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

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Opportunity REIT, Inc.	rreo-20160331xex322.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT, Inc.	rreo-20160331xex311.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT, Inc.	rreo-20160331xex312.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT, Inc.	rreo-20160331xex321.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 March 31, 2016


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

For the transition period from __________ to __________

Commission File Number 000-54369

Resource Real Estate Opportunity REIT, Inc.

(Exact name of registrant as specified in its charter)



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

1845 Walnut Street, 18th Floor, Philadelphia, PA 19103
(Address of principal executive offices) (Zip code)
(215) 231-7050
(Registrant's telephone number, including area code)

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

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

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



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

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 May 5, 2016, there were 72,127,395 outstanding shares of common stock of Resource Real Estate Opportunity REIT, Inc.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

INDEX TO ANNUAL REPORT

ON FORM 10-Q



		PAGE
PART 1	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets - March 31, 2016 (unaudited) and December 31, 2015	3

	Consolidated Statements of Operations and Comprehensive Income - Three Months Ended March 31, 2016 and 2015 (unaudited)	4

	Consolidated Statement of Changes in Equity - Three Months Ended March 31, 2016 (unaudited)	5

	Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015 (unaudited)	6

	Notes to Consolidated Financial Statements - March 31, 2016 (unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	45

Item 4.	Controls and Procedures	45

PART II

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.	Defaults Upon Senior Securities	46

Item 6.	Exhibits	47

SIGNATURES		48

(Back to Index)

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.

(Back to Index)

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS (in thousands)



	March 31, 2016			December 31, 2015
	(unaudited)
ASSETS
Investments:
Rental properties, net	$	911,546		$	916,498
Other investments	5,057			4,643
Identified intangible assets, net	158			374
Assets held for sale - rental properties, net	—			69,350
Total investments	916,761			990,865

Cash	80,314			78,442
Restricted cash	6,480			9,987
Due from related parties	260			1,421
Tenant receivables, net	86			211
Deposits	192			230
Prepaid expenses and other assets	2,799			2,227
Goodwill	841			1,231
Other assets associated with rental properties held for sale	—			81
Total assets	$	1,007,733		$	1,084,695

LIABILITIES AND EQUITY
Liabilities:
Mortgage notes payable, net	$	554,798		$	591,545
Credit facility	11,394			21,894
Accounts payable	2,966			1,583
Accrued expenses and other liabilities	6,688			7,932
Accrued real estate taxes	4,406			6,856
Due to related parties	1,325			1,185
Tenant prepayments	1,083			1,212
Security deposits	2,581			2,626
Other liabilities associated with rental properties held for sale	—			16,763
Total liabilities	585,241			651,596

Equity:
Preferred stock (par value $.01; 10,000,000 shares authorized, none issued)	—			—
Common stock (par value $.01; 1,000,000,000 shares authorized; 73,013,756 and 72,333,652 shares issued, respectively; and 71,951,878 and 71,617,117 shares outstanding, respectively)	720			716
Convertible stock (“promote shares”; par value $.01; 50,000 shares authorized, issued and outstanding)	1			1
Additional paid-in capital	641,930			638,335
Accumulated other comprehensive loss	(384		)	(440		)
Accumulated deficit	(221,913		)	(213,366		)
Total stockholders’ equity	420,354			425,246
Noncontrolling interests	2,138			7,853
Total equity	422,492			433,099
Total liabilities and equity	$	1,007,733		$	1,084,695

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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)



	Three Months Ended
	March 31,
	2016			2015
Revenues:
Rental income	$	30,391		$	27,571
Interest and dividend income	165			163
Total revenues	30,556			27,734

Expenses:
Rental operating - expenses	7,609			7,935
Rental operating - payroll	3,857			4,207
Rental operating - real estate taxes	3,626			3,018
Subtotal - Rental operating expenses	15,092			15,160
Acquisition costs	—			1,701
Management fees	4,055			3,461
General and administrative	3,515			3,522
Loss on disposal of assets	142			1,109
Depreciation and amortization expense	11,394			10,297
Total expenses	34,198			35,250
Loss before other income (expense)	(3,642		)	(7,516		)

Other income (expense):
Net gains on dispositions of properties and joint venture interest	17,755			29,175
Interest expense	(5,773		)	(4,867		)
Insurance proceeds in excess of cost basis	140			247
Total other income (expense)	12,122			24,555

