 
—

 
22,952

 
23,235

 
1/1/2019
 
3.60%
(2) 
106

Skyview Apartment Homes
 
18,533

 
—

 
18,533

 
18,762

 
1/1/2019
 
3.60%
(2) 
85

The Nesbit Palisades
 
20,298

 
—

 
20,298

 
—

 
7/1/2024
 
2.11%
(1) 
108

Maxwell Townhomes
 
14,148

 
—

 
14,148

 
14,300

 
1/1/2022
 
4.32%
(2) 
71

Champion Farms
 
16,350

 
329

 
16,679

 
—

 
7/1/2016
 
6.14%
(2) 
85

Fieldstone
 
15,921

 
—

 
15,921

 
—

 
6/26/2016
 
2.56%
(1) 
73

Pinehurst
 
4,236

 
13

 
4,249

 
—

 
1/1/2017
 
5.58%
(2) 
39

Pheasant Run
 
6,250

 
182

 
6,432

 
—

 
10/1/2018
 
5.95%
(2) 
31

Retreat of Shawnee
 
13,324

 
278

 
13,602

 
—

 
2/1/2019
 
5.58%
(2) 
99

Conifer Crossing
 
27,650

 
280

 
27,930

 
—

 
9/1/2016
 
5.96%
(2) 
171

Coursey Place
 
28,074

 
153

 
28,227

 
—

 
8/1/2021
 
5.07%
(2) 
154

Pines of York
 
15,588

 
(445
)
 
15,143

 
—

 
12/1/2021
 
4.46%
(2) 
80

Addison Place
 
50,000

 
—

 
50,000

 
—

 
7/1/2020
 
3.38%
(2) 
195

Chisholm Place
 
11,587

 
—

 
11,587

 
—

 
6/1/2024
 
2.67%
(1) 
41

Berkeley Trace
 
14,279

 
—

 
14,279

 
—

 
7/1/2019
 
3.42%
(2) 
64

Berkeley Run
 
18,092

 
—

 
18,092

 
—

 
7/1/2019
 
3.42%
(2) 
81

Merrywood
 
24,225

 
—

 
24,225

 
—

 
10/1/2021
 
4.34%
(2) 
120

Sunset Ridge 1
 
20,626

 
428

 
21,054

 
—

 
10/1/2020
 
4.58%
(2) 
113

Sunset Ridge 2
 
3,067

 
58

 
3,125

 
—

 
10/1/2020
 
4.54%
(2) 
16

 
 
$
400,561

 
$
1,276

 
$
401,837

 
$
111,811

 
 
 
 
 
 

(1)
Variable rate based on one-month LIBOR of 0.1565% (as of September 30, 2014).
(2)
Fixed rate.
At September 30, 2014, the weighted average interest rate of all our outstanding indebtedness was 3.84% .
Once we have fully invested the proceeds of our public offering, 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 cash flows from operations, proceeds from debt


financing, proceeds from the disposition of assets and, to the extent we co-invest with other entities, capital from any future joint venture partners.     
Operating Properties
As of September 30, 2014, wholly-owned interests in multifamily properties are as follows:
Property
 
Apartment Complex
 
Number
of Units
 
Location
RRE 107th Avenue Holdings, LLC (“107th Avenue”)
 
107th Avenue
 
5
 
Omaha, NE
RRE Iroquois, LP (“Vista”)
 
Vista Apartment Homes
 
133
 
Philadelphia, PA
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")
 
One Hundred Chevy Chase Apartments
 
244
 
Lexington, KY
RRE Armand Place Holdings, LLC ("Armand")
 
Ivy at Clear Creek
 
244
 
Houston, TX
RRE Autumn Wood Holdings, LLC ("Autumn Wood")
 
Retreat at Rocky Ridge
 
196
 
Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")
 
Trailpoint at the Woodlands
 
271
 
Houston, TX
RRE Nob Hill Holdings, LLC ("Nob Hill")
 
Affinity at Winter Park
 
192
 
Winter Park, FL
RRE Brentdale Holdings, LLC ("Brentdale")
 
The Westside Apartments
 
412
 
Plano, TX
RRE Jefferson Point Holdings, LLC ("Jefferson Point")
 
Tech Center Square
 
208
 
Newport News, VA
RRE Centennial Holdings, LLC ("Centennial")
 
Verona Apartment Homes
 
276
 
Littleton, CO
RRE Pinnacle Holdings, LLC ("Pinnacle")
 
Skyview Apartment Homes
 
224
 
Westminster, CO
RRE Jasmine Holdings, LLC ("Jasmine")
 
