Attached files

file filename
EX-31.1 - PEO CERT - Q1 2015 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex311-q12015.htm
EX-31.2 - PRIN FIN OFFCR CERT- Q1 2015 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex312-q12015.htm
EXCEL - IDEA: XBRL DOCUMENT - Lightstone Value Plus Real Estate Investment Trust V, Inc.Financial_Report.xls
EX-32.1 - PRES (PEO) CERT Q1 2015 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex321-q12015.htm
EX-32.2 - CFO CERT Q1 2015 - Lightstone Value Plus Real Estate Investment Trust V, Inc.ex322-q12015.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2015
 
Commission File Number: 000-53650
 
Behringer Harvard Opportunity REIT II, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
 
20-8198863
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer
Identification No.)
 
15601 Dallas Parkway, Suite 600, Addison, Texas 75001
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code:  (866) 655-3600
 
None
(Former name, former address and former fiscal year, if changed since last report)
 
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 ý 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 
Yes ý No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer o 
(Do not check if a smaller reporting company)
 
Smaller reporting company x
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes o No ý
 
As of April 30, 2015, Behringer Harvard Opportunity REIT II, Inc. had 25,691,443 shares of common stock outstanding.

 



BEHRINGER HARVARD OPPORTUNITY REIT II, INC.
FORM 10-Q
Quarter Ended March 31, 2015
 
 
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014
 
 
 
 
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2015 and 2014
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I
FINANCIAL INFORMATION
Item 1.                 Financial Statements.
Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except shares)
(unaudited)
 
 
March 31, 2015
 
December 31, 2014
Assets
 
 

 
 

Real estate
 
 

 
 

Land and improvements, net
 
$
59,893

 
$
60,374

Buildings and improvements, net
 
225,360

 
228,650

Real estate under development
 
328

 
274

Total real estate
 
285,581

 
289,298

Assets associated with real estate held for sale
 

 
12,951

Cash and cash equivalents
 
56,410

 
72,949

Restricted cash
 
3,814

 
4,199

Accounts receivable, net
 
2,353

 
2,208

Prepaid expenses and other assets
 
1,117

 
1,402

Investment in unconsolidated joint venture
 
14,098

 
13,973

Furniture, fixtures and equipment, net
 
7,740

 
8,244

Deferred financing fees, net
 
2,386

 
2,617

Lease intangibles, net
 
974

 
1,850

Total assets
 
$
374,473

 
$
409,691

Liabilities and Equity
 
 

 
 

Notes payable
 
$
214,829

 
$
216,294

Accounts payable
 
449

 
702

Payables to related parties
 
513

 
466

Acquired below-market leases, net
 
168

 
210

Distributions payable to noncontrolling interest
 
19

 
19

Income taxes payable
 
2,118

 

Accrued and other liabilities
 
6,812

 
6,232

Obligations associated with real estate held for sale
 

 
9,212

Total liabilities
 
224,908

 
233,135

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Equity
 
 

 
 

Preferred stock, $.0001 par value per share; 50,000,000 shares authorized, none outstanding
 

 

Convertible stock, $.0001 par value per share; 1,000 shares authorized, 1,000 outstanding
 

 

Common stock, $.0001 par value per share; 350,000,000 shares authorized, 25,732,304 and 25,801,669 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively
 
3

 
3

Additional paid-in capital
 
230,742

 
231,240

Accumulated distributions and net loss
 
(88,382
)
 
(62,477
)
Accumulated other comprehensive income
 
(419
)
 
(246
)
Total Behringer Harvard Opportunity REIT II, Inc. equity
 
141,944

 
168,520

Noncontrolling interest
 
7,621

 
8,036

Total equity
 
149,565

 
176,556

Total liabilities and equity
 
$
374,473

 
$
409,691

See Notes to Unaudited Condensed Consolidated Financial Statements.

3


Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Revenues
 
 

 
 
Rental revenue
 
$
8,486

 
$
7,881

Hotel revenue
 
4,828

 
4,364

Total revenues
 
13,314

 
12,245

Expenses
 
 

 
 

Property operating expenses
 
2,897

 
2,724

Hotel operating expenses
 
3,158

 
3,022

Interest expense, net
 
1,821

 
2,063

Real estate taxes
 
1,584

 
1,413

Property management fees
 
446

 
427

Asset management fees
 
725

 
970

General and administrative
 
921

 
859

Depreciation and amortization
 
4,453

 
3,662

Total expenses
 
16,005

 
15,140

Interest income, net
 
50

 
46

Loss on early extinguishment of debt
 
(119
)
 

Other loss
 
(39
)
 

Loss before gain on sale of real estate and income tax expense
 
(2,799
)
 
(2,849
)
Gain on sale of real estate
 
5,320

 

Income tax expense
 
(2,183
)
 

Net income (loss)
 
338

 
(2,849
)
Net income attributable to the noncontrolling interest
 
(511
)
 
(35
)
Net loss attributable to the Company
 
$
(173
)
 
$
(2,884
)
Weighted average shares outstanding:
 
 

 
 

Basic and diluted
 
25,776

 
26,011

Basic and diluted loss per share
 
$
(0.01
)
 
$
(0.11
)
Distributions declared per common share
 
$
1.00

 
$

Comprehensive income (loss):
 
 

 
 

Net income (loss)
 
$
338

 
$
(2,849
)
Other comprehensive income (loss):
 
 

 
 

Reclassification of unrealized loss on interest rate derivatives to net income
 

 
17

Reclassification of unrealized loss on currency translation to net income
 
596

 

Foreign currency translation gain (loss)
 
(769
)
 
27

Total other comprehensive income (loss)
 
(173
)
 
44

Comprehensive income (loss)
 
165

 
(2,805
)
Comprehensive income attributable to noncontrolling interest
 
(511
)
 
(38
)
Comprehensive loss attributable to the Company
 
$
(346
)
 
$
(2,843
)
 
See Notes to Unaudited Condensed Consolidated Financial Statements.

4


Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Equity
(in thousands)
(unaudited)
 
 
Convertible Stock
 
Common Stock
 
 
 
Accumulated Distributions and Net Income(Loss)
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
Number of Shares
 
Par Value
 
Number of Shares
 
Par Value
 
Additional Paid-in Capital
 
 
 
Noncontrolling Interest
 
Total Equity
Balance at January 1, 2014
1

 
$

 
26,016

 
$
3

 
$
232,903

 
$
(49,520
)
 
$
498

 
$
8,905

 
$
192,789

Net income (loss)
 

 
 

 
 
 
 
 
 
 
(2,884
)
 
 
 
35

 
(2,849
)
Redemption of common stock
 

 
 

 
(14
)
 
 
 
(117
)
 
 
 
 
 
 
 
(117
)
Distributions to noncontrolling interest
 

 
 

 
 
 
 
 
 
 
 
 
 
 
(259
)
 
(259
)
Other comprehensive income:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Reclassification of unrealized loss on interest rate derivatives to net income
 

 
 

 
 
 
 
 
 
 
 
 
14

 
3

 
17

Foreign currency translation gain
 

 
 

 
 
 
 
 
 
 
 
 
27

 


 
27

Balance at March 31, 2014
1

 
$

 
26,002

 
$
3

 
$
232,786

 
$
(52,404
)
 
$
539

 
$
8,684

 
$
189,608

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
1

 
$

 
25,802

 
$
3

 
$
231,240

 
$
(62,477
)
 
$
(246
)
 
$
8,036

 
$
176,556

Net income (loss)
 

 
 

 
 
 
 
 
 
 
(173
)
 
 
 
511

 
338

Redemption of common stock
 

 
 

 
(70
)
 
 
 
(498
)
 
 
 
 
 
 
 
(498
)
Distributions declared on common stock
 
 
 
 
 
 
 
 
 
 
(25,732
)
 
 
 
 
 
(25,732
)
Contributions from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
62

 
62

Distributions to noncontrolling interest
 

 
 

 
 
 
 
 
 
 
 
 
 
 
(988
)
 
(988
)
Other comprehensive income:
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Reclassification of unrealized loss on currency translation to net income
 
 
 
 
 
 
 
 
 
 
 
 
596

 
 
 
596

Foreign currency translation loss
 

 
 

 
 
 
 
 
 
 
 
 
(769
)
 
 

 
(769
)
Balance at March 31, 2015
1

 
$

 
25,732

 
$
3

 
$
230,742

 
$
(88,382
)
 
$
(419
)
 
$
7,621

 
$
149,565

 
See Notes to Unaudited Condensed Consolidated Financial Statements.

5


Behringer Harvard Opportunity REIT II, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:
 
 

 
 

Net income (loss)
 
$
338

 
$
(2,849
)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities:
 
 
 
 

Depreciation and amortization
 
4,389

 
3,634

Amortization of deferred financing fees
 
187

 
221

Gain on sale of real estate
 
(5,320
)
 

Loss on early extinguishment of debt
 
119

 

Loss on derivatives
 
15

 
56

Change in operating assets and liabilities:
 
 
 
 

Accounts receivable
 
507

 
330

Prepaid expenses and other assets
 
269

 
(120
)
Accounts payable
 
(252
)
 
201

Income taxes payable
 
2,223

 

Accrued and other liabilities
 
(6
)
 
(1,165
)
Payables to related parties
 
47

 
423

Addition of lease intangibles
 
(6
)
 
(20
)
Cash provided by operating activities
 
2,510

 
711

Cash flows from investing activities:
 
 

 
 

Acquisition deposits reimbursed
 

 
500

Investment in unconsolidated joint venture
 
(125
)
 
(127
)
Proceeds from sale of real estate
 
18,244

 

Additions of property and equipment
 
(640
)
 
(2,307
)
Change in restricted cash
 
385

 
387

Cash provided by (used in) investing activities
 
17,864

 
(1,547
)
Cash flows from financing activities:
 
 

 
 

Financing costs
 
(106
)
 

Payments on notes payable
 
(9,086
)
 
(529
)
Redemptions of common stock
 
(498
)
 
(117
)
Distributions paid on common stock
 
(25,732
)
 

Contributions from noncontrolling interest holders
 
62

 

Distributions to noncontrolling interest holders
 
(988
)
 
(223
)
Cash used in financing activities
 
(36,348
)
 
(869
)
Effect of exchange rate changes on cash and cash equivalents
 
(565
)
 
32

Net change in cash and cash equivalents
 
(16,539
)
 
(1,673
)
Cash and cash equivalents at beginning of period
 
72,949

 
94,877

Cash and cash equivalents at end of period
 
$
56,410

 
$
93,204

See Notes to Unaudited Condensed Consolidated Financial Statements.

