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EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20150630xex312.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20150630xex321.htm
EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20150630xex322.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20150630xex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
o
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 000-59430


Resource Real Estate Opportunity REIT II, Inc.   
(Exact name of registrant as specified in its charter)
Maryland
 
80-0854717
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
1845 Walnut Street, 18th Floor, Philadelphia, PA, 19103
(Address of principal executive offices) (Zip code)
 
 (215) 231-7050
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes R No  o  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes R 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer                  o
Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
As of August 11, 2015, there were 27,976,309 outstanding shares of common stock of Resource Real Estate Opportunity REIT II, Inc.



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

 
 
PAGE
PART I
FINANCIAL INFORMATION
 
 
 
 
ITEM 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
ITEM 2.
 
 
 
ITEM 6.
 
 
 






Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We have a limited operating history. As of June 30, 2015, we owned four multifamily properties. Because we have not identified any additional real estate assets to acquire with proceeds from our initial public offering we are considered a blind pool, and our stockholders will not have an opportunity to evaluate our investments before we make them, making an investment in us more speculative.
We are dependent on our advisor to select investments and conduct our operations. Our advisor has no prior operating history and no prior experience operating a public company. This inexperience makes our future performance difficult to predict.
Our executive officers and some of our directors are also officers, directors, managers or key professionals of our advisor, our dealer manager and other affiliated Resource Real Estate entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other programs sponsored by Resource Real Estate and conflicts in allocating time among us and these other programs. These conflicts could result in action or inaction that is not in the best interests of our stockholders.
We pay substantial fees to and expenses of our advisor, its affiliates and participating broker-dealers, which payments increase the risk that our stockholders will not earn a profit on their investment.
Our advisor and its affiliates will receive fees in connection with transactions involving the acquisition and management of our investments. These fees are based on the cost of the investment, and not based on the quality of the investment or the quality of the services rendered to us. This may influence our advisor to recommend riskier transactions to us.
There is no limit on the amount we can borrow to acquire a single real estate investment, but pursuant to our charter, we may not leverage our assets with debt financing such that our borrowings would exceed 300% of our net assets unless a majority of the members of our conflicts committee find substantial justification for borrowing a greater amount.
We may lack property diversification if we do not raise a substantial amount of proceeds in our initial public offering.
Our charter permits us to pay distributions from any source without limitation, including from offering proceeds, borrowings, sales of assets or waivers or deferrals of fees otherwise owed to our advisor. To the extent these distributions exceed our net income or net capital gain, a greater proportion of your distributions will generally represent a return of capital as opposed to current income or gain, as applicable.
We may experience adverse business developments or conditions similar to those affecting certain programs sponsored by our sponsor, which could limit our ability to make distributions and could decrease the value of an investment in us.
Disruptions in the financial markets and sluggish economic conditions could adversely affect our ability to implement our business strategy and generate returns to our stockholders.
Our failure to qualify as a REIT for federal income tax purposes would reduce the amount of income we have available for distribution and limit our ability to make distributions to our stockholders.
Investments in non-performing real estate assets involve greater risks than investments in stabilized performing assets and make our future performance more difficult to predict.
All forward-looking statements should be read in light of the risks described above and identified in the “Risk Factors” section of our Registration Statement on Form S-11 (File No. 333-184476) filed with the Securities and Exchange Commission (the “SEC”), as the same may be amended and supplemented from time to time.



PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2015
 
December 31,
2014
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental property, net
 
$
131,675,438

 
$
54,703,305

Identified intangible assets, net
 
1,534,205

 
1,176,061

 
 
133,209,643

 
55,879,366

 
 
 
 
 
Cash
 
116,488,300

 
15,780,579

Restricted cash
 
1,669,012

 
725,305

Tenant receivables
 
9,132

 
5,746

Due from related parties
 
218,927

 
34,025

Subscriptions receivable
 
2,346,339

 
3,819,991

Prepaid expenses and other assets
 
1,006,737

 
774,338

Deferred offering costs
 
3,460,407

 
3,618,954

Deferred financing costs, net
 
1,091,107

 
581,783

Total assets
 
$
259,499,604

 
$
81,220,087

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Mortgage notes payable
 
$
58,740,000

 
$
38,540,000

Accounts payable and accrued expenses
 
1,936,215

 
857,897

Due to related parties
 
1,438,652

 
3,851,263

Tenant prepayments
 
97,474

 
30,704

Security deposits
 
175,133

 
68,696

Distributions payable
 
3,447,574

 
259,379

Total liabilities
 
65,835,048

 
43,607,939

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock (par value $.01, 10,000,000 shares authorized, none issued and outstanding)
 

 

Convertible stock (par value $.01; 50,000 shares authorized, 50,000 issued and outstanding)
 
500

 
500

Common stock (par value $.01; 1,000,000,000 shares authorized, 23,985,818 and 4,759,567 issued and outstanding, respectively)
 
239,859

 
47,596

Additional paid-in capital
 
212,620,473

 
42,148,473

Accumulated other comprehensive loss
 
(76,267
)
 
(34,468
)
Accumulated deficit
 
(19,120,009
)
 
(4,549,953
)
Total stockholders’ equity
 
193,664,556

 
37,612,148

Total liabilities and stockholders’ equity
 
$
259,499,604

 
$
81,220,087

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



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Rental income
$
2,751,105

 
$
112,639

 
$
4,431,141

 
$
112,639

Interest income
25,895

 
183

 
45,085

 
282

Total revenues
2,777,000

 
112,822

 
4,476,226

 
112,921

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operating
1,437,560

 
39,748

 
2,187,744

 
39,748

Acquisition costs
1,263,135

 
269,391

 
2,159,232

 
269,391

Management fees - related parties
452,513

 
50,546

 
705,203

 
50,546

General and administrative
892,023

 
687,598

 
1,547,652

 
687,598

Loss on disposal of assets
608,364

 
198,840

 
1,011,230

 
198,840

Depreciation and amortization expense
1,844,447

 
83,338

 
2,781,664

 
83,338

Total expenses
6,498,042

 
1,329,461

 
10,392,725

 
1,329,461

 Loss before other expense
(3,721,042
)
 
(1,216,639
)
 
(5,916,499
)
 
(1,216,540
)
 
 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Interest expense
(228,854
)
 
(16,356
)
 
(452,933
)
 
(16,356
)
Net loss
(3,949,896
)
 
(1,232,995
)
 
(6,369,432
)
 
(1,232,896
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Designated derivative, fair value adjustment
(14,001
)
 
(7,604
)
 
(41,799
)
 
(7,604
)
Comprehensive loss
$
(3,963,897
)
 
$
(1,240,599
)
 
$
(6,411,231
)
 
$
(1,240,500
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
18,934,576

 
314,208

 
13,604,605

 
314,208

 
 
 
 
 
 
 
 
Basic and diluted loss per common share
$
(0.21
)
 
$
(3.92
)
 
$
(0.47
)
 
$
(3.92
)















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




 
RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2015
(unaudited)


 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, at January 1, 2015
 
4,759,567

 
$
47,596

 
50,000

 
$
500

 
$
42,148,473

 
$
(34,468
)
 
$
(4,549,953
)
 
$
37,612,148

Issuance of stock
 
18,869,711

 
188,697

 

 

 
187,984,233

 

 

 
188,172,930

Distributions of common stock
 
107,125

 
1,071

 

 

 
1,069,376

 

 
(1,070,447
)
 

Syndication costs
 

 

 

 

 
(20,946,460
)
 

 

 
(20,946,460
)
Common stock issued through distribution reinvestment plan
 
254,457

 
2,545

 

 

 
2,414,801

 

 
(2,417,346
)
 

Distributions declared
 

 

 

 

 

 

 
(4,712,831
)
 
(4,712,831
)
Share redemptions
 
(5,042
)
 
(50
)
 

 

 
(49,950
)
 

 

 
(50,000
)
Designated derivative, fair value adjustment
 

 

 

 

 

 
(41,799
)
 

 
(41,799
)
Net loss
 

 

 

 

 

 

 
(6,369,432
)
 
(6,369,432
)
Balance, at June 30, 2015
 
23,985,818

 
$
239,859

 
50,000

 
$
500

 
$
212,620,473

 
$
(76,267
)
 
$
(19,120,009
)
 
$
193,664,556






























The accompanying notes are an integral part of this consolidated financial statement.