The Nesbit Palisades
 
437
 
Alpharetta, GA
RRE River Oaks Holdings, LLC ("River Oaks")
 
Maxwell Townhomes
 
314
 
San Antonio, TX
RRE Nicollet Ridge Holdings, LLC ("Nicollet Ridge")
 
Meridian Pointe
 
339
 
Burnsville, MN
RRE Addison Place, LLC ("Addison Place")
 
Addison Place
 
403
 
Alpharetta, GA
PRIP Coursey, LLC ("Evergreen at Coursey Place")
 
Evergreen at Coursey Place
 
352
 
Baton Rouge, LA
PRIP 500, LLC ("Pinehurst")
 
Pinehurst
 
146
 
Kansas City, MO
PRIP 1102, LLC ("Pheasant Run")
 
Pheasant Run
 
160
 
Lee's Summit, MO
PRIP 11128, LLC ("Retreat at Shawnee")
 
Retreat at Shawnee
 
342
 
Shawnee, KS
RRE Chisholm Place Holdings LLC ("Chisholm Place")
 
Chisholm Place
 
142
 
Plano, TX
RRE Berkeley Run Holdings, LLC ("Berkley Run")
 
Berkeley Run
 
194
 
Atlanta, GA
RRE Berkeley Trace Holdings LLC ("Berkley Trace")
 
Berkeley Trace
 
165
 
Atlanta, GA
RRE Merrywood LLC ("Merrywood")
 
Merrywood
 
228
 
Katy, TX
RRE Sunset Ridge Holdings, LLC ("Sunset Ridge")
 
Sunset Ridge
 
324
 
San Antonio, TX
RRE Parkridge Place Holdings, LLC ("Parkridge Place")
 
Parkridge Place
 
536
 
Irving, TX
 
 
 
 
9,729
 
 
    


The consolidated financial statements also include our majority-owned and/or controlled joint venture interests as follows:
Property
 
Ownership %
 
Apartment Complex
 
Number
of Units
 
Property Location
Springhurst Housing Partners, LLC ("Champion Farms")
 
70.0%
 
Champion Farms
 
264
 
Louisville, KY
Glenwood Housing Partners I, LLC ("Fieldstone")
 
83.0%
 
Fieldstone
 
266
 
Woodlawn, OH
FPA/PRIP Conifer, LLC ("Conifer Place")
 
42.5%
 
Conifer Place
 
420
 
Norcross, GA
DT Stone Ridge, LLC ("Stone Ridge")
 
77.7%
 
Stone Ridge
 
191
 
Columbia, SC
FP-1, LLC ("Pines of York")
 
90.0%
 
Pines of York
 
248
 
Yorktown, VA
 
 
 
 
 
 
1,389
 
 
Operating Costs
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor. During our acquisition, 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 14 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 September 30, 2014 did not exceed the charter imposed limitation.
Distributions
For the nine months ended September 30, 2014, we paid aggregate distributions of $20.3 million, including $6.1 million of distributions paid in cash and $14.2 million of distributions reinvested in shares of common stock through our distribution reinvestment plan, as follows (in thousands, except per share data):
Record Date
 
Per Common
Share
 
Distribution Date
 
Distributions
Invested in
Shares of
Common Stock
 
Net Cash
Distribution
 
Total
Aggregate
Distribution
December 31, 2013
 
$
0.03333

 
January 2, 2014
 
$
1,566

 
$
656

 
$
2,222

January 31, 2014
 
0.03333

 
February 3, 2014
 
1,575

 
663

 
2,238

February 28, 2014
 
0.03333

 
March 2, 2014
 
1,571

 
670

 
2,241

March 31, 2014
 
0.03333

 
April 1, 2014
 
1,576

 
672

 
2,248

April 30, 2014
 
0.03333

 
May 1, 2014
 
1,574

 
679

 
2,253

May 30, 2014
 
0.03333

 
June 2, 2014
 
1,578

 
680

 
2,258

June 30, 2014
 
0.03333

 
July 1, 2014
 
1,576

 
687

 
2,263

July 31, 2014
 
0.03333

 
August 1, 2014
 
1,583

 
686

 
2,269

August 31, 2014
 
0.03333

 
September 2, 2014
 
1,582

 
693

 
2,275

 
 
 
 
 
 
$
14,181

 
$
6,086

 
$
20,267

On July 16, 2014, our Board of Directors authorized cash distributions of $0.03333 per common share to stockholders of record as of the close of business on September 30, 2014 and October 31, 2014 to be paid on October 1, 2014 and November 3, 2014, respectively. Both distributions aggregating $4.6 million, are included in the consolidated balance sheets in Distributions payable at September 30, 2014. On October 6, 2014, the Company's Board of Directors amended the October dividend record date, distribution date and the amount per share. The Board of Directors increased the cash distribution to $0.05 per common share per common share to stockholders of record as of the close of business on October 30, 2014 to be paid on October 31, 2014.
  