6


Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 

1.                    Business and Organization
Business
Behringer Harvard Opportunity REIT II, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”) was organized as a Maryland corporation on January 9, 2007 and has elected to be taxed, and currently qualifies, as a real estate investment trust (“REIT”) for federal income tax purposes.
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis. In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment, or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who are distressed or face time-sensitive deadlines.  We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality and multifamily.  We have purchased existing, income-producing properties and newly-constructed properties. We have also invested in a mortgage loan and a mezzanine loan. We are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business. We intend to hold the various real properties in which we have invested until such time as our Advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. As of March 31, 2015, we had 11 real estate investments, 10 of which were consolidated into our condensed consolidated financial statements (two wholly owned and eight properties consolidated through investments in joint ventures). We sold Babcock Self Storage (“Babcock”) and Alte Jakobstraße (“AJS”) on January 8, 2015 and February 21, 2015, respectively.
Substantially all of our business is conducted through Behringer Harvard Opportunity OP II LP, a limited partnership organized in Delaware (“Behringer Harvard Opportunity OP II”).  As of March 31, 2015, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation, owned a 0.1% partnership interest in Behringer Harvard Opportunity OP II as its sole general partner.  As of March 31, 2015, our wholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, was the sole limited partner of Behringer Harvard Opportunity OP II and owned the remaining 99.9% interest in Behringer Harvard Opportunity OP II.
We are externally managed and advised by Behringer Harvard Opportunity Advisors II, LLC (the “Advisor”).  The Advisor is responsible for managing our day-to-day affairs and for identifying and making investments on our behalf.
Organization
In connection with our initial capitalization, we issued 22,471 shares of our common stock and 1,000 shares of our convertible stock to Behringer Harvard Holdings, LLC (“Behringer”) on January 19, 2007.  Behringer transferred its shares of convertible stock to one of its affiliates on April 2, 2010.
As of March 31, 2015, we had issued 26.7 million shares of our common stock, including 22,471 shares owned by Behringer and 2.2 million shares issued through the distribution reinvestment plan.  As of March 31, 2015, we had redeemed 1 million shares of our common stock and had 25.7 million shares of common stock outstanding.  As of March 31, 2015, we had 1,000 shares of convertible stock outstanding held by an affiliate of Behringer.
Our common stock is not currently listed on a national securities exchange.  The timing of a liquidity event will depend upon then prevailing market conditions. We currently intend to consider the process of disposing assets, liquidating, and distributing the net proceeds to our stockholders no later than six years after the termination of our initial public offering of common stock, which occurred on July 3, 2011.  Economic or market conditions may, however, result in different holding periods for different assets. If we do not begin an orderly liquidation, we may seek to have our shares listed on a national securities exchange or seek alternative liquidation opportunities. 

2.                     Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 20, 2015.  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 in this report on Form 10-Q pursuant to the rules and regulations of the SEC.

7

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


The results for the interim periods shown in this report are not necessarily indicative of future financial results.  The accompanying condensed consolidated balance sheet as of March 31, 2015, the condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2015 and 2014 and condensed consolidated statements of equity and cash flows for the three months ended March 31, 2015 and 2014 have not been audited by our independent registered public accounting firm.  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to fairly present our condensed consolidated financial position as of March 31, 2015 and December 31, 2014 and our condensed consolidated results of operations and cash flows for the periods ended March 31, 2015 and 2014.  Such adjustments are of a normal recurring nature.
In the Notes to Condensed Consolidated Financial Statements, all dollar and share amounts in tabulation are in thousands of dollars and shares, respectively, unless otherwise noted.

3.                      Summary of Significant Accounting Policies
Described below are certain of our significant accounting policies.  The disclosures regarding several of the policies have been condensed or omitted in accordance with interim reporting regulations specified by Form 10-Q.  Please see our Annual Report on Form 10-K for a complete listing of all of our significant accounting policies.
Use of Estimates in the Preparation of Financial Statements
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates include such items as purchase price allocation for real estate acquisitions, impairment of long-lived assets, depreciation and amortization, and allowance for doubtful accounts.  Actual results could differ from those estimates.
Principles of Consolidation and Basis of Presentation
Our consolidated financial statements include our accounts and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, and profits have been eliminated in consolidation.  Interests in entities acquired will be evaluated based on applicable GAAP, which includes the requirement to consolidate entities deemed to be variable interest entities (“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determined not to be a VIE, then the entity will be evaluated for consolidation based on legal form, economic substance, and the extent to which we have control and/or substantive participating rights under the respective ownership agreement.  For entities in which we have less than a controlling interest or entities which we are not deemed to be the primary beneficiary, we account for the investment using the equity method of accounting.
There are judgments and estimates involved in determining if an entity in which we have made an investment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it is a VIE by, among other things, calculating the percentage of equity being risked compared to the total equity of the entity.  Determining expected future losses involves assumptions of various possibilities of the results of future operations of the entity, assigning a probability to each possibility and using a discount rate to determine the net present value of those future losses.  A change in the judgments, assumptions, and estimates outlined above could result in consolidating an entity that should not be consolidated or accounting for an investment using the equity method that should in fact be consolidated, the effects of which could be material to our financial statements.
Real Estate
Upon the acquisition of real estate properties, we recognize the assets acquired, the liabilities assumed and any noncontrolling interest as of the acquisition date, measured at their fair values.  The acquisition date is the date on which we obtain control of the real estate property.  The assets acquired and liabilities assumed may consist of land, inclusive of associated rights, buildings, assumed debt, identified intangible assets and liabilities and asset retirement obligations. Identified intangible assets generally consist of above-market leases, in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships.  Identified intangible liabilities generally consist of below-market leases. Goodwill is recognized as of the acquisition date and measured as the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree over the fair value of the identifiable net assets acquired.  Likewise, a bargain purchase gain is recognized in current earnings when the aggregate fair value of the consideration transferred and any noncontrolling interests in the acquiree is less than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed

8

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


in the period incurred.  Initial valuations are subject to change until our information is finalized, which is no later than twelve months from the acquisition date.
The fair value of the tangible assets acquired, consisting of land and buildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and buildings.  Land values are derived from appraisals, and building values are calculated as replacement cost less depreciation or management’s estimates of the fair value of these assets using discounted cash flow analyses or similar methods believed to be used by market participants.  The value of hotels and all other buildings is depreciated over the estimated useful lives of 39 years and 25 years, respectively, using the straight-line method.
We determine the fair value of assumed debt by calculating the net present value of the scheduled mortgage payments using interest rates for debt with similar terms and remaining maturities that management believes we could obtain at the date of the debt assumption.  Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan using the effective interest method.
We determine the value of above-market and below-market leases 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 (1) the contractual amounts to be paid pursuant to the in-place leases and (2) management’s estimate of current market lease rates for the corresponding in-place leases, measured over a period equal to (a) the remaining non-cancelable lease term for above-market leases, or (b) the remaining non-cancelable lease term plus any below-market fixed rate renewal options that, based on a qualitative assessment of several factors, including the financial condition of the lessee, the business conditions in the industry in which the lessee operates, the economic conditions in the area in which the property is located, and the ability of the lessee to sublease the property during the renewal term, are reasonably assured to be exercised by the lessee for below-market leases.  We record the fair value of above-market and below-market leases as intangible assets or intangible liabilities, respectively, and amortize them as an adjustment to rental income over the determined lease term.
The total value of identified real estate intangible assets acquired is further allocated to in-place leases, in-place tenant improvements, in-place leasing commissions and tenant relationships based on our evaluation of the specific characteristics of each tenant’s lease and our overall relationship with that respective tenant.  The aggregate value for tenant improvements and leasing commissions is based on estimates of these costs incurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leases acquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease-up periods for the respective spaces considering existing market conditions.  In estimating the carrying costs that would have otherwise been incurred had the leases not been in place, we include such items as real estate taxes, insurance and other operating expenses as well as lost rental revenue during the expected lease-up period based on existing market conditions.  The estimates of the fair value of tenant relationships also include costs to execute similar leases including leasing commissions, legal fees and tenant improvements as well as an estimate of the likelihood of renewal as determined by management on a tenant-by-tenant basis.
We amortize the value of in-place leases, in-place tenant improvements and in-place leasing commissions to expense over the initial term of the respective leases.  The tenant relationship values are amortized to expense over the initial term and any anticipated renewal periods, but in no event does the amortization period for intangible assets or liabilities exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the acquired lease intangibles related to that tenant would be charged to expense.
Anticipated amortization expense associated with the acquired lease intangibles for each of the following five years as of March 31, 2015 is as follows: 
Year
 
Lease / Other
Intangibles
April 1, 2015 - December 31, 2015
 
$
326

2016
 
85

2017
 
51

2018
 
16

2019
 
7

 

9

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


As of March 31, 2015 and December 31, 2014, accumulated depreciation and amortization related to our consolidated investments in real estate assets and intangibles were as follows: 
March 31, 2015
 
Buildings and Improvements
 
Land and Improvements
 
Lease Intangibles
 
Acquired
Below-Market Leases
Cost
 
$
252,114

 
$
62,159

 
$
3,914

 
$
(418
)
Less: depreciation and amortization
 
(26,754
)
 
(2,266
)
 
(2,940
)
 
250

Net
 
$
225,360

 
$
59,893

 
$
974

 
$
(168
)
 
December 31, 2014
 
Buildings and Improvements
 
Land and Improvements
 
Lease Intangibles
 
Acquired
Below-Market Leases
Cost(1)
 
$
252,812

 
$
62,447

 
$
4,551

 
$
(469
)
Less: depreciation and amortization(1)
 
(24,162
)
 
(2,073
)
 
(2,701
)
 
259

Net
 
$
228,650

 
$
60,374

 
$
1,850

 
$
(210
)
______________________________________________
(1)
Excludes Babcock and AJS which were classified as held for sale as of December 31, 2014. These two properties sold on January 8, 2015 and February 21, 2015, respectively. Net book values included in assets associated with real estate held for sale in the consolidated balance sheet were buildings and improvements of $9.6 million, land and improvements of $3.2 million, lease intangibles of $0.2 million and acquired below-market leases of less than $0.1 million. See Note 8, Real Estate Held for Sale.
Real Estate Held for Sale and Discontinued Operations
We classify properties as held for sale when certain criteria are met, in accordance with GAAP.  At that time we present the assets and obligations of the property held for sale separately in our consolidated balance sheet and we cease recording depreciation and amortization expense related to that property.  Properties held for sale are reported at the lower of their carrying amount or their estimated fair value, less estimated costs to sell.  During the fourth quarter of 2014, we entered into Purchase and Sale Agreements (“PSA”) for Babcock, a self storage facility in Texas, and AJS, one of our two office buildings located in Germany, and classified Babcock and AJS as real estate held for sale in our consolidated balance sheet at December 31, 2014. We sold Babcock on January 8, 2015 and AJS on February 21, 2015. We had no assets classified as held for sale at March 31, 2015.
Effective as of April 1, 2014, we adopted the revised guidance in Accounting Standards Update No. 2014-08 regarding discontinued operations. For sales of real estate or assets classified as held for sale after April 1, 2014, we will evaluate whether a disposal transaction meets the criteria of a strategic shift and will have a major effect on our operations and financial results to determine if the results of operations and gains on sale of real estate will be presented as part of our continuing operations or as discontinued operations in our consolidated statements of operations. If the disposal represents a strategic shift, it will be classified as discontinued operations for all periods presented; if not, it will be presented in continuing operations.
Investment Impairment
For all of our real estate and real estate-related investments, we monitor events and changes in circumstances indicating that the carrying amounts of the real estate assets may not be recoverable.  Examples of the types of events and circumstances that would cause management to assess our assets for potential impairment include, but are not limited to:  a significant decrease in the market price of an asset; a significant adverse change in the manner in which the asset is being used; an accumulation of costs in excess of the acquisition basis plus construction of the property; major vacancies and the resulting loss of revenues; natural disasters; a change in the projected holding period; legitimate purchase offers and changes in the global and local markets or economic conditions.  Our assets may at times be concentrated in limited geographic locations and, to the extent that our portfolio is concentrated in limited geographic locations, downturns specifically related to such regions may result in tenants defaulting on their lease obligations at a portion of our properties within a short time period, which may result in asset impairments.  When such events or changes in circumstances are present, we assess potential impairment by comparing estimated future undiscounted operating cash flows expected to be generated over the life of the asset and from its eventual disposition to the carrying amount of the asset.  These projected cash flows are prepared internally by the Advisor and reflect in-place and projected leasing activity, market revenue and expense growth rates, market capitalization rates, discount rates, and changes in economic and other relevant conditions. The Company’s principal executive officer and principal financial officer,