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

 
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(6,369,432
)
 
$
(1,232,896
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Loss on disposal of assets
 
1,011,230

 
198,840

Depreciation and amortization
 
2,781,664

 
83,338

Amortization of deferred financing costs
 
30,959

 

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(943,707
)
 

Tenant receivables, net
 
(3,386
)
 
(132
)
Due from related party
 
(184,902
)
 
(12,180
)
Prepaid expenses and other assets
 
(30,574
)
 
(91,640
)
Due to related parties
 
(301,779
)
 
3,086,527

Accounts payable and accrued expenses
 
882,808

 
159,492

Tenant prepayments
 
64,120

 
4,086

Security deposits
 
2,541

 
(751
)
Net cash (used in) provided by operating activities
 
(3,060,458
)
 
2,194,684

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Property acquisitions
 
(79,057,216
)
 
(9,731,042
)
Capital expenditures
 
(1,873,170
)
 
(5,194
)
Net cash used in investing activities
 
(80,930,386
)
 
(9,736,236
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock, net of redemptions
 
188,122,930

 
3,252,650

Payment of deferred financing costs
 
(540,283
)
 
(126,349
)
Deferred offering costs
 
(1,999,808
)
 
(2,381,406
)
Subscriptions receivable
 
1,473,652

 

Increase in borrowings
 
20,200,000

 
8,787,000

Repayments on borrowings
 

 
(1,322,000
)
Purchase of interest rate caps
 
(86,830
)
 
(19,670
)
Distributions paid on common stock
 
(1,524,636
)
 

Syndication costs
 
(20,946,460
)
 
(279,343
)
Net cash provided by financing activities
 
184,698,565

 
7,910,882

 
 
 
 
 
Net increase in cash
 
100,707,721

 
369,330

Cash at beginning of period
 
15,780,579

 
200,644

Cash at end of period
 
$
116,488,300

 
$
569,974


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



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
(unaudited)


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS (LOSS)
Resource Real Estate Opportunity REIT II, Inc. (the “Company”) was organized in Maryland on September 28, 2012. The Company is offering up to 100,000,000 shares of common stock in its primary initial public offering for $10 per share, with volume discounts available to investors who purchase $1.0 million or more of shares through the same participating broker-dealer. Discounts are also available for other categories of investors. The Company is also offering up to 10,000,000 shares pursuant to the Company’s distribution reinvestment plan at a purchase price initially equal to $9.50 per share. The Company has adopted a fiscal year ending December 31. On February 6, 2014, the Securities and Exchange Commission (the “SEC”) declared effective the Company's Registration Statement on Form S-11, as amended (Commission File No. 333-184476) (the “Registration Statement”), relating to the offering of up to 110,000,000 shares of the Company’s common stock, including shares offered pursuant to the Company's distribution reinvestment plan.
Resource Real Estate Opportunity Advisor II, LLC (the "Advisor”) is a wholly owned subsidiary of Resource Real Estate, Inc. (the "Sponsor") and an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors. The Advisor acts as the Company's external advisor and manages the Company's day-to-day operations and its portfolio of real estate investments and provides asset-management, marketing, investor relations and other administrative services on the Company's behalf, all subject to the supervision of the Company's Board of Directors. On October 9, 2012, the Advisor contributed $200,000 to the Company in exchange for 20,000 shares of common stock. On December 20, 2013, the Advisor received 50,000 shares of convertible stock in exchange for 5,000 shares of the Company’s common stock. The Advisor purchased an additional 117,778 shares of common stock in 2014 for $1.1 million.
On June 2, 2014, the Company satisfied the $2.0 million minimum offering amount for its initial public offering, broke escrow and issued shares of common stock in the offering. The Company subsequently raised the minimum New York offering amount of $2.5 million on June 4, 2014. On October 21, 2014, the Company raised the minimum Ohio offering amount of $20.0 million; and on January 8, 2015, the Company raised the minimum Pennsylvania offering amount of $50.0 million. As of June 30, 2015, a total of 23,849,181 shares, including additional shares purchased by the Advisor and shares issued through the distribution reinvestment plan, have been issued in connection with the Company's public offering resulting in gross offering proceeds of $237.6 million. As of June 30, 2015, the Company had issued 277,071 shares for $2.6 million pursuant to its distribution reinvestment plan.
The Company’s objective is to take advantage of the Sponsor's dedicated multifamily investing and lending platforms to invest in multifamily assets across the entire spectrum of investments in order to provide stockholders with growing cash flow and increasing asset values. The Company’s targeted portfolio will consist, at the time of acquisition, of commercial real estate assets, principally (i) underperforming multifamily rental properties which the Company will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which the Company will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans the Company originates or purchases either directly or with a co-investor or joint venture partner.
The Company intends to elect and qualify to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2014. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes at least 90% of its REIT taxable income to its stockholders. The Company also intends to operate its business in a manner that will permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
The consolidated financial statements and the information and tables contained in the notes thereto, as of June 30, 2015, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015
(unaudited)

Report on Form 10-K for the year ended December 31, 2014. The results of operations for the three and six months ended June 30, 2015 may not necessarily be indicative of the results of operations for the full year ending December 31, 2015.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary
 
Apartment Complex
 
Number
of Units
 
Property Location
RRE Opportunity Holdings II, LLC
 
N/A
 
N/A
 
N/A
RRE Opportunity OP II, LP
 
N/A
 
N/A
 
N/A
RRE Bear Creek Holdings, LLC, or Bear Creek
 
Adair off Addison
 
152
 
Dallas, TX
RRE Oak Hill Holdings, LLC, or Oak Hill
 
Overton Trails Apartment Homes
 
360
 
Fort Worth, TX
RRE Buckhead Holdings, LLC, or Buckhead
 
Uptown Buckhead
 
216
 
Atlanta, GA
RRE Farrington Holdings, LLC, or Farrington
 
Farrington Lake
 
411
 
Chapel Hill, NC

N/A - Not Applicable
All intercompany accounts and transactions have been 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 financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate Investments
The Company records acquired real estate at fair value. The Company considers the period of future benefit of an asset to determine its appropriate useful life. The Company's estimated useful lives of its assets by class are as follows:
Buildings
27.5 years
Building improvements
3.0 to 27.5 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Remaining term of related lease

Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. There were no impairments as of June 30, 2015.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, the Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, based in each case on their fair values.
Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports, along with the aforementioned information available to the Company's management, is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the remaining term of the respective leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles would be charged to expense in that period.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. These estimates are subject to change until all information is finalized, which is generally within one year of the acquisition date.
Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition of the Company’s mortgage loans, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into two interest rate caps that were designated as a cash flow hedges during 2014. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the six months ended June 30, 2015, such derivatives were used to hedge the variable cash flows, indexed to London InterBank Offered Rate ("LIBOR"), associated with an existing variable-rate loan agreement. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the six months ended June 30, 2015, the Company did not record any hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.
The specific timing of a sale is measured against various criteria related to the terms of the transaction and any continuing involvement associated with the property. If the criteria for profit recognition under the full-accrual method are not met, the Company defers the gain recognition and accounts for the continued operations of the property by applying the percentage-of-completion, reduced profit, deposit, installment or cost recovery methods, as appropriate, until the appropriate criteria are met.
The future minimum rental payments to be received from noncancelable operating leases are $6.6 million and $146,165 for the 12-month periods ending June 30, 2016 and 2017, and none thereafter.
Tenant Receivables
The Company makes estimates of the collectability of its tenant receivables related to base rents, including straight-line rentals, expense reimbursements and other revenue or income. The Company specifically analyzes accounts receivable and historical bad debts, tenant creditworthiness, current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year.
Income Taxes
The Company intends to elect and qualify to be taxed as a REIT, commencing with its taxable year ended December 31, 2014. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRSs”). In general, the Company’s TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes.
While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. Due to reported losses for the current periods presented, the convertible shares (discussed in Note 12) are not included in the diluted earnings per share calculation. All common shares and per common share information in the financial statements have been adjusted retroactively for the effect of one 0.625% stock distribution issued on July 14, 2014, one 1.00% stock distribution issued October 15, 2014, one 0.83333% stock distribution issued on January 15, 2015, one 0.5% stock distribution issued on April 15, 2015, and one 0.5% stock distribution issued on July 15, 2015.
Organization and Offering Costs
The Company incurs organizational, accounting, and offering costs in pursuit of its financing. Organization and offering costs (other than selling commissions and dealer-manager fees) of the Company are initially being paid by the Advisor on behalf of the Company. Organization costs are expensed as incurred and include all expenses to be incurred by the Company in connection with the formation of the Company, including but not limited to legal fees and other costs to incorporate the Company.
Pursuant to the Amended and Restated Advisory Agreement between the Company and the Advisor dated January 9, 2014, as amended (the “Advisory Agreement”), the Company is obligated to reimburse the Advisor for organizational and offering costs it incurs on the Company's behalf, but only to the extent that such reimbursements will not cause organizational and offering expenses (other than selling commissions and the dealer manager fees) to exceed 2.5% of the gross offering proceeds raised in the offering, when recorded by the Company. As of June 30, 2015, a total of $623,035 in reimbursable organizational and offering costs incurred on behalf of the Company by the Advisor has yet to be reimbursed by the Company. These costs are included in due to related parties on the consolidated balance sheet as of June 30, 2015.
Deferred Offering Costs
Through June 30, 2015, the Company has incurred $6.8 million for the payment of public offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal and similar costs. As of June 30, 2015, the Advisor has advanced $4.0 million of these costs on behalf of the Company. A portion of these costs was charged to equity upon the sale of each share of common stock sold under the public offering. Similarly, a portion of the proceeds received from the sales of shares in the Company's public offering was paid to the Advisor to reimburse it for the amount incurred on behalf of the Company. Deferred offering costs represent the portion of the total costs incurred that have not been charged to equity to date. As of June 30, 2015, the Company has reimbursed $3.3 million of deferred offering costs to the Advisor. Upon completion of the public offering, any deferred offering costs in excess of the limit on organization and offering costs discussed above, will be charged back to the Advisor.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


New Accounting Standards
Accounting Standards Issued But Not Yet Effective
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers” ("ASU No. 2014-09"), which will replace most existing revenue recognition guidance in GAAP. The core principle of ASU No. 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU No. 2014-09 will be effective for the Company beginning January 1, 2018, including interim periods in 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of ASU No. 2014-09 on the Company's consolidated financial position, results of operations and cash flows.
In August 2014, FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." Under the new guidance, an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on the Company's consolidated financial statements.
In January 2015, 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 amendment will eliminate the requirements 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, FASB issued ASU No. 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-02 to have a significant impact on its consolidated financial statements.

In April 2015, FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, the Company will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-03 to have a significant impact on its consolidated financial statements.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION    
The following table presents supplemental cash flow information:
 
Six Months Ended
 
June 30,
 
2015
 
2014
Non-cash financing and investing activities:
 
 
 
Cash distributions on common stock declared but not yet paid
$
3,447,574

 
$
23,987

Stock issued through distribution reinvestment plan
2,417,346

 

Stock distributions issued
1,070,447

 

Deferred offering costs
1,558,936

 

Due to related parties
1,649,290

 

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
368,292

 
$
16,356

NOTE 4 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvement. A summary of the components of restricted cash follows:
 
June 30,
2015
 
December 31,
2014
Real estate taxes
$
883,646

 
$
128,871

Insurance
53,596

 
157,600

Capital improvements
731,770

 
438,834

 
$
1,669,012

 
$
725,305

NOTE 5 - RENTAL PROPERTY, NET
The Company’s investment in rental properties consisted of the following:
 
June 30,
2015
 
December 31,
2014
Land
$
20,285,344

 
$
6,723,368

Building and improvements
110,516,138

 
47,546,786

Furniture, fixtures and equipment
2,077,468

 
612,846

Construction in progress
374,750

 


133,253,700

 
54,883,000

Less: accumulated depreciation
(1,578,262
)
 
(179,695
)

$
131,675,438

 
$
54,703,305

    
Depreciation expense for the three and six months ended June 30, 2015 was $902,373, and $1.4 million, respectively. Depreciation expense for the three and six months ended June 30, 2014 was $24,778.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


NOTE 6 - ACQUISITION
As of June 30, 2015, the Company owned four properties. The table below summarizes these acquisitions and the respective fair values assigned:    
Multifamily
Community Name
 
City and State
 
Date of
Acquisition
 
Purchase
Price (1)
 
Land
 
Building and
Improvements
 
Furniture, Fixture and Equipment
 
Intangible Assets
 
Other
Liabilities
 
Fair Valued
Assigned
Adair off Addison
 
Dallas, Texas
 
6/4/2014
 
$
9,500,000

 
$
1,888,982

 
$
7,060,815

 
$
198,840

 
$
351,363

 
$
(84,732
)
 
$
9,415,268

Overton Trails Apartment Homes
 
Fort Worth, Texas
 
12/19/2014
 
47,000,000

 
4,834,386

 
40,485,971

 
503,582

 
1,176,061

 
(59,977
)
 
46,940,023

Uptown Buckhead
 
Atlanta, Georgia
 
3/30/2015
 
32,500,000

 
6,464,391

 
24,992,651

 
399,036

 
643,922

 
(117,170
)
 
32,382,830

Farrington Lake
 
Chapel Hill, North Carolina
 
5/19/2015
 
46,750,000

 
7,097,585

 
37,946,732

 
608,364

 
1,097,319

 
(359,270
)
 
46,390,730


(1) Purchase price excludes closing costs and acquisition expenses.
The table below summarizes the total revenues, net loss, and acquisition costs of the Company's 2015 acquisitions:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Multifamily Community
 