Net income	8,480			17,039
Net income attributable to noncontrolling interests	(6,281		)	(11		)
Net income attributable to stockholders	$	2,199		$	17,028

Net income	$	8,480		$	17,039
Other comprehensive income (loss):
Reclassification adjustment for realized loss on derivative due to sale	72			—
Designated derivatives, fair value adjustments	(16		)	(84		)
Comprehensive income	8,536			16,955
Comprehensive income attributable to noncontrolling interests	(6,281		)	(11		)
Total comprehensive income attributable to stockholders	$	2,255		$	16,944

Weighted average common shares outstanding	$	71,719		$	69,485
Basic and diluted income per common share:
Net income per share	$	0.03		$	0.25

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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016

(in thousands)

(unaudited)



	Common Stock					Convertible Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity			Noncontrolling interests			Total Equity
	Shares		Amount			Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity			Noncontrolling interests			Total Equity
Balance at January 1, 2016	71,617		$	716		50	$	1	$	638,335		$	(440	)	$	(213,366	)	$	425,246		$	7,853		$	433,099
Common stock issued through distribution reinvestment plan	680		7			—	—		7,249			—			—			7,256			—			7,256
Distributions on common stock	—		—			—	—		—			—			(10,746		)	(10,746		)	—			(10,746		)
Share redemptions	(345	)	(3		)	—	—		(3,654		)	—			—			(3,657		)	—			(3,657		)
Other comprehensive income	—		—			—	—		—			56			—			56			—			56
Deconsolidation of subsidiaries	—		—			—	—		—			—			—			—			(2,876		)	(2,876		)
Distribution to noncontrolling interests	—		—			—	—		—			—			—			—			(9,120		)	(9,120		)
Net income	—		—			—	—		—			—			2,199			2,199			6,281			8,480
Balance at March 31, 2016	71,952		$	720		50	$	1	$	641,930		$	(384	)	$	(221,913	)	$	420,354		$	2,138		$	422,492

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

(Back to Index)

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

	Three Months Ended
	March 31,
	2016			2015
Cash flows from operating activities:
Net income	$	8,480		$	17,039
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss on disposal of assets	142			1,109
Net gains on dispositions of properties and joint venture interests	(17,755		)	(29,175		)
Depreciation and amortization	11,394			10,297
Amortization of deferred financing costs	567			413
Amortization of fair value adjustment of debt	(120		)	(190		)
Realized loss on change in fair value of interest rate cap	72			—
Accretion of discount and direct loan fees and costs	(11		)	(13		)
Changes in operating assets and liabilities, net of acquisitions:
Restricted cash	3,023			626
Tenant receivables, net	59			252
Deposits	6			(753		)
Prepaid expenses and other assets	459			1,034
Due to/from related parties, net	1,301			538
Accounts payable and accrued expenses	(2,730		)	(3,279		)
Tenant prepayments	(97		)	(149		)
Security deposits	94			56
Net cash provided by (used in) operating activities	4,884			(2,195		)
Cash flows from investing activities:
Proceeds from disposal of properties and joint venture interests, net of closing costs	32,526			41,911
Property acquisitions	—			(46,715		)
Preferred equity acquisition	(408		)	—
Capital expenditures	(6,665		)	(7,709		)
Principal payments received on loans held for investment	5			9
Net cash provided by (used in) investing activities	25,458			(12,504		)

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

(Back to Index)



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (in thousands) (unaudited)
	Three Months Ended
	March 31,
	2016			2015
Cash flows from financing activities:
Redemptions of common stock	$	(3,657	)	$	(1,487	)
Payment of deferred financing costs	—			(403		)
Increase in borrowings on mortgages	—			26,280
Principal payments on borrowings on mortgages	(1,703		)	(1,446		)
Payments on line of credit	(10,500		)	(10,086		)
Distributions paid on common stock	(3,490		)	(3,231		)
Contributions of noncontrolling interests	—			69
Purchase of interest rate caps	—			(92		)
Distributions to noncontrolling interests	(9,120		)	—
Net cash (used in) provided by financing activities	(28,470		)	9,604
Net increase (decrease) in cash	1,872			(5,095		)
Cash at beginning of period	78,442			140,129
Cash at end of period	$	80,314		$	135,034

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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

(unaudited)

NOTE 1 - NATURE OF BUSINESS AND OPERATIONS

Resource Real Estate Opportunity REIT, Inc. (the “Company”) was organized in Maryland on June 3, 2009 to purchase a diversified portfolio of discounted U.S. commercial real estate and real estate-related assets in order to generate gains to stockholders from the potential appreciation in the value of the assets and to generate current income for stockholders by distributing cash flow from the Company’s investments. Resource Real Estate Opportunity Advisor, LLC (the “Advisor”), an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors, has been engaged to manage the day-to-day operations of the Company.

