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EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq22015exhibit322.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq22015exhibit321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq22015exhibit312.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Pacific Oak Strategic Opportunity REIT, Inc.kbssorq22015exhibit311.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________
 
FORM 10-Q
______________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 000-54382
______________________________________________________
 
KBS STRATEGIC OPPORTUNITY REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
______________________________________________________
Maryland
 
26-3842535
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
800 Newport Center Drive, Suite 700
Newport Beach, California
 
92660
(Address of Principal Executive Offices)
 
(Zip Code)
(949) 417-6500
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  x No  ¨
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. (Check one):
Large Accelerated Filer
 
¨
 
Accelerated Filer
 
¨
Non-Accelerated Filer
 
x  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨  No  x
As of August 12, 2015, there were 59,905,120 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.



KBS STRATEGIC OPPORTUNITY REIT, INC.
FORM 10-Q
June 30, 2015
INDEX 
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.

1

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements


KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
June 30,
2015
 
December 31, 2014
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate held for investment, net
 
$
840,423

 
$
847,734

Real estate held for sale, net
 

 
7,354

Real estate loan receivable, net
 
27,850

 
27,422

Total real estate and real estate-related investments, net
 
868,273

 
882,510

Cash and cash equivalents
 
30,087

 
19,093

Investments in unconsolidated joint ventures
 
73,389

 
72,045

Rents and other receivables, net
 
22,364

 
18,283

Above-market leases, net
 
1,530

 
2,061

Assets related to real estate held for sale
 

 
213

Prepaid expenses and other assets
 
29,244

 
28,309

Total assets
 
$
1,024,887

 
$
1,022,514

Liabilities and equity
 
 
 
 
Notes and bond payable:
 
 
 
 
   Notes and bond payable, net
 
$
539,964

 
$
525,613

   Notes payable related to real estate held for sale
 

 
4,650

Total notes payable and bond payable, net
 
539,964

 
530,263

Accounts payable and accrued liabilities
 
17,106

 
18,609

Due to affiliates
 
33

 

Below-market leases, net
 
3,464

 
4,403

Other liabilities
 
9,445

 
9,192

Total liabilities
 
570,012

 
562,467

Commitments and contingencies (Note 11)
 


 


Redeemable common stock
 
11,562

 
9,911

Equity
 
 
 
 
KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding
 

 

Common stock, $.01 par value; 1,000,000,000 shares authorized, 60,202,179 and 60,044,329 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
 
602

 
600

Additional paid-in capital
 
524,487

 
524,489

Cumulative distributions and net losses
 
(99,097
)
 
(91,691
)
Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
425,992

 
433,398

Noncontrolling interests
 
17,321

 
16,738

Total equity
 
443,313

 
450,136

Total liabilities and equity
 
$
1,024,887

 
$
1,022,514

See accompanying condensed notes to consolidated financial statements.
 

2

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
22,118

 
$
20,892

 
$
43,979

 
$
40,428

Tenant reimbursements
 
4,740

 
3,822

 
9,050

 
7,624

Interest income from real estate loan receivable
 
993

 
717

 
1,968

 
1,429

Other operating income
 
816

 
813

 
1,613

 
1,390

Total revenues
 
28,667

 
26,244

 
56,610

 
50,871

Expenses:
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
8,980

 
8,578

 
17,924

 
17,293

Real estate taxes and insurance
 
3,839

 
3,426

 
7,498

 
6,920

Asset management fees to affiliate
 
2,077

 
1,909

 
4,130

 
3,518

Real estate acquisition fees to affiliate
 

 

 

 
2,274

Real estate acquisition fees and expenses
 

 
4

 

 
2,180

General and administrative expenses
 
869

 
978

 
1,732

 
1,889

Depreciation and amortization
 
11,159

 
11,883

 
22,387

 
23,614

Interest expense
 
3,857

 
4,595

 
7,769

 
8,028

Total expenses
 
30,781

 
31,373

 
61,440

 
65,716

Other income (loss):
 
 
 
 
 
 
 
 
Other interest income
 
6

 
2

 
14

 
5

Other income
 
4,889

 

 
4,889

 

Equity in loss of unconsolidated joint venture
 
(118
)
 
(333
)
 
(336
)
 
(501
)
(Loss) gain on sale of real estate, net
 
(24
)
 

 
8,287

 

Total other income (loss)
 
4,753

 
(331
)
 
12,854

 
(496
)
Income (loss) from continuing operations
 
2,639

 
(5,460
)
 
8,024

 
(15,341
)
Loss from discontinued operations
 

 
(20
)
 

 
(33
)
Net income (loss)
 
2,639

 
(5,480
)
 
8,024

 
(15,374
)
Net (income) loss attributable to noncontrolling interests
 
(1,113
)
 
149

 
(4,263
)
 
426

Net income (loss) attributable to common stockholders
 
$
1,526

 
$
(5,331
)
 
$
3,761

 
$
(14,948
)
Basic and diluted income (loss) per common share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.03

 
$
(0.09
)
 
$
0.06

 
$
(0.25
)
Discontinued operations
 

 

 

 

Net income (loss) per common share
 
$
0.03

 
$
(0.09
)
 
$
0.06

 
$
(0.25
)
Weighted-average number of common shares outstanding, basic and diluted
 
60,193,459

 
59,642,831

 
60,115,426

 
59,618,518

See accompanying condensed notes to consolidated financial statements.