2015
 
2015
Uptown Buckhead
 
 
 
 
 
Total Revenues
 
$
701,102

 
739,948

 
Net Loss
 
(261,253
)
 
(396,715
)
 
Acquisition Costs
 
1,795

 
162,412

 
Acquisition Fee
 

 
892,102

Farrington Lake
 
 
 
 
 
Total Revenues
 
$
467,619

 
$
467,619

 
Net Loss
 
(962,950
)
 
(962,950
)
 
Acquisition Costs
 
148,638

 
148,638

 
Acquisition Fee
 
1,096,992

 
1,096,992

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of rental leases. The gross value of acquired in-place leases totaled $3.3 million and $1.5 million as of June 30, 2015 and December 31, 2014, respectively, net of accumulated amortization of $1.7 million and $351,363, respectively. The weighted average remaining life of the rental leases is seven months as of June 30, 2015. Amortization expense for the three months ended June 30, 2015 and June 30, 2014 was $942,074 and $58,560, respectively. Amortization expense for the six months ended June 30, 2015 and June 30, 2014 was $1.4 million and $58,560, respectively. As of June 30, 2015, expected amortization for the rental leases for the next 12 months is $1.5 million.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


NOTES 8 - MORTGAGE NOTES PAYABLE
The following is a summary of the Company's mortgage notes payable as of June 30, 2015:
 
 
Balance Outstanding at
 
Maturity
Date
 
Interest Rate
 
Average
Monthly Debt
Service
 
Interest Expense
Collateral
 
June 30, 2015
 
 
June 30, 2015
 
 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015
Adair off Addison
 
$
7,465,000

 
7/1/2024
 
2.56
%
 
$
15,944

 
$
63,776

 
$
127,030

Overton Trails Apartment Homes
 
31,075,000

 
1/1/2025
 
2.09
%
 
54,471

 
162,521

 
323,257

Uptown Buckhead
 
20,200,000

 
7/1/2025
 
2.59
%
 
40,740

 

 

 
 
$
58,740,000

 
 
 
 
 
 
 
 
 
 
On June 4, 2014, in connection with the acquisition of Adair off Addison, the Company entered into a $7.5 million, secured mortgage loan with Berkadia Commercial Mortgage, LLC (the "Adair off Addison Mortgage Loan"), secured by Adair off Addison. The Adair off Addison Mortgage Loan, which matures on July 1, 2024, bears interest at a floating rate of one-month LIBOR plus 2.37%. Monthly payments are initially interest only. Beginning with the August 2018 payment, monthly payments will include interest and principal, based upon current interest rates, in the amount of approximately $28 thousand per month.
On December 19, 2014, in connection with the acquisition of Overton Trails Apartment Homes, the Company entered into a $31.1 million, secured mortgage loan with M&T Realty Capital Corporation (the "Overton Trails Mortgage Loan"), secured by Overton Trails Apartment Homes. The Overton Trails Mortgage Loan, which matures on January 1, 2025, bears interest at a floating rate of one-month LIBOR plus 1.90%. Monthly payments are initially interest only. Beginning with the February 2017 payment, monthly payments will include interest and principal, based upon current interest rates, in the amount of approximately $109 thousand per month.
On June 30 2015, the Company entered into a $20.2 million secured mortgage loan with Prudential Multifamily Mortgage, LLC (the "Uptown Buckhead Mortgage Loan"), secured by Uptown Buckhead. The Uptown Buckhead Mortgage Loan, which matures on July 1, 2025, bears interest at a floating rate of one-month LIBOR plus 2.407%. Monthly payments are initially interest only. Beginning with the July 2017 payment, monthly payments will include interest and principal, based upon current interest rates, in the amount of approximately $74 thousand per month.
Annual principal payments on the mortgage note payable for each of the next five 12-month periods ending June 30, and thereafter, are as follows:
2016
$

2017
322,096

2018
1,031,571

2019
1,171,294

2020
1,171,294

Thereafter
55,043,745


$
58,740,000




RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


NOTE 9 - DEFERRED FINANCING COSTS
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. As of June 30, 2015 and December 31, 2014, accumulated amortization of deferred financing costs was $40,540 and $9,581, respectively. Amortization of deferred financing costs for the next five 12-month periods ending June 30, and thereafter, is as follows:
2016
$
120,122

2017
119,540

2018
118,234

2019
116,048

2020
114,002

Thereafter
503,161

 
$
1,091,107

NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss for the six months ended June 30, 2015:
 
Unrealized loss
on derivatives
January 1, 2015
$
(34,468
)
Change in unrealized loss on designated hedge
(41,799
)
June 30, 2015
$
(76,267
)
NOTE 11 - RELATED PARTY TRANSACTIONS
Pursuant to the terms of the Advisory Agreement, the Advisor provides the Company with its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of the Sponsor or one of its affiliates. The Company does not have any employees. The Advisor is not obligated to dedicate any specific portion of its time or the time of its personnel to the Company’s business. The Advisor is at all times subject to the supervision and oversight of the Company’s Board of Directors and has only such functions and authority as the Company delegates to it.
During the course of the offering, the Advisor will provide offering-related services to the Company and will advance funds to the Company for both operating costs and organization and offering costs. These amounts will be reimbursed to the Advisor from the proceeds from the offering, although there can be no assurance that the Company’s plans to raise capital will be successful. As of June 30, 2015, the Advisor has incurred costs on a cumulative basis on behalf of the Company of approximately $4.0 million.
Relationship with the Advisor
The Advisory Agreement has a one-year term and renews for an unlimited number of successive one-year terms upon the approval of the conflicts committee of the Company's Board of Directors. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:
Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Advisor earns a monthly asset management fee equal to one-twelfth of 1.0% of the cost of each asset, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs of up to 2.5% of gross offering proceeds. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.
On June 4, 2014, the Advisor provided a $1.3 million bridge loan (the “Bridge Loan”) to the Company. The Company used the proceeds of the Bridge Loan to partially finance the acquisition of Adair off Addison. The Bridge Loan, which was scheduled to mature on December 4, 2014, incurred interest at an annual rate of LIBOR plus 3.0%. The Company repaid the Bridge Loan in full on June 30, 2014 and paid $2,242 in interest during 2014.    
Relationship with RAI
Self-insurance funds held in escrow. The receivable from related party includes escrow funds held by RAI for self-insurance. The Company's properties participate in an insurance pool with other properties directly and indirectly managed by RAI. RAI holds the escrow funds related to the insurance pool on its books. The insurance pool covers losses up to $2.5 million. Catastrophic insurance would cover losses in excess of the insurance pool up to $140 million. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results.
Internal audit fees. RAI performs internal audit services for the Company.    
Relationship with Resource Real Estate Opportunity Manager II
Resource Real Estate Opportunity Manager II, LLC (the “Manager”), an affiliate of the Advisor, manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments.
Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.
Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company.
Relationship with Resource Securities
Resource Securities, Inc. (“Resource Securities”), an affiliate of the Advisor, serves as the Company’s dealer-manager and is responsible for marketing the Company’s shares during the primary portion of its public offering. Pursuant to the terms of the dealer-manager agreement with Resource Securities, the Company pays Resource Securities a selling commission of up to 7% of gross primary offering proceeds and a dealer-manager fee of up to 3% of gross primary offering proceeds. Resource Securities reallows all selling commissions earned and a portion of the dealer-manager fee as a marketing fee to participating broker-dealers.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