Since our formation, we have declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of its common stock outstanding. In connection with these stock distributions, our accumulated deficit increased by $21.3 million as of September 30, 2014.
Our net loss attributable to common stockholders' for the nine months ended September 30, 2014 was $32.5 million and net cash provided by operating activities of continuing operations was $354,000. For the nine months ended September 30, 2014, 1.8% of our distributions was funded from net cash provided by operating activities of continuing operations, 84.1% of our distributions was funded from proceeds from the disposal of two real estate assets and 14.1% of our distributions was funded from proceeds from debt financing. Our cumulative cash distributions and net loss from inception through September 30, 2014 were $36.9 million and $70.0 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from disposal of real estate 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.
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, gains and losses from property dispositions, 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 acquisition stage is 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 acquisition stage.  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 will continue to be funded from the proceeds of debt financing 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 acquisition stage is 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 acquisition stage is 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 acquisition stage is 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.  Therefore, we also use adjusted funds from operations, or AFFO, in addition to FFO and MFFO when evaluating our operations.  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 have 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, MFFO and AFFO during this turnaround stage. We believe that the presentation of the MFFO and AFFO attributed to our stabilized assets and the MFFO and AFFO attributed to our unstabilized assets 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 are defined as assets that produced a positive MFFO during the three and nine months ended September 30, 2014 and 2013, respectively.
Stabilized assets during the three and nine months ended September 30, 2014 included: 107th Avenue, Arcadia (which was sold in September 2014), Vista Apartment Homes, Campus Club (which was sold in June 2014), Cannery Lofts, Williamsburg, The Redford, Cityside Crossing, Deerfield, The Reserve at Mt. Moriah, The Alcove, Ivy at Clear Creek, Retreat at Rocky Ridge, Trailpoint at the Woodlands, Affinity at Winter Park, The Westside Apartments, Verona Apartment Homes, Skyview Apartment Homes, The Nesbit Palisades, Chisholm Place, Addison Place, Pines of York, Evergreen at Coursey Place, Stone Ridge, Conifer Place, Hilltop Village, Retreat at Shawnee, Pheasant Run, Pinehurst, Champion Farms, Fieldstone, Berkeley Trace and Berkeley Run. Unstabilized assets during the three and nine months ended September 30, 2014 included: Mosaic, One Hundred Chevy Chase Apartments, Tech Center Square, Maxwell Townhomes, Meridian Pointe, Merrywood, Sunset Ridge and Parkridge Place. Non-property assets and corporate overhead, which consists primarily of general and administrative expenses at the company level, are allocated between stabilized and unstabilized assets based on the percentage of the total purchase price of all of our assets that the aggregate purchase prices of our stabilized and unstabilized assets respectively represent.


Stabilized assets during the three and nine months ended September 30, 2013 included: 107th Avenue, Arcadia (which was sold in September 2014), Vista Apartment Homes, Campus Club (which was sold in June 2014), Cannery Lofts, Williamsburg, The Redford, Cityside Crossing, Deerfield, Ivy at Clear Creek, Trailpoint at the Woodlands, Affinity at Winter Park, The Westside, Tech Center Square, Skyview Apartment Homes and Town Park (which was sold in April 2013). Unstabilized assets during the three and nine months ended September 30, 2013 consisted of Mosaic, The Reserve at Mt. Moriah, The Alcove, One Hundred Chevy Chase Apartments, Retreat at Rocky Ridge, Verona Apartment Homes and Heatherwood (which was sold in April 2013). Non-property assets and corporate overhead, which consists primarily of general and administrative expenses at the company level, are allocated between stabilized and unstabilized assets based on the percentage of the total purchase price of all our assets that the aggregate purchase prices of stabilized and unstabilized assets respectively represent.
Neither FFO, MFFO nor AFFO should be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor are any of these measures 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).  Amounts reported in the table below include adjustments attributable to noncontrolling interests. We expect revenues and expenses to increase in future periods as we acquire additional investments.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
(Remeasured)
Net loss attributable to stockholders – GAAP
$
(7,271
)
 
$
(7,860
)
 
$
(32,522
)
 