3

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Net income (loss)
 
$
2,639

 
$
(5,480
)
 
$
8,024

 
$
(15,374
)
Other comprehensive income:
 
 
 
 
 

 

Unrealized gain on real estate securities
 

 

 

 
9

Total other comprehensive income
 

 

 

 
9

Total comprehensive income (loss)
 
2,639

 
(5,480
)
 
8,024

 
(15,365
)
Total comprehensive (income) loss attributable to noncontrolling interests
 
(1,113
)
 
149

 
(4,263
)
 
426

Total comprehensive income (loss) attributable to common stockholders
 
$
1,526

 
$
(5,331
)
 
$
3,761

 
$
(14,939
)
See accompanying condensed notes to consolidated financial statements.



4

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2014 and the Six Months Ended June 30, 2015 (unaudited)
(dollars in thousands)
 
 
 
 
 
Additional Paid-in Capital
 
Cumulative Distributions and
Net Losses
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Common Stock
 
 
 
 
Shares
 
Amounts
 
 
 
Balance, December 31, 2013
59,619,000

 
$
596

 
$
512,036

 
$
(52,801
)
 
$
(9
)
 
$
459,822

 
$
14,864

 
$
474,686

Net loss

 

 

 
(23,194
)
 

 
(23,194
)
 
(554
)
 
(23,748
)
Other comprehensive income

 

 

 

 
9

 
9

 

 
9

Issuance of common stock
901,146

 
9

 
9,902

 

 

 
9,911

 

 
9,911

Transfers from redeemable common stock

 

 
7,662

 

 

 
7,662

 

 
7,662

Redemptions of common stock
(475,817
)
 
(5
)
 
(5,099
)
 

 

 
(5,104
)
 

 
(5,104
)
Distributions declared

 

 

 
(15,696
)
 

 
(15,696
)
 

 
(15,696
)
Other offering costs

 

 
(12
)
 

 

 
(12
)
 

 
(12
)
Noncontrolling interests contributions

 

 

 

 

 

 
2,585

 
2,585

Distributions to noncontrolling interest

 

 

 

 

 

 
(157
)
 
(157
)
Balance, December 31, 2014
60,044,329

 
$
600

 
$
524,489

 
$
(91,691
)
 
$

 
$
433,398

 
$
16,738

 
$
450,136

Net income

 

 

 
3,761

 

 
3,761

 
4,263

 
8,024

Issuance of common stock
596,331

 
6

 
6,929

 

 

 
6,935

 

 
6,935

Transfers to redeemable common stock

 

 
(1,651
)
 

 

 
(1,651
)
 

 
(1,651
)
Redemptions of common stock
(438,481
)
 
(4
)
 
(5,280
)
 

 

 
(5,284
)
 

 
(5,284
)
Distributions declared

 

 

 
(11,167
)
 

 
(11,167
)
 

 
(11,167
)
Noncontrolling interests contributions

 

 

 

 

 

 
360

 
360

Distributions to noncontrolling interests

 

 

 

 

 

 
(4,040
)
 
(4,040
)
Balance, June 30, 2015
60,202,179

 
$
602

 
$
524,487

 
$
(99,097
)
 
$

 
$
425,992

 
$
17,321

 
$
443,313

See accompanying condensed notes to consolidated financial statements.


5

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2015
 
2014
Cash Flows from Operating Activities:
 
 
 
 
Net income (loss)
 
$
8,024

 
$
(15,374
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Loss due to property damages
 
2,660

 
730

Equity in loss of unconsolidated joint venture
 
336

 
501

Depreciation and amortization
 
22,387

 
23,614

Non-cash interest income on real estate-related investments
 
(428
)
 
(203
)
Gain on sale of real estate, net
 
(8,287
)
 

Other income
 
(4,889
)
 

Deferred rent
 
(2,734
)
 
(4,799
)
Bad debt expense
 
107

 
108

Amortization of above- and below-market leases, net
 
(408
)
 
(673
)
Amortization of deferred financing costs
 
1,532

 
1,575

Amortization of discount and (premium) on bond and notes payable, net
 
11

 
(9
)
Changes in assets and liabilities:
 
 
 
 
Rents and other receivables
 
(976
)
 
(1,718
)
Prepaid expenses and other assets
 
(3,769
)
 