Through its private offering and primary public offering, which concluded on December 13, 2013, the Company raised aggregate gross offering proceeds of $645.8 million, which resulted in the issuance of 64.9 million shares of common stock, including 276,056 shares purchased by the Advisor and 1.2 million shares sold in the Company's distribution reinvestment plan. During the years ended December 31, 2015 and 2014, the Company issued 5.3 million additional shares for $51.9 million pursuant to its distribution reinvestment plan. During the three months ended March 31, 2016, the Company additionally issued 680,104 shares for $7.3 million pursuant to its distribution reinvestment plan. The Company's distribution reinvestment plan offering is ongoing.

The Company has acquired, and may continue to acquire, real estate-related debt and equity that has been significantly discounted due to the effects of economic events and high levels of leverage, as well as stabilized properties that may benefit from extensive renovations that may increase their long-term values. The Company has a particular focus on acquiring and operating multifamily assets, and it has targeted, and intends to continue to target, this asset class while also acquiring interests in other types of commercial property assets consistent with its investment objectives. The Company’s targeted portfolio consists of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate that was foreclosed upon and sold by financial institutions and (ii) multifamily rental properties to which the Company can add value with a capital infusion (referred to as “value add properties”). However, the Company is not limited in the types of real estate assets in which it may invest and, accordingly, it may invest in other real estate-related assets either directly or together with a co-investor or joint venture partner.

The Company is organized and conducts its operations in a manner intended to allow it to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended. The Company also operates its business in a manner intended to maintain its exemption from registration under the Investment Company Act of 1940, as amended.

The consolidated financial statements and the information and tables contained in the notes to the consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the three months ended March 31, 2016 may not necessarily be indicative of the results of operations for the full year ending December 31, 2016.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:



Subsidiary	Apartment Complex	Number of Units	Property Location
RRE Opportunity Holdings, LLC	N/A	N/A	N/A
Resource Real Estate Opportunity OP, LP	N/A	N/A	N/A
RRE Charlemagne Holdings, LLC	N/A	N/A	N/A
RRE Iroquois, LP (“Vista”)	Vista Apartment Homes	133	Philadelphia, PA