No selling commissions or dealer-manager fees are earned by Resource Securities in connection with sales under the distribution reinvestment plan. Additionally, the Company may reimburse Resource Securities for bona fide due diligence expenses.
Relationship with Other Related Party
The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), the principal owner of which is the father of RAI’s Chief Financial Officer.
The fees earned/expenses incurred and the amounts payable to such related parties are summarized in the following table:
 
June 30,
2015
 
December 31,
2014
Due from related parties:
 
 
 
Advisor
$
18,466

 
$

Resource Securities

 
3,944

RAI - self-insurance funds held in escrow
200,461

 
30,081

 
$
218,927

 
$
34,025

 
 
 
 
Due to related parties:
 
 
 
Advisor
 
 
 
Asset management fees
$
137,330

 
$
28,456

Organization and offering costs
623,035

 
2,272,325

Operating expense reimbursements
289,308

 
1,145,784

 
 
 
 
Manager
 
 
 
Property management fees
51,166

 
6,391

Expense reimbursements
112,663

 
39,592

 
 
 
 
Resource Securities
 
 
 
Selling commissions and dealer-manager fees
225,150

 
358,715

 
 
 
 
 
$
1,438,652

 
$
3,851,263

 
 
 
 
Graphic Images (1)
$
10,333

 
$
81,424

 
(1)
Included in Accrued expenses on the consolidated balance sheets.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Fees earned / expenses incurred:
 
 
 
 
 
 
 
Advisor
 
 
 
 
 
 
 
Acquisition fees
$
1,263,136

 
$
204,186

 
$
2,159,232

 
$
204,186

Asset management fees
$
334,158

 
$
7,397

 
512,287

 
7,397

Debt financing fees
$
101,000

 
$
37,325

 
101,000

 
37,325

Organization and offering costs
$
461,542

 
$
2,073,061

 
953,684

 
2,073,061

Overhead allocation
$
300,440

 
$
725,546

 
545,293

 
725,546

Interest expense
$

 
$
2,242

 

 
2,242

 
 
 
 
 
 
 
 
Manager
 
 
 
 
 
 
 
Property management fees
$
118,355

 
$
5,824

 
192,916

 
5,824

Construction management fees
$
76,827

 
$

 
76,827

 

Operating expense reimbursements
$
23,193

 
$
16,543

 
67,821

 
16,543

 
 
 
 
 
 
 
 
Resource Securities
 
 
 
 
 
 
 
Selling commissions and dealer-manager fees
$
5,648,639

 
$
187,901

 
14,613,722

 
187,901

 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
Graphic Images
$
257,994

 
$
54,582

 
263,573

 
54,582

NOTE 12 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10,000,000 shares of its $0.01 par value preferred stock. As of June 30, 2015, no shares of preferred stock were issued or outstanding.
Convertible Stock
As of June 30, 2015, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 7% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on or after the 31st trading day following the listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 7% return threshold.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


Common Stock
As of June 30, 2015, the Company had an aggregate of 23,985,818 shares of $0.01 par value common stock outstanding, including the Advisor's additional purchase of 117,778 shares of common stock for $1.1 million, as follows:
 
 
Shares Issued
 
Gross Proceeds
Initial public offering
 
23,572,110

 
$
234,921,286

Shares issued through stock distributions
 
126,679

 

Shares issued through distribution reinvestment plan
 
277,071

 
2,632,179

Advisor's initial investment, net of 5,000 share conversion
 
15,000

 
150,000

Redemptions
 
(5,042
)
 
(50,000
)
 
 
23,985,818

 
$
237,653,465

Redemptions
During the six months ended June 30, 2015, the Company redeemed shares as follows:
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price Paid per Share
 
Cumulative Number
of Shares Purchased
as Part of a Publicly
Announced Plan or
Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
January 2015
 
 
$—
 
 
(2) 
February 2015
 
 
$—
 
 
(2) 
March 2015
 
5,042
 
$9.92
 
5,042
 
(2) 
April 2015
 
 
$—
 
 
(2) 
May 2015
 
 
$—
 
 
(2) 
June 2015
 
 
$—
 
 
(2) 

(1)
All purchases of equity securities by the Company in the six months ended June 30, 2015 were made pursuant to the Company's share redemption program.
(2)
The Company currently limits the dollar value and number of shares that may be repurchased under the program, as discussed below.
All redemption requests tendered were honored during the six months ended June 30, 2015.
The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption.  Generally, the cash available for redemption will be limited to proceeds from the distribution reinvestment plan plus, if the Company had positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.  These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility.      


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


Distributions
For the six months ended June 30, 2015, the Company paid aggregate distributions of $3.9 million, including $1.5 million of distributions paid in cash and $2.4 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows:
Authorization Date
 
Per
Common
Share
 
Record Dates
 
Distribution Date
 
Distributions
reinvested in shares
of Common Stock
 
Net Cash Distributions
 
Total Aggregate
Distributions
November 13, 2014
 
$
0.00164384

 
December 31, 2014 through January 29, 2015
 
January 30, 2015
 
$
169,967

 
$
89,412

 
$
259,379

January 26, 2015
 
0.00164384

 
January 30, 2015 through February 26, 2015
 
February 27, 2015
 
208,353

 
115,274

 
323,627

January 26, 2015
 
0.00164384

 
February 27, 2015 through March 30, 2015
 
March 31, 2015
 
352,604

 
208,396

 
561,000

March 24, 2015
 
0.00164384

 
March 31, 2015 through April 29, 2015
 
April 30, 2015
 
465,774

 
290,181

 
755,955

March 24, 2015
 
0.00164384

 
April 30, 2015 through May 28, 2015
 
May 29, 2015
 
538,684

 
352,751

 
891,435

March 24, 2015
 
0.00164384

 
May 29, 2015 through June 29, 2015
 
June 30, 2015
 
681,964

 
468,622

 
1,150,586

 
 
 
 
 
 
 
 
$
2,417,346

 
$
1,524,636

 
$
3,941,982

On May 19, 2015, the Company's Board of Directors authorized a stock distribution of 0.00500 shares of common stock, or 0.5% of each outstanding share of common stock, to the stockholders of record at the close of business on June 30, 2015. Such stock distribution was issued on July 15, 2015.
On June 25, 2015, the Company's Board of Directors authorized cash distributions to the stockholders of record at the close of business each day in the period commencing June 30, 2015 through September 29, 2015 equal to a daily amount of $0.00164384 per share of common stock, payable on July 31, 2015, August 31, 2015 and September 30, 2015.
NOTE 13 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


The determination of where an asset or liability falls in the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, the Company expects that changes in classifications between levels will be rare.
The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.    