(5,296
)
Accounts payable and accrued liabilities
 
(1,697
)
 
(1,928
)
Due to affiliates
 
33

 

Other liabilities
 
253

 
1,982

Net cash provided by (used in) operating activities
 
12,155

 
(1,490
)
Cash Flows from Investing Activities:
 
 
 
 
Acquisitions of real estate
 

 
(182,736
)
Improvements to real estate
 
(17,641
)
 
(15,893
)
Proceeds from sales of real estate, net
 
15,738

 

Proceeds from condemnation agreements
 
5,719

 

Insurance proceeds
 
258

 

Principal repayments on real estate securities
 

 
333

Investment in unconsolidated joint venture
 
(1,680
)
 
(58,382
)
Extension fee on real estate loans receivable
 

 
105

Net cash provided by (used in) investing activities
 
2,394

 
(256,573
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes payable
 
39,706

 
261,146

Principal payments on notes payable
 
(30,016
)
 
(33,067
)
Payments of deferred financing costs
 
(49
)
 
(3,623
)
Payments to redeem common stock
 
(5,284
)
 
(2,511
)
Payments of other offering costs
 

 
(2
)
Distributions paid
 
(4,232
)
 
(2,260
)
Noncontrolling interests contributions
 
360

 
1,506

Distributions to noncontrolling interests
 
(4,040
)
 
(157
)
Net cash (used in) provided by financing activities
 
(3,555
)
 
221,032

Net increase (decrease) in cash and cash equivalents
 
10,994

 
(37,031
)
Cash and cash equivalents, beginning of period
 
19,093

 
57,996

Cash and cash equivalents, end of period
 
$
30,087

 
$
20,965

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Interest paid, net of capitalized interest of $992 and $1,009 for the six months ended June 30, 2015 and 2014, respectively
 
$
6,334

 
$
5,989

Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
 
Increase in capital expenses payable
 
$

 
$
207

Mortgage debt assumed in connection with real estate acquisition (at fair value)
 
$

 
$
24,793

Application of escrow deposits to acquisition of real estate
 
$

 
$
13,000

Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan
 
$
6,935

 
$
4,020

Liabilities assumed in connection with real estate acquisition
 
$

 
$
1,727

See accompanying condensed notes to consolidated financial statements.

6

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(unaudited)



1.
ORGANIZATION
KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in, the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.
Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2014 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments. The Advisor owns 20,000 shares of the Company’s common stock.
On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.
The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of June 30, 2015, the Company had sold 4,578,307 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $46.1 million. Also, as of June 30, 2015, the Company had redeemed 1,257,347 shares sold in the Offering for $13.6 million. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.
As of June 30, 2015, the Company owned 11 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the SEC.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

7

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Reclassifications
Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period. During the six months ended June 30, 2015, the Company sold one office property. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented. 
Amended Share Redemption Program
On May 12, 2015, the Company’s board of directors adopted a fifth amended and restated share redemption program (the “Amended Share Redemption Program”).  Pursuant to the Amended Share Redemption Program, all eligible shares will be redeemed at a price equal to the most recent estimated value per share as of the applicable redemption date, regardless of how long such shares have been held or whether shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence.”  There were no other changes to the Amended Share Redemption Program. The Amended Share Redemption Program was effective June 13, 2015.
Amended Dividend Reinvestment Plan
On May 12, 2015, the Company’s board of directors adopted a fifth amended and restated dividend reinvestment plan (the “Amended Dividend Reinvestment Plan”).  Pursuant to the Amended Dividend Reinvestment Plan, shares may be purchased at a price equal to the estimated value per share most recently announced in a public filing.  There were no other changes to the Amended Dividend Reinvestment Plan. The Amended Dividend Reinvestment Plan was effective July 1, 2015.
Segments
The Company has invested in non-performing loans, opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in non-performing loans, opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of non-performing loans, opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views non-performing loans, opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from non-performing loans, opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.
Per Share Data
Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three and six months ended June 30, 2015 and 2014.
Distributions declared per share were $0.093 and $0.186 during the three and six months ended June 30, 2015, respectively and $0.056 and $0.105 during the three and six months ended June 30, 2014, respectively.

8

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

Recently Issued Accounting Standards Updates
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of 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 and services.  ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification.  ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. On July 9, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year. Early adoption is permitted but not before the original effective date. The Company is still evaluating the impact of adopting ASU No. 2014-09 on its financial statements, but does not expect the adoption of ASU No. 2014-09 to have a material impact on its financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of ASU No. 2014-15 to have a significant impact on its financial statements.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU No. 2015-01”). The amendments in ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items.  Although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU No. 2015-01 to have a significant impact on its financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU No. 2015-02”), which amended the existing accounting standards for consolidation under both the variable interest model and the voting model. ASU No. 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU No. 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU No. 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. The Company is still evaluating the impact of adopting ASU No. 2015-02 on its financial statements, but does not expect the adoption of ASU No. 2015-02 to have a material impact on its financial statements.