10

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


as well as a panel of asset managers and a financial analyst of the Advisor, review these projected cash flows to assure that the valuation is prepared using reasonable inputs and assumptions that are consistent with market data or with assumptions that would be used by a third-party market participant and assume the highest and best use of the investment. We consider trends, strategic decisions regarding future development plans, and other factors in our assessment of whether impairment conditions exist. In the event that the carrying amount exceeds the estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the asset to estimated fair value.  While we believe our estimates of future cash flows are reasonable, different assumptions regarding factors such as market rents, economic conditions, and occupancy rates could significantly affect these estimates.
In evaluating our investments for impairment, management may use appraisals and make estimates and assumptions, including, but not limited to, the projected date of disposition of the properties, the estimated future cash flows of the properties during our ownership, and the projected sales price of each of the properties.  A future change in these estimates and assumptions could result in understating or overstating the carrying value of our investments, which could be material to our financial statements. In addition, we may incur impairment charges on assets classified as held for sale in the future if the carrying amount of the asset upon classification as held for sale exceeds the estimated fair value, less costs to sell.
We also evaluate our investments in unconsolidated joint ventures at each reporting date.  If we believe there is an other than temporary decline in market value, we will record an impairment charge based on these evaluations.  We assess potential impairment by comparing our portion of estimated future undiscounted operating cash flows expected to be generated by the joint venture over the life of the joint venture’s assets to the carrying amount of the joint venture.  In the event that the carrying amount exceeds our portion of estimated future undiscounted operating cash flows, we recognize an impairment loss to adjust the carrying amount of the joint venture to its estimated fair value.
We believe the carrying value of our operating real estate is currently recoverable.  Accordingly, there were no impairment charges for the three months ended March 31, 2015 and 2014.  However, if market conditions worsen unexpectedly or if changes in our strategy significantly affect any key assumptions used in our fair value calculations, we may need to take charges in future periods for impairments related to our existing investments.  Any such non-cash charges would have an adverse effect on our consolidated financial position and results of operations.
Investment in Unconsolidated Joint Venture
We provide funding to third-party developers for the acquisition, development and construction of real estate (“ADC Arrangement”).  Under the ADC Arrangement, we may participate in the residual profits of the project through the sale or refinancing of the property.  We evaluate this arrangement to determine if it has characteristics similar to a loan or if the characteristics are more similar to a joint venture or partnership such as participating in the risks and rewards of the project as an owner or an investment partner.  When we determine that the characteristics are more similar to a jointly-owned investment or partnership, we account for the arrangement as an investment in an unconsolidated joint venture under the equity method of accounting or a direct investment (consolidated basis of accounting) instead of applying loan accounting. The ADC Arrangement is reassessed at each reporting period. See Note 9, Investment in Unconsolidated Joint Venture, for further discussion.
Revenue Recognition
We recognize rental income generated from leases of our operating properties on a straight-line basis over the terms of the respective leases, including the effect of rent holidays, if any.  Straight-line rent was income of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2015. Straight-line rent was a charge of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2014. Leases associated with our multifamily, student housing, and hotel assets are generally short-term in nature, and thus have no straight-line rent. Net below-market lease amortization was income of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2015. Net above-market lease amortization was a charge of less than $0.1 million recognized in rental revenues for the three months ended March 31, 2014.
Hotel revenue is derived from the operations of the Courtyard Kauai Coconut Beach Hotel and consists primarily of guest room, food and beverage, and other ancillary revenues such as laundry and parking. Hotel revenue is recognized as the services are rendered.

11

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Accounts Receivable
Accounts receivable primarily consist of receivables related to our consolidated properties of $2.4 million and $2.2 million as of March 31, 2015 and December 31, 2014, respectively, and included straight-line rental revenue receivables of $0.4 million and $0.6 million as of March 31, 2015 and December 31, 2014, respectively. 
Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment are recorded at cost and are depreciated according to the Company’s capitalization policy which uses the straight-line method over their estimated useful lives of five to seven years.  Maintenance and repairs are charged to operations as incurred.  Accumulated depreciation associated with our furniture, fixtures, and equipment was $7 million and $6.4 million as of March 31, 2015 and December 31, 2014, respectively.
Deferred Financing Fees
Deferred financing fees are recorded at cost and are amortized to interest expense of our notes payable using a straight-line method that approximates the effective interest method over the life of the related debt.  Accumulated amortization of deferred financing fees was $2.2 million as of March 31, 2015 and December 31, 2014.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), and have qualified as a REIT since the year ended December 31, 2008.  To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subject to federal income tax at the corporate level.  We are organized and operate in such a manner as to qualify for taxation as a REIT under the Code and intend to continue to operate in such a manner, but no assurance can be given that we will operate in a manner so as to qualify or remain qualified as a REIT. Taxable income from non-REIT activities managed through a taxable REIT subsidiary (“TRS”) is subject to applicable federal, state, and local income and margin taxes. We have no taxable income associated with a TRS. Our operating partnerships are flow-through entities and are not subject to federal income taxes at the entity level.
The Company recorded a provision for income tax of approximately $2.2 million for the first quarter of 2015 as a result of foreign income tax related to the sale of AJS located in Berlin, Germany. The foreign income tax was calculated on gains recognized at the exchange rate in effect on the sale date of February 21, 2015 and calculated using current tax rates.
We have reviewed our tax positions under GAAP guidance that clarify the relevant criteria and approach for the recognition and measurement of uncertain tax positions. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that the tax positions taken relative to our federal tax status as a REIT will be sustained in any tax examination.
Foreign Currency Translation
For our international investments where the functional currency is other than the U.S. dollar, assets and liabilities are translated using period-end exchange rates, while the statement of operations amounts are translated using the average exchange rates for the respective period. Gains and losses resulting from the change in exchange rates from period to period are reported separately as a component of other comprehensive income (loss) (“OCI”) as a separate component. Gains and losses resulting from foreign currency transactions are included in the condensed consolidated statements of operations and comprehensive income (loss).
The Euro is the functional currency for the operations of Holstenplatz and AJS. We also maintain a Euro-denominated bank account that is translated into U.S. dollars at the current exchange rate at each reporting period. For the three months ended March 31, 2015, the foreign currency translation adjustment was a loss of $0.8 million. For the three months ended March 31, 2014, the foreign currency translation adjustment was a gain of less than $0.1 million.
Effective as of January 1, 2015, we adopted the revised guidance regarding cumulative translation adjustment (“CTA”) as further discussed in Note 4, New Accounting Pronouncements. When the Company has substantially liquidated its investment in a foreign entity, the CTA balance is required to be released into earnings. During the first quarter of 2015, we recognized a CTA of approximately $0.6 million as a reduction to the gain on sale of our AJS office building which we sold on February 21,

12

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


2015. Our wholly owned investment in the Holstenplatz office building, located in Hamburg, Germany, is our only remaining foreign operation at March 31, 2015.
Concentration of Credit Risk
At March 31, 2015 and December 31, 2014, we had cash and cash equivalents deposited in certain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalents among several banking institutions in an attempt to minimize exposure to any one of these entities.  We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents or restricted cash.
Geographic and Asset Type Concentration
Our investments in target assets may at times be concentrated in certain asset types that are subject to higher risk of foreclosure, or secured by assets concentrated in a limited number of geographic locations. For the three months ended March 31, 2015, excluding Babcock and AJS sold in 2015, 37% and 19% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, excluding Babcock and AJS, 41%, 37% and 16% of our total revenues for the three months ended March 31, 2015 were from our multifamily, hotel, and student housing investments, respectively. To the extent that our portfolio is concentrated in limited geographic regions or types of assets, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period, which may reduce our net income and the value of our common stock and accordingly limit our ability to fund our operations.
Noncontrolling Interest
Noncontrolling interest represents the noncontrolling ownership interest’s proportionate share of the equity in our consolidated real estate investments.  Income and losses are allocated to noncontrolling interest holders based generally on their ownership percentage.  In certain instances, our joint venture agreement provides for liquidating distributions based on achieving certain return metrics (“promoted interest”).  If a property reaches a defined return threshold, then it will result in distributions to noncontrolling interest which is different from the standard pro-rata allocation percentage.
Earnings per Share
Net loss per share is calculated based on the weighted average number of common shares outstanding during each period.  The weighted average shares outstanding used to calculate both basic and diluted loss per share were the same for the three months ended March 31, 2015 and 2014, as there were no potentially dilutive securities outstanding.
Subsequent Events
We have evaluated subsequent events for recognition or disclosure in our condensed consolidated financial statements.
 
4.                 New Accounting Pronouncements
In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-05 (“ASU 2013-05”), Foreign Currency Matters, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.  ASU 2013-05 specifies that a CTA should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings when the investment is sold. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. ASU 2013-05 is effective for public companies for fiscal years, and interim periods within those years, beginning after December 15, 2013. For nonpublic entities, the amendments are effective for fiscal years beginning after December 15, 2014, and interim and annual periods thereafter. ASU 2013-05 should be applied prospectively to derecognition events occurring after the effective date. Early adoption is permitted. The Company adopted ASU 2013-05 effective January 1, 2015. On February 21, 2015, we sold AJS, located in Berlin, Germany.  We recorded a gain on sale of real estate property of approximately $3.3 million which is net of a CTA of approximately $0.6 million.

13

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


In May 2014, the FASB issued an update (“ASU 2014-09”) to ASC Topic 606, Revenue from Contracts with Customers.  ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance.  ASU 2014-09 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.  ASU 2014-09 was effective for interim and annual reporting periods beginning after December 15, 2016 for public companies. For nonpublic entities, the updated guidance was effective for annual reporting periods beginning after December 15, 2017 and for interim periods within annual periods beginning after December 15, 2018. In April 2015, the FASB tentatively decided to defer for one year the effective date of the new revenue standard for public and nonpublic entities reporting under U.S. GAAP. Either full retrospective adoption or modified retrospective adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
In February 2015, the FASB issued an update (“ASU 2015-02”) to ASC Topic 810, Amendments to the Consolidation Analysis, which improves targeted areas of the consolidation guidance and reduces the number of consolidation models. The amendments in ASU 2015-02 are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2015, with early adoption permitted. The Company is currently evaluating the effect this guidance will have on its consolidated financial statements.

5.                    Assets and Liabilities Measured at Fair Value
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s own assumptions, as there is little, if any, related market activity.  In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Recurring Fair Value Measurements
Currently, we use interest rate swaps and caps to manage our interest rate risk.  The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, implied volatilities, and foreign currency exchange rates.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties.  However, as of March 31, 2015, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.  As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

14

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


The following fair value hierarchy table presents information about our assets measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014: 
March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 

 
 

 
 

 
 

Derivative financial instruments
 
$

 
$
13

 
$

 
$
13

December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 

 
 

 
 

 
 

Derivative financial instruments
 
$

 
$
28

 
$

 
$
28

Derivative financial instruments classified as assets are included in prepaid expenses and other assets on the balance sheet.

6.                   Financial Instruments not Reported at Fair Value
We determined the following disclosure of estimated fair values using available market information and appropriate valuation methodologies.  However, considerable judgment is necessary to interpret market data and develop the related estimates of fair value.  The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
As of March 31, 2015 and December 31, 2014, management estimated that the carrying value of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued expenses, other liabilities, payables/receivables from related parties, and distributions payable to noncontrolling interests were at amounts that reasonably approximated their fair value based on their highly-liquid nature and/or short-term maturities.  The notes payable of $214.8 million as of March 31, 2015 and $216.3 million, excluding $9.1 million of contractual obligations on real estate held for sale as of December 31, 2014, have a fair value of approximately $216.7 million and $217.1 million as of March 31, 2015 and December 31, 2014, respectively, based upon interest rates for debt with similar terms and remaining maturities that management believes we could obtain.  The fair value of the notes payable is categorized as a Level 2 basis.  The fair value is estimated using a discounted cash flow analysis valuation on the borrowing rates currently available for loans with similar terms and maturities.  The fair value of the notes payable was determined by discounting the future contractual interest and principal payments by a market rate.  Disclosure about fair value of financial instruments is based on pertinent information available to management as of March 31, 2015 and December 31, 2014. 