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



RRE Iroquois Holdings, LLC	N/A	N/A	N/A
RRE Cannery Holdings, LLC (“Cannery”)	Cannery Lofts	156	Dayton, OH
RRE Williamsburg Holdings, LLC (“Williamsburg”)	Williamsburg	976	Cincinnati, OH
WPL Holdings, LLC	N/A (a)	N/A	Cincinnati, OH
RRE Park Forest Holdings, LLC ("Park Forest")	Mosaic	216	Oklahoma City, OK
RRE Deerfield Holdings, LLC ("Deerfield")	Deerfield	166	Hermantown, MN
RRE Autumn Wood Holdings, LLC ("Autumn Wood")	Retreat at Rocky Ridge	206	Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")	Trailpoint at the Woodlands	271	Houston, TX
RRE Nob Hill Holdings, LLC ("Nob Hill")	Affinity at Winter Park	192	Winter Park, FL
RRE Brentdale Holdings, LLC ("Brentdale")	The Westside Apartments	412	Plano, TX
RRE Jefferson Point Holdings, LLC ("Jefferson Point")	Tech Center Square	208	Newport News, VA
RRE Centennial Holdings, LLC ("Centennial")	Verona Apartment Homes	276	Littleton, CO
RRE Pinnacle Holdings, LLC ("Pinnacle")	Skyview Apartment Homes	224	Westminster, CO
RRE Jasmine Holdings, LLC ("Jasmine")	The Nesbit Palisades	437	Alpharetta, GA
RRE River Oaks Holdings, LLC ("River Oaks")	Maxwell Townhomes	314	San Antonio, TX
RRE Nicollet Ridge Holdings, LLC ("Nicollet Ridge")	Meridian Pointe	339	Burnsville, MN
RRE Addison Place Holdings, LLC ("Addison Place")	The Estates at Johns Creek	403	Alpharetta, GA
PRIP Coursey, LLC ("Evergreen at Coursey Place")	Evergreen at Coursey Place (b)	352	Baton Rouge, LA
PRIP 10637, LLC ("Fieldstone")	N/A (b)	N/A	N/A
PRIP 500, LLC ("Pinehurst")	Pinehurst (b)	146	Kansas City, MO
PRIP 1102, LLC ("Pheasant Run")	Pheasant Run (b)	160	Lee's Summit, MO
PRIP 11128, LLC ("Retreat at Shawnee")	Retreat at Shawnee (b)	342	Shawnee, KS
PRIP Stone Ridge, LLC ("Stone Ridge")	N/A (b)	N/A	N/A
PRIP Pines, LLC ("Pines of York")	Pines of York (b)	248	Yorktown, VA
RRE Chisholm Place Holdings LLC ("Chisholm Place")	Chisholm Place	142	Plano, TX
RRE Berkeley Run Holdings, LLC ("Berkley Run")	Perimeter Circle	194	Atlanta, GA
RRE Berkeley Trace Holdings LLC ("Berkley Trace")	Perimeter 5550	165	Atlanta, GA
RRE Merrywood Holdings, LLC ("Merrywood")	Aston at Cinco Ranch	228	Katy, TX
RRE Sunset Ridge Holdings, LLC ("Sunset Ridge")	Sunset Ridge	324	San Antonio, TX
RRE Parkridge Place Holdings, LLC ("Parkridge Place")	Calloway at Las Colinas	536	Irving, TX
RRE Spring Hill Holdings, LLC ("Spring Hill")	N/A	N/A	N/A
RRE Woodmoor Holdings, LLC ("Woodmoor")	South Lamar Village	208	Austin, TX
RRE Gilbert Holdings, LLC ("Springs at Gilbert")	Heritage Pointe	458	Gilbert, AZ
RRE Bonita Glen Holdings, LLC ("Bonita")	Villages at Bonita Glen	295	Chula Vista, CA
RRE Yorba Linda Holdings, LLC ("Yorba Linda")	Yorba Linda	400	Yorba Linda, CA
		9,127
Entities related to sold properties:
RRE Crestwood Holdings, LLC (“Crestwood”)	(c)	N/A	N/A
RRE 107th Avenue Holdings, LLC (“107th Avenue”)	(c)	N/A	N/A
RRE Westhollow Holdings, LLC (“Westhollow”)	(c)	N/A	N/A
RRE Campus Club Holdings, LLC (“Campus Club”)	(c)	N/A	N/A
RRE Bristol Holdings, LLC (“Bristol”)	(c)	N/A	N/A
RRE Skyview Holdings, LLC ("Skyview")	(c)	N/A	N/A
RRE Foxwood Holdings, LLC ("Foxwood")	(c)	N/A	N/A
RRE Flagstone Holdings, LLC ("Flagstone")	(c)	N/A	N/A

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



RRE Kenwick Canterbury Holdings, LLC ("Kenwick & Canterbury")	(c)	N/A	N/A
RRE Armand Place Holdings, LLC ("Armand")	(d)	N/A	Houston, TX
PRIP 5060/6310, LLC ("Governor Park")	(b)(c)	N/A	N/A
PRIP 3700, LLC ("Champion Farms")	(b)(d)	N/A	N/A
PRIP 6700, LLC ("Hilltop Village")	(b)(c)	N/A	N/A
PRIP 3383, LLC ("Conifer Place")	(b)(d)	N/A	N/A

N/A - Not Applicable

(a) - Subsidiary holds a portion of the Williamsburg parking lot

(b) - Wholly-owned subsidiary of RRE Charlemagne Holdings, LLC

(d) - Sold in 2016

All intercompany accounts and transactions have been eliminated in consolidation.