9

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-03”).  The amendments in ASU No. 2015-03 require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU No. 2015-03 is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs.  ASU No. 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and is to be applied retrospectively.  Early adoption is permitted for financial statements that have not been previously issued.  The adoption of ASU No. 2015-03 would change the presentation of debt issuance costs, as the Company presents debt issuance costs as prepaid expenses and other assets on the accompanying consolidated balance sheets. 
3.
REAL ESTATE HELD FOR INVESTMENT
As of June 30, 2015, the Company owned 11 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 63 acres of undeveloped land, one office portfolio consisting of three office properties and one retail property encompassing, in the aggregate, approximately 4.5 million rentable square feet. As of June 30, 2015, these properties were 82% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 91% occupied. The Company also owned two investments in undeveloped land encompassing an aggregate of 1,670 acres. The following table summarizes the Company’s real estate held for investment as of June 30, 2015 and December 31, 2014, respectively (in thousands):
 
 
June 30, 2015
 
December 31, 2014
Land
 
$
231,963

 
$
230,109

Buildings and improvements
 
639,669

 
630,206

Tenant origination and absorption costs
 
48,267

 
50,807

Total real estate, cost
 
919,899

 
911,122

Accumulated depreciation and amortization
 
(79,476
)
 
(63,388
)
Total real estate, net
 
$
840,423

 
$
847,734


10

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

The following table provides summary information regarding the Company's real estate held for investment as of June 30, 2015 (in thousands):
Property
 
Date
Acquired or Foreclosed on
 
City
 
State
 
Property Type
 
Land
 
Building
and Improvements
 
Tenant Origination and Absorption
 
Total
Real Estate at Cost (1)
 
Accumulated Depreciation and Amortization
 
Total
Real Estate,
Net
 
Ownership %
Academy Point Atrium I
 
11/03/2010
 
Colorado Springs
 
CO
 
Office
 
$
1,056

 
$
1,544

 
$

 
$
2,600

 
$
(48
)
 
$
2,552

 
100.0
%
Northridge Center I & II
 
03/25/2011
 
Atlanta
 
GA
 
Office
 
2,234

 
6,971

 

 
9,205

 
(1,598
)
 
7,607

 
100.0
%
Iron Point Business Park
 
06/21/2011
 
Folsom
 
CA
 
Office
 
2,670

 
19,264

 
52

 
21,986

 
(3,327
)
 
18,659

 
100.0
%
Richardson Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Palisades Central I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
1,037

 
9,715

 
832

 
11,584

 
(1,924
)
 
9,660

 
90.0
%
Palisades Central II
 
11/23/2011
 
Richardson
 
TX
 
Office
 
810

 
17,434

 
1,219

 
19,463

 
(3,973
)
 
15,490

 
90.0
%
Greenway I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
561

 
2,186

 

 
2,747

 
(505
)
 
2,242

 
90.0
%
Greenway III
 
11/23/2011
 
Richardson
 
TX
 
Office
 
702

 
3,984

 
823

 
5,509

 
(1,432
)
 
4,077

 
90.0
%
Undeveloped Land
 
11/23/2011
 
Richardson
 
TX
 
Undeveloped Land
 
8,316

 

 

 
8,316

 

 
8,316

 
90.0
%
Total Richardson Portfolio
 
 
 
 
 
 
 
 
 
11,426

 
33,319

 
2,874

 
47,619

 
(7,834
)
 
39,785

 
 
Park Highlands
 
12/30/2011
 
North Las Vegas
 
NV
 
Undeveloped Land
 
28,805

 

 

 
28,805

 

 
28,805

 
50.1
%
Bellevue Technology Center
 
07/31/2012
 
Bellevue
 
WA
 
Office
 
25,506

 
54,638

 
3,813

 
83,957

 
(6,627
)
 
77,330

 
100.0
%
Powers Ferry Landing East
 
09/24/2012
 
Atlanta
 
GA
 
Office
 
1,643

 
8,051

 
105

 
9,799

 
(1,201
)
 
8,598

 
100.0
%
1800 West Loop
 
12/04/2012
 
Houston
 
TX
 
Office
 
8,360

 
58,720

 
5,521

 
72,601

 
(8,819
)
 
63,782

 
100.0
%
West Loop I & II
 
12/07/2012
 
Houston
 
TX
 
Office
 
7,300

 
29,704

 
2,857

 
39,861

 
(4,823
)
 
35,038

 
100.0
%
Burbank Collection
 
12/12/2012
 
Burbank
 
CA
 
Retail
 
4,175

 
9,297

 
945

 
14,417

 
(1,165
)
 
13,252

 
90.0
%
Austin Suburban Portfolio
 
03/28/2013
 
Austin
 
TX
 
Office
 
8,288

 
67,116

 
4,075

 
79,479

 
(8,843
)
 