15

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



7.      Real Estate and Real Estate-Related Investments
As of March 31, 2015, we consolidated 10 real estate assets. The following table presents certain information about our consolidated investments as of March 31, 2015:

Property Name
 
Description
 
Location
 
Date Acquired
 
Ownership
Interest
Holstenplatz
 
Office building
 
Hamburg, Germany
 
June 30, 2010
 
100%
Gardens Medical Pavilion(1)
 
Medical office building
 
Palm Beach Gardens, Florida
 
October 20, 2010
 
80.4%
Courtyard Kauai Coconut Beach Hotel
 
Hotel
 
Kauai, Hawaii
 
October 20, 2010
 
80%
River Club and the Townhomes at River Club
 
Student housing
 
Athens, Georgia
 
April 25, 2011
 
85%
Lakes of Margate
 
Multifamily
 
Margate, Florida
 
October 19, 2011
 
92.5%
Arbors Harbor Town
 
Multifamily
 
Memphis, Tennessee
 
December 20, 2011
 
94%
Wimberly at Deerwood (“Wimberly”)
 
Multifamily
 
Jacksonville, Florida
 
February 19, 2013
 
95%
22 Exchange
 
Student housing
 
Akron, Ohio
 
April 16, 2013
 
90%
Parkside Apartments (“Parkside”)
 
Multifamily
 
Sugar Land, Texas
 
August 8, 2013
 
90%
Lakewood Flats
 
Multifamily
 
Dallas, Texas
 
October 10, 2014
 
100%
_________________________________________
(1) 
We acquired a portfolio of eight medical office buildings, known as the Original Florida MOB Portfolio on October 8, 2010.  We acquired a medical office building known as Gardens Medical Pavilion on October 20, 2010.  Collectively, the Original Florida MOB Portfolio and Gardens Medical Pavilion were referred to as the Florida MOB Portfolio.  The Florida MOB Portfolio consisted of nine medical office buildings.  On September 20, 2013, we sold the Original Florida MOB Portfolio. As of March 31, 2015, we own approximately 80.4% of the ninth building, Gardens Medical Pavilion.
Real Estate Asset Dispositions
Babcock Self Storage
On January 8, 2015, we sold Babcock for a contract sales price of approximately $5.4 million. We recorded a gain on sale of real estate property of $2.0 million and loss on early extinguishment of debt of less than $0.1 million, which was composed of the write-off of deferred financing fees and an early termination fee. A portion of the proceeds from the sale were used to pay off in full the existing indebtedness of approximately $2.1 million associated with the storage facility. Babcock was classified as held for sale on our consolidated balance sheet at December 31, 2014.
Alte Jakobstraße
On February 21, 2015, we sold AJS, located in Berlin, Germany, for a contract sales price of approximately €12.4 million or approximately $14.1 million.  We recorded a gain on sale of real estate property of approximately $3.3 million which is net of a CTA of approximately $0.6 million. We recognized a loss on early extinguishment of debt of less than $0.1 million, which was composed of the write-off of deferred financing fees and an early termination fee. A portion of the proceeds from the sale were used to fully satisfy the existing indebtedness associated with the property of approximately €5.7 million or approximately $6.5 million. The Company recorded a provision for income tax of approximately $2.2 million for the first quarter of 2015 as a result of foreign income tax related to the sale. The foreign income tax was calculated on gains recognized at the exchange rate in effect on the sale date of February 21, 2015 and calculated using current tax rates. All U.S. dollar amounts related to the AJS sale herein are based on the exchange rate in effect on February 21, 2015. AJS was classified as held for sale on our consolidated balance sheet at December 31, 2014.


16

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


Sales of Real Estate Reported in Continuing Operations
The Company does not view the disposals of Babcock and AJS in the first quarter of 2015 or the disposal of 1875 Lawrence in the second quarter of 2014 as a strategic shift, therefore the results of operations for the three investments are presented in continuing operations in the consolidated statements of operations for the three months ended March 31, 2015 and 2014.
The following table presents our sales of real estate for the three months ended March 31, 2015 (in millions):
Date of Sale
 
Property
 
Ownership Interest
 
Sales Contract Price
 
Net Cash Proceeds(1)
 
Gain on Sale of Real Estate
January 8, 2015
 
Babcock Self Storage
 
85%
 
$
5.4

 
$
5.2

 
$
2.0

February 21, 2015
 
Alte Jakobstraße
 
99.7%
 
$
14.1

 
$
13.0

 
$
3.3

______________________________________
(1)
A portion of the net cash proceeds were used to pay off the property-associated debt of $8.6 million.
In addition, we sold our 1875 Lawrence office building on May 30, 2014, which is included in continuing operations for the three months ended March 31, 2014.
The following table presents net income attributable to the Company for the three months ended March 31, 2015 and 2014 related to Babcock, AJS and 1875 Lawrence. Net income for the three months ended March 31, 2015 includes the gain on sale of AJS and Babcock (in millions):
 
 
For the Three Months Ended March 31,
Description
 
2015
 
2014
Net income (loss) attributable to the Company
 
$
2.4

 
$
(0.6
)

8.      Real Estate Held for Sale
As of December 31, 2014, Babcock and AJS were classified as real estate held for sale on our consolidated balance sheet. We sold both of these properties in the first quarter of 2015. We did not have any real estate assets classified as held for sale as of March 31, 2015.
The major classes of assets and liabilities associated with our real estate held for sale as of December 31, 2014 were as follows:
Description
 
Amount
Land and improvements, net
 
$
3,195

Building and improvements, net
 
9,581

Lease intangibles, net
 
175

Assets associated with real estate held for sale
 
$
12,951

 
 
 
Notes payable
 
$
9,122

Other
 
90

Obligations associated with real estate held for sale
 
$
9,212


17

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



9.                   Investment in Unconsolidated Joint Venture
On May 24, 2013, we (the “Lender”) provided mezzanine financing totaling $13.7 million, (the “Initial Advance”) to an unaffiliated third-party entity (the “Borrower”) that owns an apartment complex under development in Denver, Colorado (“Prospect Park”).  The Borrower also has a senior construction loan with a third-party construction lender (the “Senior Lender”), in an aggregate original principal amount of $35.6 million.  The senior construction loan is guaranteed by the owners of the developer.  We also have a personal guaranty from the owners of the developer guaranteeing completion of the project and payment of cost overruns. Our mezzanine loan is secured by all of the membership interests of the Borrower and is subordinate to the senior construction loan. Our Initial Advance has an annual stated interest rate of 10% for the first three years of the term, followed by two one-year extension options at which point the annual interest rate would increase to 14%. We evaluated this ADC Arrangement and determined that the characteristics are similar to a jointly-owned investment or partnership. Accordingly, the investment was accounted for as an unconsolidated joint venture under the equity method of accounting instead of loan accounting since we will participate in the residual interests through the sale or refinancing of the property. 
As a result of projected cost overruns, an event of default was declared by the Senior Lender on April 28, 2014 and we declared an event of default under the mezzanine loan agreement on May 5, 2014. The events of default were cured by the Borrower and developer agreeing to cover cost overruns totaling $6.6 million, increasing our financing $1.5 million (the “Additional Advance”) at an annual interest rate of 18%, and the Senior Lender increasing their loan to $40 million. The terms of our Initial Advance remained the same under the amended loan agreement.
We considered the impact of these events on the accounting treatment and determined the ADC Arrangement will continue to be accounted for as an unconsolidated joint venture under the equity method of accounting. We will continue to monitor this situation and any impact these events might have on our ability to ultimately realize our investment. The ADC Arrangement is reassessed at each reporting period.
As of March 31, 2015, the outstanding principal balance under our mezzanine loan was $15.3 million. Interest capitalized for the three months ended March 31, 2015 and 2014 was $0.1 million.  For the three months ended March 31, 2015 and 2014, we recorded no equity in earnings (losses) of unconsolidated joint venture related to our investment in Prospect Park.
The following table sets forth our ownership interest in Prospect Park: 
Property Name
 
Ownership Interest at March 31, 2015
 
Carrying Amount at March 31, 2015
Prospect Park
 
N/A
 
$14,098
 

18

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


 
10.                     Notes Payable
The following table sets forth information on our notes payable as of March 31, 2015 and December 31, 2014:
 
 
Notes Payable as of
 
 
 
 
Description
 
March 31, 2015
 
December 31, 2014
 
Interest Rate
 
Maturity Date
Holstenplatz(1)
 
$
8,101

 
$
9,125

 
3.887%
 
4/30/2015
Courtyard Kauai Coconut Beach Hotel
 
38,000

 
38,000

 
30-day LIBOR + .95%
(2) 
11/9/2015
Florida MOB Portfolio - Gardens Medical Pavilion
 
13,585

 
13,678

 
4.9%
 
1/1/2018
River Club and the Townhomes at River Club
 
24,570

 
24,664

 
5.26%
 
5/1/2018
Lakes of Margate
 
14,676

 
14,723

 
5.49% and 5.92%
 
1/1/2020
Arbors Harbor Town
 
25,474

 
25,591

 
3.985%
 
1/1/2019
Wimberly
 
26,685

 
26,685

 
30-day LIBOR + 2.28%
(2) 
3/1/2023
22 Exchange
 
19,500

 
19,500

 
3.93%
 
5/5/2023
Parkside(3)
 
10,738

 
10,828

 
5%
 
6/1/2018
Lakewood Flats
 
33,500

 
33,500

 
30-day LIBOR + 1.5%
(2) 
11/5/2019
 
 
$
214,829

 
$
216,294

 
 
 
 
Notes Payable included with Obligations related to real estate held for sale:
 
 
 
 
 
 
 
 
Babcock Self Storage(4)
 
$

 
$
2,137

 
5.8%
 
8/30/2018
Alte Jakobstraße(4)
 

 
6,985

 
2.3%
 
12/30/2015
 
 
$

 
$
9,122

 
 
 
 
Total notes payable obligations
 
$
214,829

 
$
225,416

 
 
 
 
_________________________________
(1)
We paid off the balance of the Holstenplatz debt on April 30, 2015.
(2)
30-day London Interbank Offer Rate (“LIBOR”) was 0.18% at March 31, 2015.
(3)
Includes approximately $0.5 million of unamortized premium related to debt we assumed at acquisition.
(4)
As of December 31, 2014, Babcock and AJS were classified as real estate held for sale on our consolidated balance sheet. The properties were sold in the first quarter of 2015 and a portion of the sales proceeds for each property was used to pay off the existing indebtedness in full.
At March 31, 2015, our notes payable balance was $214.8 million and consisted of the notes payable related to our consolidated properties.  We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai Coconut Beach Hotel, Wimberly, 22 Exchange, and Parkside notes payable. Interest capitalized for the three months ended March 31, 2015 and 2014 was $0.1 million, in connection with our equity method investment in Prospect Park.
On January 8, 2015, we sold our Babcock property to an unaffiliated third party. We used a portion of the proceeds from the sale to fully satisfy the existing indebtedness of approximately $2.1 million. On February 21, 2015, we sold AJS, located in Berlin, Germany, to an unaffiliated third party and used a portion of the proceeds from the sale to payoff in full the existing indebtedness of approximately €5.7 million or approximately $6.5 million, based on the exchange rate in effect on February 21, 2015. Babcock and AJS were classified as held for sale on our consolidated balance sheet as of December 31, 2014.
We are subject to customary affirmative, negative, and financial covenants and representations, warranties, and borrowing conditions, all as set forth in our loan agreements, including, among other things, maintaining minimum debt service coverage ratios, loan to value ratios and liquidity. As of March 31, 2015, we believe we were in compliance with the covenants under our loan agreements.