$
(9,277
)
Gain on foreclosure
—

 
—

 
—

 
(3,460
)
Net gains on dispositions
(7,824
)
 
—

 
(10,365
)
 
(3,173
)
Depreciation expense
8,624

 
3,097

 
22,039

 
7,071

FFO
(6,471
)
 
(4,763
)
 
(20,848
)
 
(8,839
)
Adjustments for straight-line rents
129

 
(34
)
 
(241
)
 
(157
)
Amortization of intangible lease assets
2,516

 
2,188

 
12,122

 
4,098

Impairment charge
—

 
—

 
—

 
539

Debt premium amortization
(89
)
 
—

 
(261
)
 
—

Acquisition costs
2,932

 
3,711

 
9,467

 
6,229

MFFO
$
(983
)
 
$
1,102

 
$
239

 
$
1,870

Net gains (loss) on dispositions
7,824

 
—

 
10,365

 
3,173

AFFO
$
6,841

 
$
1,102

 
$
10,604

 
$
5,043

 
 
 
 
 
 
 
 
Basic and diluted loss per common share - GAAP
$
(0.11
)
 
$
(0.22
)
 
$
(0.48
)
 
$
(0.28
)
FFO per share
$
(0.09
)
 
$
(0.13
)
 
$
(0.31
)
 
$
(0.27
)
MFFO per share
$
(0.01
)
 
$
0.03

 
$
—

 
$
0.06

AFFO per share
$
0.10

 
$
0.03

 
$
0.16

 
$
0.15

 
 
 
 
 
 
 
 
Weighted average shares outstanding
68,197

 
36,156

 
67,773

 
33,055




 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
MFFO and AFFO Attributed to Stabilized Assets
 
MFFO and AFFO Attributed to Unstabilized Assets
 
Total
 
MFFO and AFFO Attributed to Stabilized Assets
 
MFFO and AFFO Attributed to Unstabilized Assets
 
Total
Net loss attributable to stockholders- GAAP
$
(4,281
)
 
$
(2,990
)
 
$
(7,271
)
 
$
(1,492
)
 
$
(6,368
)
 
$
(7,860
)
Net (gain) loss on dispositions
(7,824
)
 
—

 
(7,824
)
 
—

 
—

 
—

Depreciation expense
7,195

 
1,429

 
8,624

 
2,597

 
500

 
3,097

FFO
(4,910
)
 
(1,561
)
 
(6,471
)
 
1,105

 
(5,868
)
 
(4,763
)
Adjustments for straight-line rents
129

 
—

 
129

 
(34
)
 
—

 
(34
)
Amortization of intangible lease assets
2,108

 
408

 
2,516

 
1,258

 
930

 
2,188

Debt premium amortization
(89
)
 
—

 
(89
)
 
—

 
—

 
—

Acquisition costs
2,699

 
233

 
2,932

 
359

 
3,352

 
3,711

MFFO
(63
)
 
(920
)
 
(983
)
 
2,688

 
(1,586
)
 
1,102

Net gain (loss) on dispositions
7,824

 
—

 
7,824

 
—

 
—

 
—

AFFO
$
7,761

 
$
(920
)
 
$
6,841

 
$
2,688

 
$
(1,586
)
 
$
1,102


 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
 
 
 
 
 
 
(Remeasured)
 
MFFO and AFFO Attributed to Stabilized Assets
 
MFFO and AFFO Attributed to Unstabilized Assets
 
Total
 
MFFO and AFFO Attributed to Stabilized Assets
 
MFFO and AFFO Attributed to Unstabilized Assets
 
Total
Net income (loss) attributable to stockholders- GAAP
$
(20,528
)
 
$
(11,994
)
 
$
(32,522
)
 
$
2,180

 
$
(11,457
)
 
$
(9,277
)
Net (gain) loss on dispositions
(10,365
)
 
—

 
(10,365
)
 
(3,199
)
 
26

 
(3,173
)
Gain on foreclosure
—

 
—

 
—

 
—

 
(3,460
)
 
(3,460
)
Depreciation expense
18,561

 
3,478

 
22,039

 
5,840

 
1,231

 
7,071

FFO
(12,332
)
 
(8,516
)
 
(20,848
)
 
4,821

 
(13,660
)
 
(8,839
)
Adjustments for straight-line rents
(239
)
 
(2
)
 
(241
)
 
(157
)
 
—

 
(157
)
Impairment charge
—

 
—

 
—

 
—

 
539

 
539

Amortization of intangible lease assets
10,126

 
1,996

 
12,122

 
2,554

 
1,544

 
4,098

Debt premium amortization
(261
)
 