70,636

 
100.0
%
Westmoor Center
 
06/12/2013
 
Westminster
 
CO
 
Office
 
10,058

 
66,043

 
9,166

 
85,267

 
(11,322
)
 
73,945

 
100.0
%
Central Building
 
07/10/2013
 
Seattle
 
WA
 
Office
 
7,015

 
25,840

 
2,293

 
35,148

 
(2,915
)
 
32,233

 
100.0
%
50 Congress Street
 
07/11/2013
 
Boston
 
MA
 
Office
 
9,876

 
40,631

 
3,100

 
53,607

 
(4,532
)
 
49,075

 
100.0
%
1180 Raymond
 
08/20/2013
 
Newark
 
NJ
 
Apartment
 
8,292

 
36,692

 
136

 
45,120

 
(2,168
)
 
42,952

 
100.0
%
Park Highlands II
 
12/10/2013
 
North Las Vegas
 
NV
 
Undeveloped Land
 
21,622

 

 

 
21,622

 

 
21,622

 
99.5
%
Maitland Promenade II
 
12/18/2013
 
Orlando
 
FL
 
Office
 
3,434

 
23,793

 
4,811

 
32,038

 
(3,242
)
 
28,796

 
100.0
%
Plaza Buildings
 
01/14/2014
 
Bellevue
 
WA
 
Office
 
53,040

 
133,074

 
8,519

 
194,633

 
(10,047
)
 
184,586

 
100.0
%
424 Bedford
 
01/31/2014
 
Brooklyn
 
NY
 
Apartment
 
8,860

 
24,972

 

 
33,832

 
(965
)
 
32,867

 
90.0
%
Richardson Land II
 
09/04/2014
 
Richardson
 
TX
 
Undeveloped Land
 
8,303

 

 

 
8,303

 

 
8,303

 
90.0
%
 
 
 
 
 
 
 
 
 
 
$
231,963

 
$
639,669

 
$
48,267

 
$
919,899

 
$
(79,476
)
 
$
840,423

 
 
_____________________
(1) Amounts are net of impairment charges.

11

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

Operating Leases
Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of June 30, 2015, the leases, excluding options to extend and apartment leases, which have terms that are generally one year or less, had remaining terms of up to 12.8 years with a weighted-average remaining term of 3.7 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions or foreclosures related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $5.0 million and $5.0 million as of June 30, 2015 and December 31, 2014, respectively.
During the six months ended June 30, 2015 and 2014, the Company recognized deferred rent from tenants of $2.7 million and $4.8 million, respectively, net of lease incentive amortization. As of June 30, 2015 and December 31, 2014, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $20.2 million and $16.8 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $2.2 million and $1.6 million of unamortized lease incentives as of June 30, 2015 and December 31, 2014, respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.
As of June 30, 2015, the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):
July 1, 2015 through December 31, 2015
$
36,641

2016
72,297

2017
63,659

2018
52,744

2019
40,069

Thereafter
82,382

 
$
347,792

As of June 30, 2015, the Company’s commercial real estate properties were leased to approximately 500 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:
Industry
 
Number of
Tenants
 
Annualized
Base Rent (1) 
(in thousands)
 
Percentage of
Annualized
Base Rent
Finance
 
50
 
$
11,356

 
14.5
%
Computer System Design & Programming
 
44
 
10,216

 
13.0
%
Insurance Carriers & Related Activities
 
28
 
8,954

 
11.4
%
 
 
 
 
$
30,526

 
38.9
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of June 30, 2015, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.
No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

12

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

Geographic Concentration Risk
As of June 30, 2015, the Company’s real estate investments in Washington and Texas represented 28.7% and 21.2% of the Company’s total assets, respectively.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Washington and Texas real estate markets.  Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.
Condemnation Agreements
During the three and six months ended June 30, 2015, the Company received $5.7 million in proceeds from condemnation agreements.  The carrying value of the condemned land was $0.8 million, resulting in a gain of $4.9 million (including amounts for noncontrolling interests of $1.2 million), which is included in other income in the accompanying consolidated statements of operations. 
Property Damage
During the six months ended June 30, 2015, 1800 West Loop suffered physical damages due to floods. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to $100,000 per incident. Based on management’s estimates, the Company recognized an estimated aggregate loss due to damages of $2.6 million during the six months ended June 30, 2015, which was reduced by $2.5 million of estimated insurance recoveries related to such damages, which the Company determined were probable of collection. The aggregate net loss due to damages of $0.1 million during the six months ended June 30, 2015 was classified as operating, maintenance and management expenses on the accompanying consolidated statements of operations and relates to the Company’s insurance deductible. Through June 30, 2015, the Company had not received insurance proceeds related to this incident. As of June 30, 2015, the total estimated insurance proceeds to be collected of $2.5 million were classified as prepaid expenses and other assets on the accompanying consolidated balance sheets.
4.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES
As of June 30, 2015 and December 31, 2014, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
 