19

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


The following table summarizes our contractual obligations for principal payments as of March 31, 2015:  
Year
 
Amount Due
April 1, 2015 - December 31, 2015
 
$
47,712

2016
 
2,447

2017
 
2,670

2018
 
47,399

2019
 
58,345

Thereafter
 
55,724

Total contractual obligations for principal payments
 
$
214,297

Unamortized premium
 
532

Total notes payable
 
$
214,829

 

Our debt secured by Courtyard Kauai Coconut Beach Hotel, with a balance of $38 million at March 31, 2015, matures on November 9, 2015. The loan has an 18-month renewal option to extend the term to May 9, 2017. Subsequent to March 31, 2015, we paid off the Holstenplatz debt of approximately $8.1 million which was set to mature on April 30, 2015.

11.               Leasing Activity
Future minimum base rental payments of our office properties due to us under non-cancelable leases in effect as of March 31, 2015 are as follows: 
Year
 
Amount Due
April 1, 2015 - December 31, 2015
 
$
1,902

2016
 
2,412

2017
 
1,965

2018
 
1,583

2019
 
1,186

Thereafter
 
4,733

Total
 
$
13,781

 
The schedule above does not include rental payments due to us from our multifamily, hotel, and student housing properties, as leases associated with these properties typically are for periods of one year or less.

12.               Derivative Instruments and Hedging Activities
We may be exposed to the risk associated with variability of interest rates that might impact our cash flows and the results of operations.  The hedging strategy of entering into interest rate caps and swaps, therefore, is to eliminate or reduce, to the extent possible, the volatility of cash flows.  As of March 31, 2015, none of our derivative instruments were designated as hedging instruments. We have two interest rate caps as of March 31, 2015.
Derivative instruments classified as assets were reported at their combined fair values of less than $0.1 million in prepaid expenses and other assets at March 31, 2015 and December 31, 2014. During the three months ended March 31, 2014, we recorded a reclassification of unrealized loss to interest expense of $0.1 million to adjust the carrying amount of the interest rate caps. During the three months ended March 31, 2015 we had no reclassification of unrealized loss to interest expense.  The reclassification out of OCI in our statement of equity for the three months ended March 31, 2014 was due to all derivatives being designated as non-hedging instruments as of January 1, 2013.

20

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table summarizes the notional values of our derivative financial instruments.  The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate, or market risks: 
Type / Description
 
Notional
Value
 
Interest Rate /
Strike Rate
 
Index
 
Maturity Date
Not Designated as Hedging Instruments
 
 

 
 
 
 
 
 
Interest rate cap - Courtyard Kauai Coconut Beach Hotel
 
$
38,000

 
3.00%
 
30-day LIBOR
 
October 15, 2016
Interest rate cap - Wimberly
 
26,685

 
4.56%
 
30-day LIBOR
 
March 1, 2018
The table below presents the fair value of our derivative financial instruments, as well as their classification on the consolidated balance sheets as of March 31, 2015 and December 31, 2014: 
 
 
 
 
Asset Derivatives
Derivatives not designated as hedging instruments:
 
Balance Sheet Location
 
March 31, 2015
 
December 31, 2014
 
 
 
 
 
 
 
Interest rate derivative contracts
 
Prepaid expenses and other assets
 
$
13

 
$
28

The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014: 
Derivatives Not Designated as Hedging Instruments
Amount of Loss 
Three months ended March 31,
2015
 
2014
$15
 
$56

13.              Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board deems relevant. The board’s decision will be substantially influenced by its obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all. We expect that any future distributions authorized by our board of directors will be periodic, special distributions as opposed to regular monthly or quarterly distributions.
On March 18, 2015, our board of directors authorized a special cash distribution of $1.00 per share of common stock payable to stockholders of record as of March 30, 2015. The total special cash distribution of $25.7 million, which represents a portion of proceeds from asset sales, was paid on March 31, 2015. We did not pay any distributions to stockholders during the three months ended March 31, 2014.
We have paid, and may in the future pay, some or all of our distributions from sources other than operating cash flow. For example, we have generated cash to pay special distributions from sales activities and financing activities, components of which included proceeds from our offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management, or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns, which may increase the amount of cash that we have available to pay distributions to our stockholders.
Future special distributions authorized and paid at the discretion of the board of directors, are expected to be funded with proceeds from asset sales; therefore, future special distributions may exceed cash flow from operating activities or funds from operations.

21

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



14.              Related Party Transactions
Advisor
The Advisor and certain of its affiliates may receive fees and compensation in connection with the acquisition, management, and sale of our assets based on the advisory management agreement, as amended and restated.
Fourth Amended and Restated Advisory Management Agreement
On June 20, 2014, we entered into the Fourth Amended and Restated Advisory Management Agreement (the “Fourth Advisory Agreement”) with our Advisor to, among other things, revise the acquisition and advisory fees, asset management fee, and the debt financing fee that may be paid to the Advisor and to fix certain expense reimbursement provisions. The Fourth Advisory Agreement was effective as of January 1, 2014. The following discussion reflects the terms of the Fourth Advisory Agreement and the fees and expenses paid or reimbursed to the Advisor thereunder since January 1, 2014.
The Advisor or its affiliates receive acquisition and advisory fees of 1.5% of the amount paid in respect of the purchase, development, construction, or improvement of each asset we acquire, including any debt attributable to those assets. In addition, the Advisor and its affiliates will also receive acquisition and advisory fees of 1.5% of the funds advanced in respect of a loan investment. We incurred no acquisition and advisory fees payable to the Advisor for the three months ended March 31, 2015 and 2014.
The Advisor or its affiliates also receive an acquisition expense reimbursement in the amount of (i) 0.25% of the funds paid for purchasing an asset, including any debt attributable to the asset, plus 0.25% of the funds budgeted for development, construction, or improvement in the case of assets that we acquire and intend to develop, construct, or improve or (ii) 0.25% of the funds advanced in respect of a loan investment. We also pay third parties, or reimburse the Advisor or its affiliates, for any investment-related expenses due to third parties in the case of a completed investment, including, but not limited to, legal fees and expenses, travel and communication expenses, costs of appraisals, accounting fees and expenses, third-party brokerage or finder's fees, title insurance, premium expenses, and other closing costs.
In addition, acquisition expenses for which we will reimburse the Advisor, include any payments approved in advance by our board of directors made to (i) a prospective seller of an asset, (ii) an agent of a prospective seller of an asset, or (iii) a party that has the right to control the sale of an asset intended for investment by us that are not refundable and that are not ultimately applied against the purchase price for such asset. Previously, to the extent the Advisor or its affiliates directly provided services, formerly provided or usually provided by third parties, including, without limitation, accounting services related to the preparation of audits required by the Securities and Exchange Commission, property condition reports, title services, title insurance, insurance brokerage or environmental services related to the preparation of environmental assessments in connection with a completed investment, the direct employee costs and burden to the Advisor of providing these services was included as acquisition expenses for which we reimbursed the Advisor. Pursuant to the Fourth Advisory Agreement, effective January 1, 2014, such services will no longer be included as acquisition expenses for which the Company will reimburse the Advisor.
In addition, the Advisor is responsible for paying all of the expenses it incurs associated with persons employed by the Advisor to the extent that they are dedicated to making investments for us, such as wages and benefits of the investment personnel. The Advisor and its affiliates are also responsible for paying all of the investment-related expenses that we or the Advisor or its affiliates incur that are due to third parties or related to the additional services provided by the Advisor as described above with respect to investments we do not make, other than certain non-refundable payments made in connection with any acquisition. For the three months ended March 31, 2015 and 2014 we incurred no acquisition expense reimbursements.
Beginning January 1, 2014, we pay the Advisor or its affiliates a debt financing fee of 0.5% of the amount available under any loan or line of credit made available to us and will pay directly all third-party costs associated with obtaining the debt financing. We incurred no debt financing fees for the three months ended March 31, 2015 and 2014.
We pay the Advisor or its affiliates a development fee in an amount that is usual and customary for comparable services rendered to similar projects in the geographic market of the project if such affiliate provides the development services and if a majority of our independent directors determines that such development fee is fair and reasonable to us.  We incurred no such fees for the three months ended March 31, 2015 and 2014.

22

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 


Pursuant to the Fourth Advisory Agreement, we pay the Advisor or its affiliates a monthly asset management fee which, effective January 1, 2014, was reduced to one-twelfth of 0.7% of the value of each asset. The value of our assets will be the value as determined in connection with the establishment and publication of an estimated value per share unless the asset was acquired after our publication of an estimated value per share (in which case the value of the asset will be the contract purchase price of the asset). For the three months ended March 31, 2015 and 2014, we expensed $0.7 million and $0.9 million, respectively, of asset management fees. The totals for the three months ended March 31, 2015 and 2014 include asset management fees related to our disposed properties.
Under the Fourth Advisory Agreement, beginning January 1, 2014, instead of reimbursing the Advisor for specific expenses paid or incurred in connection with providing services to us, we pay the Advisor an administrative services fee based on a budget of expenses prepared by the Advisor. The administrative services fee is intended to reimburse for all costs associated with providing services to us under the Fourth Advisory Agreement. The administrative services fee is $1.8 million per calendar year, payable in four equal quarterly installments within 45 days of the end of each calendar quarter beginning with calendar year 2014. For the three months ended March 31, 2015 and 2014, we incurred and expensed such costs for administrative services of approximately $0.4 million .
Notwithstanding the fees and cost reimbursements payable to our Advisor pursuant to the Fourth Advisory Agreement, under our charter we may not reimburse the Advisor for any amount by which our operating expenses (including the asset management fee) at the end of the four preceding fiscal quarters exceeds the greater of:  (i) 2% of our average invested assets, or (ii) 25% of our net income determined without reduction for any additions to reserves for depreciation, bad debts or other similar non-cash reserves and excluding any gain from the sale of our assets for that period unless a majority of our independent directors determines that such excess expenses are justified based on unusual and non-recurring factors. For the four fiscal quarters ended March 31, 2015, our total operating expenses (including the asset management fee) were not excessive.
Property Manager
We pay our property manager and affiliate of the Advisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO II Management”), or its affiliates, fees for the management, leasing, and construction supervision of our properties.  Effective January 1, 2014, we entered into the First Amendment to the Amended and Restated Property Management and Leasing Agreement, which reduced the property management fee paid to 4.0% of gross revenues of the properties managed by BHO II Management or its affiliates. We pay BHO II Management or its affiliates an oversight fee equal to 0.5% of the gross revenues of the property managed for any property for which we contract directly with a third-party property manager.  In no event will BHO II Management or its affiliates receive both a property management fee and an oversight fee with respect to any particular property.  In the event we own a property through a joint venture that does not pay BHO II Management directly for its services, we will pay BHO II Management a management fee or oversight fee, as applicable, based only on our economic interest in the property.  We incurred and expensed property management fees or oversight fees to BHO II Management of approximately $0.2 million for the three months ended March 31, 2015 and 2014.
We pay the Advisor or its affiliates a construction management fee in an amount not to exceed 5% of all hard construction costs incurred in connection with, but not limited to capital repairs and improvements, major building reconstruction and tenant improvements, if such affiliate supervises construction performed by or on behalf of us or our affiliates. We incurred no construction management fees for the three months ended March 31, 2015. We incurred less than $0.1 million of construction management fees for the three months ended March 31, 2014.
We are dependent on the Advisor and BHO II Management for certain services that are essential to us, including asset acquisition and disposition decisions, property management and leasing services, and other general administrative responsibilities.  In the event that these companies were unable to provide us with their respective services, we would be required to obtain such services from other sources.