—

 
(261
)
 
—

 
—

 
—

Acquisition costs
6,735

 
2,732

 
9,467

 
1,521

 
4,708

 
6,229

MFFO
4,029

 
(3,790
)
 
239

 
8,739

 
(6,869
)
 
1,870

Net (gain) loss on disposition
10,365

 
—

 
10,365

 
3,199

 
(26
)
 
3,173

AFFO
$
14,394

 
$
(3,790
)
 
$
10,604

 
$
11,938

 
$
(6,895
)
 
$
5,043





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, 2013 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”
Off-Balance Sheet Arrangements
As of September 30, 2014 and December 31, 2013, we did not have any off-balance sheet arrangements or obligations.
Subsequent Events
On October 6, 2014, our Board of Directors authorized cash distributions of $0.05 per common share to stockholders of record as of the close of business on October 30, 2014, November 26, 2014 and December 30, 2014 to be paid on October 31, 2014, November 28, 2014 and December 31, 2014, respectively.
On November 7, 2014, we entered into a mortgage loan in the amount of $36.4 million secured by Parkridge Place. The loan has a fixed interest rate of 3.87% and a term of seven years.
On November 12, 2014, we funded $3.5 million of a total commitment of $5 million for a preferred equity investment in Spring Hill Investors Limited Partner, LLC, which has an indirect ownership of the Spring Hill Apartments, a 606-unit multifamily property located in Dallas, Texas. We will earn a preferred equity return of 12% on our investment.



49

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon, and as of the date of, that evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sale of Equity Securities
All securities sold by us during the nine months ended September 30, 2014 were sold in an offering registered under the Securities Act of 1933, as amended (the "Securities Act").
Redemption of Securities
During the three months ended September 30, 2014, we redeemed shares of our common stock as follows:
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price
Paid per Share
 
Cumulative Number of
Shares Purchased
as Part of a
Publicly Announced
Plan or Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
July 2014
 
15,163
 
$8.76
 
188,275
 
(3)
August 2014
 
—
 
—
 
188,275
 
(3)
September 2014
 
9,749
 
$8.75
 
198,024
 
(3)
 
(1)
All redemptions of equity securities in the three months ended September 30, 2014 were made pursuant to our share redemption program.
(2)
The share redemption program commenced on June 16, 2010 and was subsequently amended on September 29, 2011.
(3)
We currently limit the dollar value and number of shares that may be redeemed under the program as described below.
All redemption requests tendered were honored during the three months ended September 30, 2014.
We will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. Our board of directors will determine at least quarterly whether it has sufficient excess cash to redeem shares. Generally, the cash available for redemptions will be limited to proceeds from our distribution reinvestment plan plus, if we have positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.
Our board of directors, in its sole discretion, may suspend, terminate or amend our share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in our best interest. Our board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon the stockholder's death, qualifying disability or confinement to a long-term care facility.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
(a)
There have been no defaults with respect to any of our indebtedness.
(b)
Not applicable.



ITEM 6.
EXHIBITS
Exhibit No.
 
Description
2.1
 
Agreement and Plan of Merger, dated July 18, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.2
 
Second Amendment to Agreement and Plan of Merger, dated September 13, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.3
 
Third Amendment to Agreement and Plan of Merger, dated December 16, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to Post-Effective Amendment No. 15 to the Company's Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
3.1
 
Amended and Restated Articles of Incorporation (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
3.2
 
Bylaws (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
4.1
 
Form of Distribution Reinvestment Plan Enrollment Form, included as Appendix B to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-3 (No. 333-160463) filed December 30, 2013)
4.2
 
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed November 12, 2009)
4.3
 
Amended and Restated Distribution Reinvestment Plan, included as Appendix A to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-3 (No. 333-160463) filed December 30, 2013)
10.1
 
Renewal Agreement, dated September 15, 2014, between Resource Real Estate Opportunity REIT, Inc. and Resource Real Estate Opportunity Advisor, LLC.
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
99.1
 
Amended and Restated Share Redemption Program (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 14, 2011)
101.1
 
The following information from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Comprehensive Loss; (iii) Consolidated Statements of Changes in Stockholders' Equity; (iv) Consolidated Statements of Cash Flows



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.
 
 
 
November 14, 2014
By:
/s/ Alan F. Feldman
 
 
ALAN F. FELDMAN
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
November 14, 2014
By:
/s/ Steven R. Saltzman
 
 
STEVEN R. SALTZMAN
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)


Resource Real Estate Opportunity REIT, Inc. Reports