June 30,
2015
 
December 31,
2014
Cost
 
$
48,267

 
$
50,807

 
$
3,169

 
$
3,752

 
$
(6,936
)
 
$
(7,585
)
Accumulated Amortization
 
(22,206
)
 
(19,113
)
 
(1,639
)
 
(1,691
)
 
3,472

 
3,182

Net Amount
 
$
26,061

 
$
31,694

 
$
1,530

 
$
2,061

 
$
(3,464
)
 
$
(4,403
)

13

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and six months ended June 30, 2015 and 2014 were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Three Months Ended
June 30,
 
For the Three Months Ended
June 30,
 
For the Three Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Amortization
 
$
(2,716
)
 
$
(4,028
)
 
$
(258
)
 
$
(305
)
 
$
445

 
$
624

 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Amortization
 
$
(5,639
)
 
$
(8,396
)
 
$
(531
)
 
$
(608
)
 
$
939

 
$
1,281

Additionally, as of June 30, 2015 and December 31, 2014, the Company had recorded unamortized tax abatement intangible assets, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $7.7 million and $8.2 million, respectively.  During the three and six months ended June 30, 2015, the Company recorded amortization expense of $0.2 million and $0.5 million related to tax abatement intangible assets, respectively.  During the three and six months ended June 30, 2014, the Company recorded amortization expense of $0.2 million and $0.5 million related to tax abatement intangible assets, respectively. 
5.
REAL ESTATE LOAN RECEIVABLE
As of June 30, 2015, the Company owned one real estate loan receivable that it had originated. The information for that real estate loan receivable as of June 30, 2015 and December 31, 2014 is set forth below (in thousands):
Loan Name
Location of Related Property or 
Collateral
 
Date Originated
 
Property Type
 
Loan Type
 
Outstanding Principal Balance as of June 30, 2015 (1)
 
Book Value as of June 30, 2015 (2)
 
Book Value as of December 31, 2014 (2)
 
Contractual Interest Rate (3)
 
Annualized Effective Interest Rate (3)
 
Maturity Date
University House First Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New York, New York
 
3/20/2013
 
Student Housing
 
Mortgage
 
$
27,850

 
$
27,850

 
$
27,422

 
11.0%
 
14.2%
 
06/30/2015
_____________________
(1) Outstanding principal balance as of June 30, 2015 represents original principal balance outstanding under the loan, increased for any subsequent fundings, including interest income deferred until maturity.
(2) Book value of the real estate loan receivable represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.
(3) Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2015, using the interest method annualized (if applicable) and divided by the average amortized cost basis of the investment. The annualized effective interest rate and contractual interest rate presented are as of June 30, 2015.

14

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

On June 30, 2015, the University House First Mortgage matured without repayment.  As a result, on July 1, 2015, the Company provided noticed to the borrower of default and may commence foreclosure proceedings on, or otherwise take title to, the property securing the University House First Mortgage.  The Company generally recognizes income on impaired loans on either a cash basis, where interest income is only recorded when received in cash, or on a cost-recovery basis, where all cash receipts are applied against the carrying value of the loan. The Company will resume the accrual of interest if it determines the collection of interest according to the contractual terms of the loan is probable.  The Company considers the collectibility or recoverability of the loan’s principal balance in determining whether to recognize income on impaired loans.  With respect to the University House First Mortgage, the Company will continue to recognize interest income on an accrual basis, including the default interest rate of 16%, as the Company believes the recoverability of the outstanding principal balance and unpaid accrued interest is probable. The Company did not record a provision for loan loss reserves during the six months ended June 30, 2015 or 2014.
The following summarizes the activity related to the real estate loan receivable for the six months ended June 30, 2015 (in thousands):
Real estate loan receivable - December 31, 2014
$
27,422

Accretion of closing costs and origination fees on real estate loan receivable, net
428

Real estate loan receivable - June 30, 2015
$
27,850

For the three and six months ended June 30, 2015 and 2014, interest income from the real estate loan receivable consisted of the following (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Contractual interest income
$
774

 
$
612

 
$
1,540

 
$
1,217

Accretion of closing costs, origination fees and extension fees, net
219

 
105

 
428

 
212

Interest income from real estate loan receivable
$
993

 
$
717

 
$
1,968

 
$
1,429


15

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

6.
REAL ESTATE SALES
In accordance with ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”), results of operations from properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. Results of operations from properties that were classified as held for sale in financial statements issued prior to January 1, 2014 will remain in discontinued operations on the Company’s consolidated statements of operations. Prior to the adoption of ASU 2014-08, the operations of properties held for sale or to be disposed of and the aggregate net gains recognized upon their disposition were presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. During the six months ended June 30, 2015, the Company disposed of one office property and no properties were classified as held for sale as of June 30, 2015.
During the year ended December 31, 2014, the Company sold one office property and during the six months ended June 30, 2015, the Company sold one office property, which were not classified as held for sale in financial statements issued for the reporting period prior to January 1, 2014. The operations of these properties and gain on sale are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to these properties for the three and six months ended June 30, 2015, and 2014 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Total revenues
$
6