23

Behringer Harvard Opportunity REIT II, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited) 



15.              Supplemental Cash Flow Information
Supplemental cash flow information is summarized below:  
 
 
Three months ended March 31,
Description
 
2015
 
2014
Interest paid, net of amounts capitalized
 
$
1,630

 
$
1,920

Income tax paid
 

 
183

Non-cash investing and financing activities:
 
 
 
 

Proceeds held in escrow through sale of real estate interests
 
912

 

Capital expenditures for real estate in accrued liabilities
 
86

 
421

Accrued distributions to noncontrolling interest holder
 
19

 
36

 

16.         Subsequent Events
Debt Payoff
We paid off the Holstenplatz debt of approximately $8.1 million on April 30, 2015.
Share Redemption Program
On May 6, 2015, our board of directors approved redemptions for the second quarter of 2015 totaling 40,861 shares with an aggregate redemption payment of approximately $0.3 million. Effective March 30, 2015, the price at which we redeem shares under our share redemption program changed as a result of the adjustment to our estimated value per share to reflect the payment of the special cash distribution to stockholders of record as of March 30, 2015.  See Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” herein for a full description of the price at which we redeem shares under our share redemption program.


******

24


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 condensed consolidated financial statements and the notes thereto. 

Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements include discussion and analysis of the financial condition of Behringer Harvard Opportunity REIT II, Inc. and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”), including our ability to rent space on favorable terms, to address our debt maturities and to fund our liquidity requirements, to sell our assets when we believe advantageous to achieve our investment objectives, our anticipated capital expenditures, the amount and timing of anticipated future special cash distributions to our stockholders, the estimated per share value of our common stock, and other matters.  Words such as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should” and variations of these words and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are not historical facts but reflect the intent, belief or current expectations of our management based on their knowledge and understanding of the business and industry, the economy and other future conditions.  These statements are not guarantees of future performance, and we caution stockholders not to place undue reliance on forward-looking statements.  Actual results may differ materially from those expressed or forecasted in the forward-looking statements due to a variety of risks, uncertainties and other factors, including but not limited to the factors listed and described herein and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2015 and the factors described below: 
market and economic challenges experienced by the U.S. and global economies or real estate industry as a whole and the local economic conditions in the markets in which our investments are located;
the availability of cash flow from operating activities for special distributions, if any;
conflicts of interest arising out of our relationships with our advisor and its affiliates;
our ability to retain our executive officers and other key personnel of our advisor, our property manager and their affiliates;
our level of debt and the terms and limitations imposed on us by our debt agreements;
the availability of credit generally, and any failure to obtain debt financing at favorable terms or a failure to satisfy the conditions and requirements of that debt;
our ability to make accretive investments in a diversified portfolio of assets; 
future changes in market factors that could affect the ultimate performance of our development or redevelopment projects, including but not limited to construction costs, plan or design changes, schedule delays, availability of construction financing, performance of developers, contractors and consultants and growth in rental rates and operating costs;
our ability to secure leases at favorable rental rates;
our ability to sell our assets at a price and on a timeline consistent with our investment objectives;
unfavorable changes in laws or regulations impacting our business, our assets or our key relationships; and
factors that could affect our ability to qualify as a real estate investment trust. 
Forward-looking statements in this Quarterly Report on Form 10-Q reflect our management’s view only as of the date of this Report, and may ultimately prove to be incorrect.  We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results, except as required by applicable law.  We intend for these forward-looking statements to be covered by the applicable safe harbor provisions created by Section 27A of the Securities Act and Section 21E of the Exchange Act.

25



Cautionary Note
The representations, warranties, and covenants made by us in any agreement filed as an exhibit to this Quarterly Report on Form 10-Q are made solely for the benefit of the parties to the agreement, including, in some cases, for the purpose of allocating risk among the parties to the agreement, and should not be deemed to be representations, warranties, or covenants to or with any other parties.  Moreover, these representations, warranties or covenants should not be relied upon as accurately describing or reflecting the current state of our affairs. 

Executive Overview
We were formed primarily to acquire and operate commercial real estate and real estate-related assets on an opportunistic and value-add basis.  In particular, we have focused generally on acquiring commercial properties with significant possibilities for capital appreciation, such as those requiring development, redevelopment or repositioning, those located in markets and submarkets with high growth potential, and those available from sellers who were distressed or faced time-sensitive deadlines.  In addition, our opportunistic and value-add investment strategy has included investments in real estate-related assets that present opportunities for higher current income. We have acquired a wide variety of commercial properties, including office, industrial, retail, hospitality, and multifamily. We have purchased existing, income-producing properties and newly constructed properties. We have also invested in a mortgage loan and a mezzanine loan. We have made our investments in or in respect of real estate assets located in the United States and other countries based on our view of existing market conditions. While we acquired one property in 2014, we are not actively seeking to purchase additional assets at this time.

Liquidity and Capital Resources
We had unrestricted cash and cash equivalents of $56.4 million at March 31, 2015. Our principal demands for funds going forward will be for the payment of (a) operating expenses, (b) interest and principal on our outstanding indebtedness, and (c) special distributions. Generally, we expect to meet cash needs for the payment of operating expenses and interest on our outstanding indebtedness from our cash flow from operations and to fund special distributions from our proceeds from asset sales. To the extent that our cash flow from operations is not sufficient to cover our operating expenses, interest on our outstanding indebtedness, redemptions or special distributions, we expect to use borrowings and asset sales to fund such needs.
We are not actively seeking to purchase additional properties, but may invest capital in our current assets in order to position them for sale in the normal course of business. We intend to hold the various real properties in which we have invested until such time as our Advisor determines that a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. We sold 1875 Lawrence on May 30, 2014, Babcock on January 8, 2015, and AJS on February 21, 2015. We anticipate we will complete the disposition phase in 2017 or 2018. On March 31, 2015, we paid a special cash distribution, which represents a portion of proceeds from asset sales, of $25.7 million, or $1.00 per share of common stock.
We continually evaluate our liquidity and ability to fund future operations and debt obligations.  As of March 31, 2015, we had $46.1 million of notes payable maturing in the next twelve months. Of that amount, a $38 million loan associated with the Courtyard Kauai Coconut Beach Hotel contains a renewal option to extend the term to May 2017. The remaining $8.1 million was a loan associated with our Holstenplatz investment and we paid this debt off on April 30, 2015. The next debt maturity for the Company is January 2018. In addition to our debt obligations, we consider other factors in evaluating our liquidity. For example, to the extent our portfolio is concentrated in certain geographic regions and types of assets, downturns relating generally to such regions and assets may result in tenants defaulting on their lease obligations at a number of our properties within a short time period.  Such defaults could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations. For the three months ended March 31, 2015, 37% and 19% of our total revenues were derived from our properties located in Hawaii and Florida, respectively. Additionally, 41% and 37% of our total revenues for the three months ended March 31, 2015 were from our multifamily and hotel properties, respectively.
We may, but are not required to, establish capital reserves from cash flow generated by operating properties and other investments, or net sales proceeds from the sale of our properties and other investments.  Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may establish its own criteria for escrow of capital reserves.
We have borrowed money to acquire properties and make other investments.  Under our charter, the maximum amount of our indebtedness is limited to 300% of our “net assets” (as defined by our charter) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors.  In addition to our charter limitation, our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 75% of the aggregate value of our

26


assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets.
Commercial real estate debt markets may experience volatility and uncertainty as a result of certain related factors, including the tightening of underwriting standards by lenders and credit rating agencies, macro-economic issues related to fiscal, tax and regulatory policies, and global financial issues.  Should the overall cost of borrowings increase, either by increases in the index rates or by increases in lender spreads, we will need to factor such increases into the economics of our developments and investments.  This may result in our investment operations generating lower overall economic returns and a reduced level of cash flow, which could potentially impact our ability to make special distributions to our stockholders.  In addition, disruptions in the debt markets may reduce the amount of capital that is available to finance real estate, which in turn could: (i) lead to a decline in real estate values generally; (ii) slow real estate transaction activity; (iii) reduce the loan to value ratio upon which lenders are willing to extend debt; and (iv) result in difficulty in refinancing debt as it becomes due, all of which may reasonably be expected to have a material adverse impact on the value of real estate investments and the revenues, income or cash flow from the operations of real properties and mortgage loans.
Debt Financings
We have, from time to time, obtained mortgage, bridge or mezzanine loans for acquisitions and investments, as well as property development. In the future, we may obtain financing for property development or at such time as determined to be necessary for our existing real estate assets, depending on multiple factors.
At March 31, 2015, our notes payable balance was $214.8 million and had a weighted average interest rate of 3.3% compared to a balance of $216.3 million, excluding $9.1 million of contractual obligations on real estate held for sale, and a weighted average interest rate of 3.3% at December 31, 2014. We have guaranteed payment of certain recourse liabilities with respect to certain customary nonrecourse carveouts as set forth in the guaranties in favor of the unaffiliated lenders with respect to the Courtyard Kauai Coconut Beach Hotel, Wimberly, 22 Exchange, and Parkside notes payable.
On January 8, 2015, we sold our Babcock property to an unaffiliated third party and used a portion of the proceeds from the sale to pay off in full the existing indebtedness of approximately $2.1 million. On February 21, 2015, we sold AJS, located in Berlin, Germany, to an unaffiliated third party and used a portion of the proceeds from the sale to payoff in full the existing indebtedness of approximately €5.7 million or approximately $6.5 million, based on the exchange rate in effect on February 21, 2015. The debt secured by our AJS property was scheduled to mature on December 30, 2015.
Our loan agreements stipulate that we comply with certain reporting and financial covenants.  These covenants include, among other things, maintaining minimum debt service coverage ratios, loan to value ratios, and liquidity.  As of March 31, 2015, we believe we were in compliance with the debt covenants under our loan agreements.
One of our principal short-term and long-term liquidity requirements includes the repayment of maturing debt.  The following table provides information with respect to the contractual maturities and scheduled principal repayments of our indebtedness as of March 31, 2015. Interest payments on variable rate debt are based on rates in effect as of March 31, 2015. The table does not represent any extension options (in thousands):
 
 
Payments Due by Period(1)
 
 
April 1, 2015 -December 31, 2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Principal payments - fixed rate debt(2)
 
$
9,310

 
$
1,911

 
$
2,134

 
$
46,863

 
$
24,309

 
$
31,585

 
$
116,112

Principal payments - variable rate debt
 
38,402

 
536

 
536

 
536

 
34,036

 
24,139

 
98,185

Interest payments - fixed rate debt
 
3,904

 
5,053

 
4,941

 
3,308

 
1,579

 
2,449

 
21,234

Interest payments - variable rate debt
 
1,229

 
1,221

 
1,204

 
1,192

 
1,132

 
1,883

 
7,861

Total(3)
 
$
52,845

 
$
8,721

 
$
8,815

 
$
51,899

 
$
61,056

 
$
60,056

 
$
243,392

_________________________________
(1) 
Does not include approximately $0.5 million of unamortized premium related to debt we assumed on our acquisition of Parkside.
(2)
Includes Holstenplatz debt of $8.1 million which we paid off on April 30, 2015.
(3)
Does not include assumptions for any available extension options.