Derivatives (interest rate caps) which are reported at fair value in the consolidated balance sheets are valued by a third party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2)

The following table presents information about the Company's assets measured at fair value on a recurring basis and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows:
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
97,846

 
$

 
$
97,846

 
$

 
$
97,846

 
$

 
$
97,846

 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
53,002

 
$

 
$
53,002

 
$

 
$
53,002

 
$

 
$
53,002

Interest rate caps are included in Prepaid expenses and other assets on the consolidated balance sheets:
The carrying amount and fair value of the Company’s mortgage notes payable are as follows:
 
June 30, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Mortgage notes payable
$
58,740,000

 
$
58,740,000

 
$
38,540,000

 
$
38,540,000

Since the interest rates are variable, the fair value of the mortgage notes payable are equal to these carrying amounts.
NOTE 14 - DERIVATIVES AND HEDGING ACTIVITIES
As of June 30, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivative
 
Number of Instruments
 
Notional
Amount
 
Maturity Dates
Interest rate caps
 
3
 
$
58,740,000

 
November 1, 2018 and January 1, 2018


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2015
(unaudited)


Tabular Disclosure of Fair Value of Derivative Instrument on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments, which are included in prepaid expenses and other assets on the consolidated balance sheets:
Asset Derivatives
 
Liabilities Derivatives
June 30, 2015
 
December 31, 2014
 
June 30, 2015
 
December 31, 2014
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Interest rate caps
 
$
97,846

 
Interest rate caps
 
$
53,002

 
NA
 
$

 
NA
 
$

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
NOTE 15 - OPERATING EXPENSE LIMITATION
As required under the Company's charter, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of the average invested assets or 25% of net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined under GAAP, that are in any way related to operations, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential investments that do not close), disposition fees on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property). Operating expenses for the four quarters ended June 30, 2015 exceeded the charter imposed limitation; however, the conflicts committee of the board of directors determined that the excess was justified for these periods given the costs of operating a public company and the early stage of the Company's operations.
NOTE 16 - SUBSEQUENT EVENTS

On July 22, 2015, the Company entered into an agreement of sale to purchase a 200-unit multifamily community located in Dallas, Texas from an unaffiliated seller for $21.3 million.

On July 28, 2015, the Company, through a wholly owned subsidiary, entered into a five-year secured mortgage loan with
Bank of America, N.A., an unaffiliated lender, for borrowings of approximately $32.0 million secured by Farrington Lakes (the
“Farrington Mortgage Loan”). The Farrington Mortgage Loan matures on July 28, 2020.

On August 13, 2015, the Company entered into an agreement of sale to purchase a 252-unit multifamily community located in Atlanta, Georgia from an unaffiliated seller for $41.0 million.
The Company has evaluated subsequent events and determined that no additional events have occurred which would require an adjustment to the consolidated financial statements.






ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (unaudited)
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT II, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT II, Inc., a Maryland corporation, and, as required by context, RRE Opportunity OP II, LP, a Delaware limited partnership, and to their subsidiaries.
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
Overview
We are a Maryland corporation that intends to invest in multifamily assets across the entire spectrum of investments in order to provide investors with growing cash flow and increasing asset values. Our targeted portfolio will consist, at the time of acquisition, of commercial real estate assets, principally (i) underperforming multifamily rental properties which we will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which we will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans we originate or purchase either directly or with a co-investor or joint venture partner. We anticipate acquiring approximately 60% of our total assets in category (i) listed above, 20% of total assets in category (ii) listed above, and 20% of our total assets in category (iii) listed above. We believe multiple opportunities exist within the multifamily industry today and will continue to present themselves over the next few years to real estate investors who possess the following characteristics: (i) extensive experience in multifamily investing, (ii) strong management platforms specializing in operational and financial performance optimization, (iii) financial sophistication allowing them to benefit from complex opportunities and (iv) the overall scale and breadth of a national real estate platform in both the equity and debt markets. If we are only able to raise an amount substantially less than our maximum offering, our plan of operation will be scaled down considerably and we would expect to acquire a limited number of assets. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that Resource Real Estate Opportunity Advisor II, LLC, our external advisor, or the Advisor, presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code, and to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, our portfolio composition may vary from what we initially expect.
We commenced the public offering of our common stock in February 2014. We describe this offering in “Liquidity and Capital Resources,” below.
Results of Operations
We were formed on September 28, 2012.  We commenced active real estate operations on June 4, 2014 with the acquisition of our first multi-family property.  As of June 30, 2015, we owned four multifamily properties. Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.



Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014
As a result of the timing of our commencement of our public offering and active real estate operations, comparative operating results are not relevant to a discussion of operations for the two periods represented. We expect revenue and expenses to increase in future periods as we acquire additional properties. The following table sets forth the results of our operations:
 
Three Months Ended
 
June 30,
 
2015
 
2014
Revenues:
 
 
 
Rental income
$
2,751,105

 
$
112,639

Interest income
25,895

 
183

Total revenues
2,777,000

 
112,822

 
 
 
 
Expenses:
 
 
 
Rental operating
1,437,560

 
39,748

Acquisition costs
1,263,135

 
269,391

Management fees - related parties
452,513

 
50,546

General and administrative
892,023

 
687,598

Loss on disposal of assets
608,364

 
198,840

Depreciation and amortization expense
1,844,447

 
83,338

Total expenses
6,498,042

 
1,329,461

 Loss before other expense
(3,721,042
)
 
(1,216,639
)
 
 
 
 
Other expense:
 
 
 
Interest expense
(228,854
)
 
(16,356
)
Net loss
$
(3,949,896
)
 
$
(1,232,995
)
Revenues. During the three months ended June 30, 2015, our revenue was primarily from the rent of our multifamily properties, which increased from one property at June 30, 2014 to four properties at June 30, 2015.
Expenses.  Our operating expenses for the three months ended June 30, 2015 were from the ongoing operations of our business and the ownership of four operating properties. Accordingly, we incurred increased management fees, general and administrative expenses, and depreciation and amortization expenses.  
General and administrative expenses were $892,023, primarily related to the following:
Company level expenses included $287,726 in payroll costs allocated to us by our Advisor, $35,464 of director and officer's insurance, $34,610 of director fees, and $82,221 of professional fees.
Property level expenses of $327,540 were related to the operations of our four multifamily properties.
Acquisition costs of $1.3 million related to the acquisition of Farrington Lakes, a multifamily property purchased May 19, 2015, with an aggregate purchase price of $46.8 million.
Loss on disposal of assets increased from $198,840 for the three months ended June 30, 2014 to $608,364 for the three months ended June 30, 2015, primarily related to the increase in properties owned.
We recorded $228,854 of interest expense related to the mortgage loans secured by three of our multifamily properties and amortization of deferred financing costs.



Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014
As a result of the timing of our commencement of our public offering and active real estate operations, comparative operating results are not relevant to a discussion of operations for the two periods represented. We expect revenue and expenses to increase in future periods as we acquire additional properties. The following table sets forth the results of our operations:
 
Six Months Ended
 
June 30
 
2015
 
2014
Revenues:
 
 
 
Rental income
$
4,431,141

 
$
112,639

Interest income
45,085

 
282

Total revenues
4,476,226

 
112,921

 
 
 
 
Expenses:
 
 
 
Rental operating
2,187,744

 
39,748

Acquisition costs
2,159,232

 
269,391

Management fees - related parties
705,203

 
50,546

General and administrative
1,547,652

 
687,598

Loss on disposal of assets
1,011,230

 
198,840

Depreciation and amortization expense
2,781,664

 
83,338

Total expenses
10,392,725

 
1,329,461

 Loss before other expense
(5,916,499
)
 
(1,216,540
)
 
 
 
 
Other expense:
 
 
 
Interest expense
(452,933
)
 
(16,356
)
Net loss
$
(6,369,432
)
 
$
(1,232,896
)
Revenues. During the six months ended June 30, 2015, our revenue was primarily from the rent of our multifamily properties, which increased from one property at June 30, 2014 to four properties at June 30, 2015.
Expenses.  Our operating expenses for the six months ended June 30, 2015 were from the ongoing operations of our business and the ownership of four operating properties. Accordingly, we incurred increased management fees, general and administrative expenses, and depreciation and amortization expenses.  
General and administrative expenses were $1.5 million, primarily related to the following:
Company level expenses included $507,151 in payroll costs allocated to us by our Advisor, $71,520 of director and officer's insurance, $64,813 of director fees, and $208,822 of professional fees.
Property level expenses of $498,277 were related to the operations of our four multifamily properties.
Acquisition costs of $2.2 million related to the acquisitions of Uptown Buckhead and Farrington Lakes, with an aggregate purchase price of $79.3 million.
Loss on disposal of assets increased from $198,840 for the six months ended June 30, 2014 to $1.0 million for the six months ended June 30, 2015, primarily related to the increase in properties owned.
We recorded $452,933 of interest expense related to the mortgage loans secured by three of our multifamily properties and amortization of deferred financing costs.