 
$
301

 
$
216

 
$
573

 
 
 
 
 
 
 
 
Total expenses
6

 
399

 
354

 
771


16

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

7.
NOTES AND BOND PAYABLE
As of June 30, 2015 and December 31, 2014, the Company’s notes and bond payable consisted of the following (dollars in thousands):
 
 
Book Value as
of June 30, 2015
 
Book Value as of December 31, 2014
 
Contractual Interest Rate as of June 30, 2015 (1)
 
Effective Interest Rate at June 30, 2015 (1)
 
Payment Type
 
Maturity
Date (2)
Richardson Portfolio Mortgage Loan
 
$
41,457

 
$
38,000

 
One-Month LIBOR + 2.10%
 
2.28%
 
Principal
& Interest
 
05/01/2017
Bellevue Technology Center Mortgage Loan
 
50,984

 
49,836

 
One-Month LIBOR + 2.25%
 
2.43%
 
Interest Only (3)
 
03/01/2017
Portfolio Revolving Loan Facility (4)
 
39,835

 
12,447

 
One-Month LIBOR + 2.25%
 
2.43%
 
Interest Only
 
05/01/2017
Portfolio Mortgage Loan
 
98,289

 
93,751

 
One-Month LIBOR + 2.25%
 
2.43%
 
Interest Only (3)
 
07/01/2017
1635 N. Cahuenga Mortgage Loan (5)
 

 
4,650

 
(5) 
 
(5) 
 
(5) 
 
(5) 
Burbank Collection Mortgage Loan
 
9,098

 
9,043

 
One-Month LIBOR + 2.35%
 
2.54%
 
Interest Only
 
09/30/2016
50 Congress Mortgage Loan
 
28,075

 
26,935

 
One-Month LIBOR + 1.90%
 
2.08%
 
Interest Only (3)
 
10/01/2017
1180 Raymond Bond Payable
 
6,875

 
6,945

 
6.50%
 
6.50%
 
Principal
& Interest
 
09/01/2036
Central Building Mortgage Loan
 
24,896

 
24,896

 
One-Month LIBOR + 1.75%
 
1.93%
 
Interest Only
 
11/13/2018
Maitland Promenade II Mortgage Loan (6)
 
20,182

 
20,182

 
One-Month LIBOR + 2.90%
 
3.25%
 
Interest Only (3)
 
01/01/2017
Westmoor Center Mortgage Loan
 
56,036

 
54,880

 
One-Month LIBOR + 2.25%
 
2.43%
 
Interest Only (3)
 
02/01/2018
Plaza Buildings Senior Loan
 
110,488

 
109,707

 
One-Month LIBOR + 1.90%
 
2.08%
 
Interest Only (3)
 
01/14/2017
Plaza Buildings Mezzanine Loan (7)
 

 
25,000

 
(7) 
 
(7) 
 
(7) 
 
(7) 
424 Bedford Mortgage Loan
 
25,613

 
25,866

 
3.91%
 
3.91%
 
Principal
& Interest
 
10/01/2022
1180 Raymond Mortgage Loan
 
28,100

 
28,100

 
One-Month LIBOR + 2.25%
 
2.43%
 
Interest Only
 
12/01/2017
Total Notes and Bond Payable principal outstanding
 
539,928

 
530,238

 
 
 
 
 
 
 
 
Net Premium/Discount on Notes and Bond Payable (8)
 
36

 
25

 
 
 
 
 
 
 
 
Total Notes and Bond Payable, net
 
$
539,964

 
$
530,263

 
 
 
 
 
 
 
 
_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of June 30, 2015. Effective interest rate is calculated as the actual interest rate in effect as of June 30, 2015 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at June 30, 2015, where applicable.
(2) Represents the initial maturity date or the maturity date as extended as of June 30, 2015; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.
(3) Represents the payment type required under the loan as of June 30, 2015. Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bond payable, see five-year maturity table below.
(4) The Portfolio Revolving Loan Facility is secured by the 1800 West Loop Building and the Iron Point Business Park. The Portfolio Revolving Loan Facility is comprised of $59.5 million of revolving debt and $13.0 million of non-revolving debt available to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. As of June 30, 2015, $30.0 million of revolving debt and $9.8 million of non-revolving debt had been disbursed to the Company and the remaining $29.5 million of revolving debt and $3.2 million of non-revolving debt is available for future disbursements, subject to certain conditions contained in the loan documents. Monthly payments are initially interest only. Beginning June 1, 2016, and to the extent that there are amounts outstanding under the non-revolving portion of the loan, monthly payments will include interest and principal amortization payments of up to $80,000 per month.
(5) On March 11, 2015, in connection with the disposition of 1635 N. Cahuenga, the joint venture paid off the outstanding principal balance and all other sums due under this loan.
(6) Interest on the Maitland Promenade II Mortgage Loan is calculated at a variable annual rate of 290 basis points over one-month LIBOR, but at no point shall the interest rate be less than 3.25%.
(7) On April 1, 2015, the Company paid off the outstanding principal balance and all other sums due under this loan.
(8) Represents the unamortized premium/discount on notes and bond payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bond payable.