27



Results of Operations
As of March 31, 2015, we had 11 real estate investments, ten of which were consolidated (two wholly owned and eight properties consolidated through investments in joint ventures). As of March 31, 2014, we had 13 real estate investments, 12 of which were consolidated (two wholly owned and ten properties consolidated through investments in joint ventures). Babcock and AJS were classified as held for sale as of December 31, 2014. We sold Babcock on January 8, 2015 and AJS on February 21, 2015. On May 30, 2014, we sold 1875 Lawrence. The results of operations for Babcock, AJS, and 1875 Lawrence will remain in continuing operations based on the new accounting treatment for discontinued operations which we adopted in April 2014. We made no acquisitions during the quarters ended March 31, 2015 and 2014, and completed one acquisition during the fourth quarter of 2014.
Three months ended March 31, 2015 as compared to the three months ended March 31, 2014.
The following table provides summary information about our results of operations for the three months ended March 31, 2015 and 2014 ($ in thousands):
 
Three Months Ended
March 31,
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
Increase (Decrease)
 
Percentage Change
 
$ Change due to Acquisitions(1)
 
$ Change due to Dispositions(2)
 
$ Change due to Same Store (3)
Rental revenue
$
8,486

 
$
7,881

 
$
605

 
7.7
 %
 
$
1,570

 
$
(857
)
 
$
(108
)
Hotel revenue
4,828

 
4,364

 
464

 
10.6
 %
 

 

 
464

Property operating expenses
2,897

 
2,724

 
173

 
6.4
 %
 
362

 
(382
)
 
193

Hotel operating expenses
3,158

 
3,022

 
136

 
4.5
 %
 

 

 
136

Interest expense, net
1,821

 
2,063

 
(242
)
 
(11.7
)%
 
170

 
(341
)
 
(71
)
Real estate taxes
1,584

 
1,413

 
171

 
12.1
 %
 
374

 
(200
)
 
(3
)
Property management fees
446

 
427

 
19

 
4.4
 %
 
48

 
(37
)
 
8

Asset management fees(4)
725

 
970

 
(245
)
 
(25.3
)%
 
106

 
(135
)
 
(216
)
General and administrative
921

 
859

 
62

 
7.2
 %
 
n/a

 
n/a

 
n/a

Depreciation and amortization
4,453

 
3,662

 
791

 
21.6
 %

1,364

 
(541
)
 
(32
)
Gain on sale of real estate
5,320

 

 
5,320

 
100.0
 %


 
5,320

 

Income tax expense
(2,183
)
 

 
(2,183
)
 
(100.0
)%
 

 
(2,183
)
 

______________________
(1)
Represents the dollar amount increase for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 related to Lakewood Flats which we acquired on October 10, 2014.
(2)
Represents the dollar amount increase (decrease) for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 related to the dispositions of Babcock on January 8, 2015, AJS on February 21, 2015 and 1875 Lawrence on May 30, 2014.
(3)
Represents the dollar amount increase (decrease) for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 with respect to real estate and real estate-related investments owned by us during the entire periods presented (“Same Store”). Same Store for the periods ended March 31, 2015 and 2014 include Holstenplatz, Gardens Medical Pavilion, River Club and the Townhomes at River Club, Lakes of Margate, Arbors Harbor Town, Courtyard Kauai Coconut Beach Hotel, Wimberly at Deerwood, 22 Exchange, and Parkside.
(4)
Total asset management fees above include fees associated with any property owned during a particular period, including those related to our disposed properties.


28


The following table reflects rental revenue and property operating expenses for the three months ended March 31, 2015 and 2014 for (i) our Same Store operating portfolio; (ii) our acquisition of Lakewood Flats in 2014; and (iii) our dispositions of 1875 Lawrence on May 30, 2014, Babcock on January 8, 2015, and AJS on February 21, 2015 (in thousands):
 
 
Three Months Ended March 31,
 
 
Description
 
2015
 
2014
 
Change
Rental revenue
 
 
 
 
 
 
Same Store
 
$
6,747

 
$
6,855

 
$
(108
)
Acquisitions
 
1,570

 

 
1,570

Dispositions
 
169

 
1,026

 
(857
)
Total rental revenue
 
$
8,486

 
$
7,881

 
$
605

 
 
 
 
 
 
 
Property operating expenses
 
 
 
 
 
 
Same Store
 
$
2,448

 
$
2,255

 
$
193

Acquisitions
 
362

 

 
362

Dispositions
 
87

 
469

 
(382
)
Total property operating expenses
 
$
2,897

 
$
2,724

 
$
173


The tables below reflect occupancy and effective monthly rental rates for our Same Store operating properties and occupancy and average daily rate (“ADR”) for Courtyard Kauai Coconut Beach Hotel:
 
 
Occupancy (%)
 
Effective Monthly Rent per Square Foot/Unit/Bed ($)(1)
 
 
 
 
As of March 31,
 
As of March 31,
 
 
Property
 
2015
 
2014
 
2015
 
2014
 
 
Holstenplatz(2)
 
100%

100%

$
1.04


$
1.34

 
per sq ft
Gardens Medical Pavilion
 
60%

80%

2.08


2.28

 
per sq ft
River Club and the Townhomes at River Club
 
98%

79%

360.47


391.74

 
per bed
Lakes of Margate
 
92%

97%

1,158.20


1,113.73

 
per unit
Arbors Harbor Town
 
89%

94%

1,160.75


1,138.04

 
per unit
Wimberly at Deerwood
 
92%

86%

1,028.50


940.13

 
per unit
22 Exchange
 
83%
 
92%
 
582.93

 
598.50

 
per bed
Parkside
 
80%
 
93%
 
1,067.39

 
996.03

 
per unit
______________________________
(1)
Effective monthly rent is calculated as in-place contracted monthly rental revenue, including any premiums due for short-term or month-to-month leases, less any concessions or discounts.
(2)
The exchange rates in effect on March 31, 2015 and 2014 were $1.09 and $1.38, respectively.
 
 
Occupancy (%)(1)
 
ADR ($)
 
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
Property
 
2015
 
2014
 
2015
 
2014
Courtyard Kauai Coconut Beach Hotel
 
90
%
 
89
%
 
$
145.18

 
$
136.42

_______________________________________
(1)
Represents average occupancy for the three months ended March 31. The Courtyard Kauai Coconut Beach Hotel has 311 rooms and approximately 6,200 square feet of meeting space. Occupancy is for the entire three-month period and is based on standard industry metrics, including rooms available for rent.

29


Results of Operations
Our results of operations for the respective periods presented primarily reflect decreases in most categories due to the disposition of 1875 Lawrence in May 2014 and the dispositions of Babcock and AJS in January and February 2015, respectively, partially offset by the acquisition of Lakewood Flats in October 2014. Management expects decreases in most categories in the future as we dispose of additional real estate and real estate-related assets. Although we acquired one property in 2014, we are not actively seeking to purchase additional assets at this time, but may invest capital in our current assets in order to position them for sale in the normal course of business.
Revenues.  Revenues for the three months ended March 31, 2015, including Courtyard Kauai Coconut Beach Hotel, were $13.3 million, an increase of $1.1 million from the three months ended March 31, 2014.  Same Store rental revenue for the three months ended March 31, 2015 and 2014 was approximately $6.7 million and $6.8 million, respectively, while rental revenue from our acquisition in 2014 was $1.6 million for the three months ended March 31, 2015. Rental revenue from the dispositions of Babcock and AJS in 2015 and 1875 Lawrence in 2014 was $0.2 million and $1 million for the three months ended March 31, 2015 and 2014, respectively.
The change in revenue is primarily due to:
an increase in rental revenue of $1.6 million as a result of our 2014 acquisition of Lakewood Flats. This increase was partially offset by a decrease of approximately $0.9 million related to our dispositions in 2014 and 2015 and a decrease of $0.1 million for investments we owned during the entire periods presented.
an increase in hotel revenue of $0.5 million, or 11%, at the Courtyard Kauai Coconut Beach Hotel due to a 1% increase in occupancy rate and a 6% increase in ADR, resulting in a 7% increase in revenue per available room period-over-period. These improvements are primarily the result of improved operating performance.
Property Operating Expenses.    Property operating expenses for the three months ended March 31, 2015 and 2014 were $2.9 million and $2.7 million, respectively. The increase of $0.2 million was primarily due to increases of $0.4 million and $0.2 million for the acquisition of Lakewood Flats and our Same Store operations, respectively. These increases were partially offset by a decrease of $0.4 million related to our 2014 and 2015 dispositions.
Hotel Operating Expenses.  Hotel operating expenses for the three months ended March 31, 2015 and 2014 were approximately $3.2 million and $3 million, respectively. The increase in hotel operating expenses was due to additional costs as a result of increased occupancy at the Courtyard Kauai Coconut Beach Hotel.
Interest Expense, net.  Interest expense for the three months ended March 31, 2015 and 2014 was $1.8 million and $2.1 million, respectively.  The $0.3 million decrease was primarily due to a decrease of $0.3 million related to our dispositions in 2014 and 2015, and a decrease of less than $0.1 million related to our Same Store operations. These decreases were partially offset by an increase of $0.2 million related to our acquisition of Lakewood Flats in the fourth quarter of 2014. For the three months ended March 31, 2015 and 2014, we capitalized interest of $0.1 million in connection with our equity method investment in Prospect Park.
Real Estate Taxes.  Real estate taxes were $1.6 million and $1.4 million for the three months ended March 31, 2015 and 2014, respectively. Our 2014 acquisition accounted for an increase of $0.4 million in real estate taxes while the three dispositions in 2014 and 2015 accounted for a $0.2 million decrease.
Property Management Fees.   Property management fees, which are based on revenues, were $0.4 million for the three months ended March 31, 2015 and 2014, and were composed of property management fees paid to unaffiliated third parties and our Property Manager or its affiliates.
Asset Management Fees.   Asset management fees for the three months ended March 31, 2015 and 2014 were $0.7 million and $1 million, respectively, and were comprised of asset management fees paid to our Advisor and third parties with respect to our investments. The $0.3 million decrease in asset management fees for the quarter ended March 31, 2015 was primarily due to a decrease of $0.1 million related to three dispositions and a decrease of $0.2 million in Same Store. These decreases were partially offset by a $0.1 million increase related to our 2014 acquisition. Asset management fees for the three months ended March 31, 2015 and 2014 include fees related to our disposed properties. We expensed less than $0.1 million and $0.2 million in asset management fees related to disposed properties during the three months ended March 31, 2015 and 2014, respectively.
General and Administrative Expenses.   General and administrative expenses for the three months ended March 31, 2015 and 2014 were $0.9 million, and were composed of audit fees, legal fees, board of directors’ fees, and other administrative expenses. 

30


Depreciation and Amortization.   Depreciation and amortization for the three months ended March 31, 2015 and 2014 was approximately $4.5 million and $3.7 million, respectively.  The increase of $0.8 million during the first quarter of 2015 was primarily due to a $1.4 million increase for the acquisition of Lakewood Flats in October 2014. This increase was partially offset by a period-over-period decrease of $0.5 million due to the dispositions of 1875 Lawrence in May 2014 and Babcock and AJS in January and February 2015, respectively.
Gain on Sale of Real Estate.    We did not sell any real estate during the three months ended March 31, 2014. During the three months ended March 31, 2015, we recorded gains on sale of $2 million for Babcock and $3.3 million for AJS which were sold on January 8, 2015 and February 21, 2015, respectively. The gain on sale of AJS, which is located in Berlin, Germany, is net of a CTA of $0.6 million.
Income Tax Expense. We recorded a provision for income tax of approximately $2.2 million for the first quarter of 2015 as a result of foreign income tax related to the sale of AJS. The foreign income tax was calculated on gains recognized at the exchange rate in effect on the sale date of February 21, 2015 and calculated using current tax rates. We had no income tax expense in the first quarter of 2014.

Cash Flow Analysis
Quarter ended March 31, 2015 as compared to quarter ended March 31, 2014
During the three months ended March 31, 2015, net cash provided by operating activities was $2.5 million compared to $0.7 million for the three months ended March 31, 2014. The primary reasons for the increase in cash flow from operating activities was the increase in total revenues and changes in working capital.
During the three months ended March 31, 2015, net cash provided by investing activities was $17.9 million compared to net cash used of $1.5 million for the three months ended March 31, 2014. During the first quarter of 2015, we sold Babcock and AJS and received net sales proceeds of $18.2 million. We had no sales in the first quarter of 2014.
During the three months ended March 31, 2015, net cash used in financing activities was $36.3 million compared to net cash used of $0.9 million for the same period of 2014. On March 30, 2015, we paid a special cash distribution to stockholders totaling $25.7 million. In addition, we paid off in full the indebtedness associated with the Babcock and AJS investments, totaling approximately $8.7 million, with proceeds from the sales of the two investments during the first quarter of 2015.