Liquidity and Capital Resources
We are offering and selling to the public in our public offering up to $1.0 billion in shares of common stock, $0.01 par value per share, at $10 per share. We are also offering up to $95.0 million in shares of our common stock to be issued pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares at $9.50 per share.    We anticipate deriving the capital required to purchase real estate investments and conduct our operations from the proceeds of our public offering and any future offerings we may conduct, from secured or unsecured financings from banks or other lenders, from proceeds from the sale of assets and from any undistributed funds from our operations. In addition, our Advisor has and will advance funds to us for certain accrued organization and offering costs. As of June 30, 2015, we had not identified any additional sources of financing. As of June 30, 2015, we have identified two additional properties that we may acquire; although we cannot guarantee that we will acquire such properties.
If we are unable to raise substantial funds in the offering, we will make fewer investments resulting in less diversification in terms of the type, number and size of investments we make and the value of an investment in us will fluctuate with the performance of the specific assets we acquire. Further, we will have certain fixed operating expenses, including certain expenses as a publicly offered REIT, regardless of whether we are able to raise substantial funds in our offering. Our inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, reducing our net income and limiting our ability to make distributions. As of June 30, 2015, we had raised $234.9 million in our public offering.
We intend to allocate funds as necessary to aid our objective of preserving value for our investors by supporting the maintenance and viability of properties we acquire in the future. If such allocations and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold. We cannot assure you that we will be able to access additional funds when we need them or upon acceptable terms.
We may obtain REIT-level financing through a line of credit from third-party financial institutions or other commercial lenders. Our assets will serve as collateral for this type of debt incurred to acquire real estate investments. In addition to debt financing at the REIT-level, we have financed, and may continue to finance, the acquisition costs of individual real estate investments, as well as the acquisition costs of all or a group of real estate investments acquired by us, by causing our subsidiaries to borrow directly from third-party financial institutions or other commercial lenders. Under these circumstances, our Advisor anticipates that certain properties will serve as collateral for the debt we incur to acquire those particular properties and that we will seek to obtain nonrecourse financing for the acquisition of the properties. However, there is no guarantee that our Advisor will be successful in obtaining financing arrangements on a property-by-property basis and that the loans would be nonrecourse to us. Finally, we may also obtain seller financing with respect to specific assets that we acquire.
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor and the dealer manager of our public offering, which is an affiliate of our Advisor. During our organization and offering stage, these payments will include payments to the dealer manager for selling commissions and the dealer manager fee and payments to the dealer manager and our Advisor for reimbursement of organization and offering expenses. However, our Advisor has agreed to reimburse us to the extent that selling commissions, the dealer manager fee and other organization and offering expenses incurred by us exceed 15% of our gross offering proceeds. During our acquisition and development stage, we expect to make payments to our Advisor in connection with the selection or purchase of real estate investments, the management of our assets and costs incurred by our Advisor in providing services to us. We describe these payments in more detail in Note 11 to our consolidated financial statements.
Capital Expenditures
We deployed a total of $1.9 million during the six months ended June 30, 2015 for capital expenditures primarily related to unit rehabilitations at Adair off Addison and Overton Trails Apartment Homes. Over the next two years, we have budgeted additional capital expenditures as follows: $2.1 million at Adair off Addison; $7.0 million at Overton Trails Apartment Homes; $4.0 million at Uptown Buckhead and $8.3 million at Farrington Lakes.



Common Stock
As of June 30, 2015, we had an aggregate of 23,985,818 shares of $0.01 par value common stock outstanding, including the Advisor's additional purchase of 117,778 shares of common stock for $1.1 million, as follows:
 
 
Shares Issued
 
Gross Proceeds
Initial public offering
 
23,572,110

 
$
234,921,286

Shares issued through stock distributions
 
126,679

 

Shares issued through distribution reinvestment plan
 
277,071

 
2,632,179

Advisor's initial investment, net of 5,000 share conversion
 
15,000

 
150,000

Redemptions
 
(5,042
)
 
(50,000
)
 
 
23,985,818

 
$
237,653,465

Debt
The following is a summary of our mortgage notes payable:
 
 
 
 
Maturity
Date
 
 
 
Average
Monthly Debt
Service
 
Interest Expense
Collateral
 
Balance Outstanding June 30, 2015
 
 
Interest Rate June 30, 2015
 
 
Three Months Ended 
 June 30, 2015
 
Six Months Ended 
 June 30, 2015
Adair off Addison
 
$
7,465,000

 
7/1/2024
 
2.56
%
 
$
15,944

 
$
63,776

 
$
127,030

Overton Trails Apartment Homes
 
31,075,000

 
1/1/2025
 
2.09
%
 
54,471

 
162,521

 
323,257

Uptown Buckhead
 
20,200,000

 
7/1/2025
 
2.59
%
 
40,740

 

 

 
 
$
58,740,000

 
 
 
 
 
 
 
 
 
 
On June 4, 2014, in connection with our acquisition of Adair off Addison, we entered into a $7.5 million, 10-year secured mortgage loan with Berkadia Commercial Mortgage, LLC, (the "Adair off Addison Mortgage Loan"), secured by Adair off Addison. The Adair off Addison Mortgage Loan matures on July 1, 2024. The Adair off Addison Mortgage Loan bears interest at a floating rate of one-month London InterBank Offered Rate, or LIBOR, plus 2.37%. Monthly payments are initially interest only. Beginning with the August 2018 payment, monthly payments will include interest and repayments of principal, based upon current interest rates, in the amount of approximately $28 thousand per month.
On December 19, 2014, in connection with our acquisition of Overton Trails Apartment Homes, we entered into a $31.1 million, secured mortgage loan with M&T Reality Capital Corporation (the "Overton Trails Mortgage Loan"), secured by Oak Hill. The Overton Trails Mortgage Loan, which matures on January 1, 2025, bears interest at a floating rate of one-month LIBOR plus 1.90%. Monthly payments are initially interest only. Beginning with the February 2017 payment, monthly payments will include interest and principal, based upon current interest rates, in the amount of approximately $109 thousand per month.
On June 30 2015, the Company entered into a $20.2 million, secured mortgage loan with Prudential Multifamily Mortgage, LLC (the "Uptown Buckhead Mortgage Loan"), secured by Uptown Buckhead. The Uptown Buckhead Mortgage Loan, which matures on June 1, 2025, bears interest at a floating rate of one-month LIBOR plus 2.41%. Monthly payments are initially interest only. Beginning with the July 2017 payment, monthly payments will include interest and principal, based upon current interest rates, in the amount of approximately $74 thousand per month.
On June 4, 2014, the Advisor provided us a $1.3 million bridge loan, or the Bridge Loan. We used the proceeds of the Bridge Loan to partially finance the acquisition of Adair off Addison. The Bridge Loan, which was scheduled to mature on December 4, 2014, incurred interest at an annual rate of LIBOR plus 3.0%. As of June 30, 2015, we had repaid the Bridge Loan in full and paid $2,242 in interest.