17

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

During the three and six months ended June 30, 2015, the Company incurred $3.9 million and $7.8 million of interest expense, respectively. Included in interest expense for the three and six months ended June 30, 2015 was $0.8 million and $1.5 million of amortization of deferred financing costs, respectively. Additionally, during the three and six months ended June 30, 2015, the Company capitalized $0.5 million and $1.0 million of interest to its investments in undeveloped land, respectively. During the three and six months ended June 30, 2014, the Company incurred $4.6 million and $8.0 million of interest expense, respectively. Included in interest expense for the three and six months ended June 30, 2014 was $1.0 million and $1.6 million of amortization of deferred financing costs, respectively. Additionally, during the three and six months ended June 30, 2014, the Company capitalized $0.5 million and $1.0 million of interest to its investments in undeveloped land, respectively. As of June 30, 2015 and December 31, 2014, the Company’s deferred financing costs were $4.7 million and $6.1 million, respectively, net of amortization, and are included in prepaid expenses and other assets on the accompanying consolidated balance sheets. As of June 30, 2015 and December 31, 2014, the Company’s interest payable was $1.1 million and $1.2 million, respectively.
The following is a schedule of maturities, including principal amortization payments, for all notes and bond payable outstanding as of June 30, 2015 (in thousands):
July 1, 2015 through December 31, 2015
 
$
1,099

2016
 
14,555

2017
 
415,600

2018
 
82,117

2019
 
7,804

Thereafter
 
18,753

 
 
$
539,928

The Company’s notes payable contain financial debt covenants. As of June 30, 2015, the Company was in compliance with all of these debt covenants.
8.
FAIR VALUE DISCLOSURES
Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;
Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

18

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instruments for which it is practicable to estimate the fair value:
Cash and cash equivalents, rent and other receivables, prepaid expenses and other assets and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.
Real estate loan receivable: The Company’s real estate loan receivable is presented in the accompanying consolidated balance sheets at its amortized cost net of recorded loan loss reserves and not at fair value. The fair value of real estate loan receivable was estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.
Notes and bond payable: The fair values of the Company’s notes and bond payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs.
The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of June 30, 2015 and December 31, 2014, which carrying amounts do not approximate the fair values (in thousands):
 
 
June 30, 2015
 
December 31, 2014
 
 
Face Value        
 
Carrying Amount    
 
Fair Value        
 
Face Value        
 
Carrying Amount    
 
Fair Value        
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans receivable
 
$
27,850

 
$
27,850

 
$
27,850

 
$
27,850

 
$
27,422

 
$
27,813

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Notes and bond payable
 
$
539,928

 
$
539,964

 
$
542,757

 
$
530,238

 
$
530,263

 
$
534,045

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

19

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

9.
RELATED PARTY TRANSACTIONS
The Advisory Agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments and the disposition of real estate and real estate-related investments (including the discounted payoff of non-performing loans) among other services, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. The Advisory Agreement may also entitle the Advisor to certain back-end cash flow participation fees. The Company also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with KBS Capital Markets Group LLC, the dealer manager for the Company’s initial public offering (the “Dealer Manager”), pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).
On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above.
During the three and six months ended June 30, 2015 and 2014, no other business transactions occurred between the Company and these other KBS-sponsored programs.

20

PART I. FINANCIAL INFORMATION (CONTINUED)
Item 1. Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2015
(unaudited)

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and six months ended June 30, 2015 and 2014, respectively, and any related amounts payable as of June 30, 2015 and December 31, 2014 (in thousands):
 
 
Incurred
 
Payable as of
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
June 30,
 
December 31,
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Expensed
 
 
 
 
 
 
 
 
 
 
 
 
Asset management fees
 
$
2,077

 
$
1,909

 
$
4,130

 
$
3,518

 
$

 
$

Real estate acquisition fees
 

 

 

 
2,274

 

 

Reimbursable operating expenses (1)
 
32

 
42

 
77

 
73

 
33

 

Disposition fees(2)
 

 

 
102

 

 

 

Capitalized
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition fee on investment in unconsolidated joint venture
 

 
1,573

 

 
1,573

 

 

 
 
$
2,109

 
$