Funds from Operations
Funds from operations (“FFO”) is a non-GAAP financial 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 (“NAREIT”) in the April 2002 “White Paper of Funds From Operations” which is net income (loss), computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property and impairments of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership), plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, subsidiaries, and noncontrolling interests as one measure to evaluate our operating performance. In October 2011, NAREIT clarified the FFO definition to exclude impairment charges of depreciable real estate (including impairments of investments in unconsolidated joint ventures and partnerships which resulted from measurable decreases in the fair value of the depreciable real estate held by the joint venture or partnership).
Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate 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, provides a more complete understanding of our performance.
We believe that FFO is helpful to investors and our management as a measure of operating performance because it excludes depreciation and amortization, gains and losses from property dispositions, impairments of depreciable assets, 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 is not immediately apparent from net income.

31


FFO should not be considered as an alternative to net income (loss), as an indication of our liquidity, nor as an indication of funds available to fund our cash needs, including our ability to make special distributions and should be reviewed in connection with other GAAP measurements. Additionally, the exclusion of impairments limits the usefulness of FFO as a historical operating performance measure since an impairment charge indicates that operating performance has been permanently affected. FFO is not a useful measure in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO. Our FFO as presented may not be comparable to amounts calculated by other REITs that do not define these terms in accordance with the current NAREIT definition or that interpret the definition differently.
Our calculation of FFO for the three months ended March 31, 2015 and 2014 is presented below ($ in thousands except per share amounts):  
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
Amount
 
Per Share
 
Amount
 
Per Share
Net loss attributable to the Company
 
$
(173
)
 
$
(0.01
)
 
$
(2,884
)
 
$
(0.11
)
Adjustments for:
 
 
 
 
 
 
 
 
Real estate depreciation and amortization(1)
 
4,029

 
0.16

 
3,567

 
0.14

Gain on sale of real estate(2)
 
(4,700
)
 
(0.18
)
 

 

Income tax expense associated with real estate sale(3)
 
2,135

 
0.08

 

 

Funds from operations (FFO)
 
$
1,291

 
$
0.05

 
$
683

 
$
0.03

 
 
 
 
 
 
 
 
 
GAAP weighted average shares:
 
 

 
 
 
 

 
 
Basic and diluted
 
 
 
25,776

 
 
 
26,011

_________________________________
(1)
Includes our consolidated amount, as well as our pro rata share of those unconsolidated investments which we account for under the equity method of accounting, and the noncontrolling interest adjustment for the third-party partners’ share.
(2)
For the three months ended March 31, 2015, includes our proportionate share of the gain on sale of real estate related to the Babcock and AJS investments. The gain on sale of AJS is net of a cumulative foreign currency translation loss of approximately $0.6 million due to the substantial liquidation of AJS.
(3)
The Company recorded a provision for income tax of approximately $2.2 million for the first quarter of 2015 as a result of foreign income tax related to the sale of AJS.
Provided below is additional information related to selected items included in net loss above, which may be helpful in assessing our operating results.
Straight-line rental revenue was income of less than $0.1 million and a charge of less than $0.1 million for the three months ended March 31, 2015 and 2014, respectively. The noncontrolling interest portion of straight-line rental revenue for the three months ended March 31, 2015 and 2014 was income of less than $0.1 million and a charge of less than $0.1 million, respectively.
Net below-market lease amortization of less than $0.1 million was recognized as an increase to rental revenue for the three months ended March 31, 2015. Net above-market lease amortization of less than $0.1 million was recognized as a decrease to rental revenue for the three months ended March 31, 2014. The noncontrolling interest portion of the net below-market lease amortization for the three months ended March 31, 2015 and the net above-market lease amortization for the three months ended March 31, 2014 was less than $0.1 million.
Amortization of deferred financing costs of $0.2 million was recognized as interest expense for our notes payable for the three months ended March 31, 2015 and 2014.
In addition, cash flows generated from FFO may be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as capital expenditures and payments of principal on debt, each of which may impact the amount of cash available for special distributions to our stockholders. 

32



Distributions
Distributions are authorized at the discretion of our board of directors based on its analysis of our performance over the previous periods and expectations of performance for future periods. These analyses may include actual and anticipated operating cash flow, changes in market capitalization rates for investments suitable for our portfolio, capital expenditure needs, general financial and market conditions, proceeds from asset sales and other factors that our board deems relevant. The board’s decision will be substantially influenced by its obligation to ensure that we maintain our federal tax status as a REIT. We cannot provide assurance that we will pay distributions at any particular level, or at all. We expect that any future distributions authorized by our board of directors will be periodic, special distributions as opposed to regular monthly or quarterly distributions.
On March 18, 2015, our board of directors authorized a special cash distribution of $25.7 million, or $1.00 per share of common stock, payable to stockholders of record as of March 30, 2015. The special cash distribution, which represents a portion of proceeds from asset sales, was paid on March 31, 2015. We did not pay any distributions to stockholders during the three months ended March 31, 2014. 
We have paid and may in the future pay some or all of our distributions from sources other than operating cash flow. We have, for example, generated cash to pay special distributions from sales activities and financing activities, components of which included proceeds from our offerings and borrowings (including borrowings secured by our assets) in anticipation of future operating cash flow. We have also utilized cash from refinancing and dispositions, the components of which may represent a return of capital and/or the gains on sale. In addition, from time to time, our Advisor may agree to waive or defer all or a portion of the acquisition, asset management or other fees or incentives due to it, pay general administrative expenses or otherwise supplement investor returns which may increase the amount of cash that we have available to pay distributions to our stockholders.
Future special distributions authorized and paid at the discretion of the board of directors, are expected to be funded with proceeds from asset sales; however, future special distributions may exceed cash flow from operating activities or funds from operations.

Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 

Critical Accounting Policies and Estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP.  The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate these estimates, including investment impairment.  These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates.
Our critical accounting policies and estimates have not changed significantly from the discussion found in the Management Discussion and Analysis and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2015.

Item 3.     Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Risk
As of March 31, 2015, we maintained approximately $7.6 million in Euro-denominated accounts at European financial institutions.  After the sale of AJS in February 2015, we have one investment remaining in Europe.  As the cash is held in the same currency as the real estate assets and related loans, we believe that we are not materially exposed to any significant foreign currency fluctuations related to these accounts as it relates to ongoing property operations.  Material movements in the exchange rate of Euros could materially impact distributions from our foreign investments.

33


Interest Rate Risk
We may be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard to interest rate risks, are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrow primarily at fixed rates or variable rates with the lowest margins available and in some cases, with the ability to convert variable rates to fixed rates.  With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financial instruments such as options, forwards, interest rate swaps, caps, or floors to mitigate our interest rate risk on a related financial instrument or to effectively lock the interest rate portion of our variable rate debt.  Of our $214.8 million in notes payable at March 31, 2015, $98.2 million represented debt subject to variable interest rates.  If our variable interest rates increased 100 basis points, we estimate that total annual interest cost, including interest expensed and interest capitalized, would increase by $1 million.
Interest rate caps classified as assets were reported at their combined fair value of less than $0.1 million within prepaid expenses and other assets at March 31, 2015.  A 100 basis point decrease in interest rates would result in a less than $0.1 million net decrease in the fair value of our interest rate caps.  A 100 basis point increase in interest rates would result in a $0.1 million net increase in the fair value of our interest rate caps. 

Item 4.   Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) and Rule 15d-15(b) under the Exchange Act, our management, including our principal executive officer and principal financial officer, evaluated, as of March 31, 2015, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Rule 15d-15(e) using the criteria established in Internal Control-New Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective, as of March 31, 2015, to provide reasonable assurance that information required to be disclosed by us in this report is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
We believe, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There has been no change in internal control over financial reporting that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

34


PART II 

OTHER INFORMATION 

Item 1.      Legal Proceedings.
We are not a party to, and none of our properties are subject to, any material pending legal proceedings.

Item 1A.   Risk Factors.
There have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2014. 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities
During the period covered by this quarterly report, we did not sell any equity securities that were not registered under the Securities Act of 1933.
Share Redemption Program
Our board of directors has adopted a share redemption program that permits stockholders to sell their shares back to us, subject to the significant conditions and limitations of the program.  Our board of directors can amend the provisions of our share redemption program at any time without the approval of our stockholders.
The terms on which we redeem shares may differ between redemptions upon a stockholder’s death, “qualifying disability” (as defined in the share redemption program) or confinement to a long-term care facility (collectively, “Exceptional Redemptions”) and all other redemptions (“Ordinary Redemptions”).  From April 1, 2012 through May 15, 2014, our board of directors suspended accepting Ordinary Redemptions. On May 15, 2014, our board of directors adopted the Third Amended and Restated Share Redemption Program and reopened the share redemption program for Ordinary Redemptions, to be effective on that date. In addition, for periods beginning on or after May 15, 2014, the cash available for redemptions was increased from $1 million to no more than $10 million in any twelve-month period. The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.
The per share redemption price for Ordinary Redemptions and Exceptional Redemptions is equal to the lesser of 80% and 90%, respectively, of (i) the current estimated per share value and (ii) the average price per share the investor paid for all of his shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to our common stock) less the Special Distributions (as defined in the share redemption program). 
On November 21, 2014, our board of directors approved an estimated value per share of $9.72.  As of March 30, 2015, the estimated value per share of our common stock was reduced by $1.00 per share in accordance with our valuation policy to take into account the special cash distribution authorized by our board of directors on March 18, 2015. For a full description of the methodologies used to estimate the value of our common stock as of October 31, 2014, see Part II, Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Market Information” included in our Annual Report on Form 10-K for the year ended December 31, 2014.
Notwithstanding the redemption prices set forth above, our board of directors may determine, whether pursuant to formulas or processes approved or set by our board of directors, the redemption price of the shares, which may differ between Ordinary Redemptions and Exceptional Redemptions; provided, however, that we must provide at least 30 days’ notice to stockholders before applying this new price determined by our board of directors.
Any shares approved for redemption will be redeemed on a periodic basis as determined from time to time by our board of directors, and no less frequently than annually.  We will not redeem, during any twelve-month period, more than 5% of the weighted average number of shares outstanding during the twelve-month period immediately prior to the date of redemption.  In addition, the cash available for redemptions is limited to no more than $10 million in any twelve-month period.  The redemption limitations apply to all redemptions, whether Ordinary or Exceptional Redemptions.
Any Ordinary Redemption requests submitted while Ordinary Redemptions were suspended were returned to investors and must be resubmitted. We gave all stockholders notice that we were resuming Ordinary Redemptions, so that all stockholders would have an equal opportunity to submit shares for redemption. Any redemption requests are honored pro rata among all requests received based on funds available and are not honored on a first come, first served basis. During the three months ended March 31, 2015, our board of directors redeemed all 33 Ordinary Redemption requests received that complied

35


with the applicable requirements and guidelines of the share redemption program for an aggregate of 68,214 shares redeemed for $0.5 million (approximately $7.17 per share).  All redemptions were funded with cash on hand.
During the three months ended March 31, 2015, our board of directors redeemed the one Exceptional Redemption request received that complied with the applicable requirements and guidelines of the share redemption program for an aggregate of 1,151 shares redeemed for less than $0.1 million (approximately $8.06 per share).  All redemptions were funded with cash on hand.
During the first quarter ended March 31, 2015, we redeemed shares as follows (including both Ordinary Redemptions and Exceptional Redemptions): 
2015
 
Total Number of
Shares Redeemed
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
 
Maximum
Number of Shares
That May Be
Purchased Under
the Plans or
Programs
January
 

 
$

 

 
 
February
 
69,365

 
7.19

 
69,365

 
(1)
March
 

 

 

 
 
 
 
69,365

 
$
7.19

 
69,365

 
 
  _______________________________
(1) 
A description of the maximum number of shares that may be purchased under our redemption program is included in the narrative preceding this table.

Item 3.                     Defaults Upon Senior Securities.
None. 

Item 4.          &#