Operating Properties
As of June 30, 2015, our wholly-owned interests in multifamily properties were as follows:
Subsidiary
 
Apartment Complex
 
Number
of Units
 
Property Location
RRE Bear Creek Holdings, LLC, or Bear Creek
 
Adair off Addison
 
152
 
Dallas, TX
RRE Oak Hill Holdings, LLC, or Oak Hill
 
Overton Trails Apartment Homes
 
360
 
Fort Worth, TX
RRE Buckhead Holdings, LLC, or Buckhead
 
Uptown Buckhead
 
216
 
Atlanta, GA
RRE Farrington Holdings, LLC, or Farrington
 
Farrington Lake
 
411
 
Chapel Hill, NC
 
 
 
 
1,139
 
 
As two of our multifamily properties are located in the Dallas-Fort Worth area, our portfolio is currently particularly susceptible to adverse economic developments in this real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.
Organization and Offering Costs
Our Advisor has advanced funds to us for certain organization and offering costs.  We reimburse the Advisor for all of the expenses paid or incurred by our Advisor or its affiliates on our behalf or in connection with the services provided to us in relation to our ongoing public offering.  This includes all organization and offering costs other than selling commissions and dealer manager fees, but only to the extent that such reimbursement will not cause organizational and offering expenses (other than selling commissions and the dealer manager fee) to exceed 2.5% of gross offering proceeds as of the date of such reimbursement.  As of June 30, 2015, the Advisor has advanced a total of $4.0 million for organization and offering costs and received $3.3 million in reimbursements.    
Acquisition and Asset Management Costs    
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor. During our acquisition stage, we expect to make payments to our Advisor in connection with the acquisition of real estate investments. In addition, we expect to continue to make payments to our Advisor for the management of our assets and costs incurred by our Advisor in providing services to us. We describe these payments in more detail in Note 11 of the notes to our consolidated financial statements.
Operating Expenses
Under our charter, our Advisor must reimburse us the amount by which our aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of our average invested assets or 25% of our net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of our assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by us, as determined under GAAP, that are in any way related to our operation, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of our stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of our assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential investments that we do not close), disposition fees on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property). Operating expenses for the four quarters ended June 30, 2015 exceeded the charter imposed limitation; however, the conflicts committee of our board of directors determined that the excess was justified for these periods given the costs of operating a public company and the early stage of our operations.
Critical Accounting Policies
For a discussion on our critical accounting policies and estimates, see our Annual Report on Form 10-K for the year ended December 31, 2014.



Distributions
For the six months ended June 30, 2015, we paid aggregate distributions of $3.9 million, including $1.5 million of distributions paid in cash and $2.4 million of distributions reinvested in shares of common stock through our distribution reinvestment plan. Distributions declared, distributions paid and cash flows provided by (used in) operating activities were as follows for the six months ended June 30, 2015:
 
Distributions Paid
 
 
 
 
 
Distributions Declared
 
Sources of Distributions Paid
2015
Cash
 
Distributions Reinvested (DRIP)
 
Total
 
Cash Provided By (Used In) Operating Activities - Quarter to Date
 
Cash Provided By (Used In) Operating Activities - Year to Date
 
Total
 
Per Share
 
Amount Paid from Operating Activities/Percent of Total Distributions Paid
 
Amount Paid from Debt Financing/Percent of Total Distributions Paid
First Quarter
$
413,082

 
$
730,924

 
$
1,144,006

 
$
(1,966,650
)
 
$
(1,966,650
)
 
$
1,435,235

 
$
0.149589

 
-/-
 
$1,144,006/100%
Second Quarter
$
1,111,554

 
$
1,686,422

 
$
2,797,976

 
$
(1,093,808
)
 
$
(3,060,458
)
 
$
3,447,574

 
$
0.151233

 
-/-
 
$2,797,976/100%
Total
$
1,524,636

 
$
2,417,346

 
$
3,941,982

 
$
(3,060,458
)
 
 
 
$
4,882,809

 
 
 
 
 
 
On May 19, 2015, our Board of Directors authorized a stock distribution of 0.005 shares of common stock, or 0.500% of each outstanding share of common stock to the stockholders of record at the close of business on June 30, 2015. Such stock distribution was issued on July 15, 2015.
On June 25, 2015, our Board of Directors authorized cash distributions to the stockholders of record at the close of business each day in the period commencing June 30, 2015 through September 29, 2015 equal to a daily amount of $0.00164384 per share of common stock, payable on July 31, 2015, August 31, 2015 and September 30, 2015.
Funds from Operations and Modified Funds from Operations
Funds from operations, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests.  We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient.  As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance.  Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.  In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but are not limited to, commercial real estate assets, principally (i) non-performing or distressed loans, including but not limited to first- and second-priority mortgage loans, mezzanine loans, B-Notes and other loans, (ii) real estate that was foreclosed upon and sold by financial institutions, (iii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”), and (iv) discounted investment-grade commercial mortgage-backed securities.
Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Investment Program Association, or IPA.  MFFO excludes from FFO the following items:
(1)
acquisition fees and expenses;
(2)
straight-line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;



(5)
impairment charges;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our offering and acquisition stages are complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired.  Although MFFO includes other adjustments, the exclusion of acquisition expenses is the most significant adjustment to us at the present time, as we are currently in our offering and acquisition stage.  Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.    
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations.  Many of the adjustments in arriving at MFFO are not applicable to us.  Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:
Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs related to business combinations are expensed.  Both of these acquisition costs have been and will continue to be funded from the proceeds of our offering and not from operations.  We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those paid to our Advisor or third parties.
Adjustments for straight-line rents and amortization of discounts and premiums on debt investments.  In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
Adjustments for amortization of above or below market intangible lease assets.  Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue.  Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments.  Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance.  As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.





Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price.  Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations.  By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our offering and acquisition stages are completed.  We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry.  MFFO is useful in comparing the sustainability of our operating performance after our offering and acquisition stages are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments.  However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our offering and acquisition stages are completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.
Neither FFO nor MFFO should be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions.  In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments that are increases to MFFO and AFFO are, and may continue to be, a significant use of cash.  Accordingly, FFO and MFFO should be reviewed in connection with other GAAP measurements.  Our FFO and MFFO as presented may not be comparable to amounts calculated by other REITs.
The following section presents our calculation of FFO and MFFO and provides additional information related to our operations. As a result of the timing of the commencement of our initial public offering and our active real estate operations and the general and administrative expenses incurred in connection with these events. FFO and MFFO are not relevant to a discussion comparing operations for the two periods presented.  We expect revenues and expenses to increase in future periods as we acquire additional investments.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30
 
2015
 
2014
 
2015
 
2014
Net loss – GAAP
$
(3,949,896
)
 
$
(1,232,995
)
 
$
(6,369,432
)
 
$
(1,232,896
)
Depreciation expense
902,373

 
24,778