The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” and accordingly consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it has been determined that the Company holds a variable interest in a VIE, management performs a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and re-evaluate the requirement to consolidate them. For consolidated entities (including VIEs of which the Company is the primary beneficiary), noncontrolling interests are presented and disclosed as a separate component of stockholders' equity (not as a liability or other item outside of stockholders' equity). Consolidated net income (loss) includes the noncontrolling interests’ share of income (loss). All changes in the Company’s ownership interest in a subsidiary are accounted for as stockholders' equity transactions if the Company retains its controlling financial interest in the subsidiary. The portions of these entities that the Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. The consolidated financial statements include the accounts of the Company's majority-owned and/or controlled subsidiaries, which are VIEs, as follows:



Subsidiary	Ownership %	Apartment Complex	Number of Units	Property Location
Springhurst Housing Partners, LLC ⁽¹⁾	70.0%	Champion Farms	N/A	Louisville, KY
Glenwood Housing Partners I, LLC	83.0%	Fieldstone	266	Woodlawn, OH
FPA/PRIP Conifer, LLC ⁽²⁾	42.5%	Conifer Place	N/A	Norcross, GA
DT Stone Ridge, LLC	83.4%	Stone Ridge	188	Columbia, SC

(1) On January 29, 2016, the Company sold its joint venture interest in Champion Farms to its joint venture partner. As such, the Company deconsolidated the entity as of January 29, 2016. The Company has no continuing involvement with this joint venture. (See Note 6)

(2) On January 27, 2016, the Company and its joint venture partner sold the Conifer Place Apartments, which resulted in the deconsolidation of the entity as of January 27, 2016. (See Note 6)

The Company's preferred equity investment is a VIE for which the Company has determined it is not the primary beneficiary; therefore, the Company does not consolidate the entity. The Company is not considered the primary beneficiary of the preferred equity investee because it does not possess the unilateral power to direct the key activities of investee that are considered most significant. Information with respect to the nature of the preferred equity investment, the carrying amount of the investment, and the Company’s maximum exposure to the losses (which equals the carrying amount of the investment plus additional funding commitments) are disclosed in Note 5.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Assets Held for Sale

The Company presents the assets and liabilities of any rental properties which have been sold subsequent to the balance sheet date, or otherwise qualify as held for sale, separately in the consolidated balance sheets. Real estate assets held for sale are measured at the lower of carrying amount or fair value less cost to sell. Both the real estate and the corresponding liabilities are presented separately in the consolidated balance sheets. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. At December 31, 2015, the Company had three rental properties included in assets held for sale. At March 31, 2016, there were no rental properties included in assets held for sale.

Rental Properties

The Company records acquired rental properties at fair value on their respective acquisition date. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates the rental properties using the straight line method. The Company anticipates the estimated useful lives of its assets by class as follows:



Buildings	27.5 years
Building improvements	3.0 to 27.5 years
Tenant improvements	Shorter of lease term or expected useful life

Improvements and replacements in excess of $1,000 are capitalized when they extend the useful life of the asset. Resource Real Estate Opportunity Manager, LLC (the “Manager”), an affiliate of the Advisor, earns a construction management fee of 5% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.

Impairment of Long Lived Assets

When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for permanent impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.

An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of a property to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset. There were no impairment charges during the three months ended March 31, 2016 and 2015.

Loans Held for Investment, Net

The Company records acquired performing loans held for investment at cost and reviews them for potential impairment at each balance sheet date. The Company considers a loan to be impaired if one of two conditions exists. The first condition is if, based on current information and events, management believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty. A TDR may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and/or guarantees made by the borrowers.

The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or, as a practical expedient, the fair value of the collateral. If a loan is deemed to be impaired, the Company records a reserve for loan losses through a charge to income for any shortfall.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

Interest income from performing loans held for investment is recognized based on the contractual terms of the loan agreement. Fees related to any buy down of the interest rate are deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income. The initial investment made in a purchased performing loan includes the amount paid to the seller plus fees. The initial investment frequently differs from the related loan’s principal amount at the date of the purchase. The difference is recognized as an adjustment of the yield over the life of the loan. Closing costs related to the purchase of a performing loan held for investment are amortized over the term of the loan and accreted as an adjustment to interest income.

The Company may acquire real estate loans at a discount due to the credit quality of such loans and the respective borrowers under such loans. Revenues from these loans are recorded under the effective interest method. Under this method, an effective interest rate (“EIR”) is applied to the cost basis of the real estate loan held for investment. The EIR that is calculated when the loan held for investment is acquired remains constant and is the basis for subsequent impairment testing and income recognition. However, if the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the loan held for investment has been fully recovered.

Preferred Equity Investment

The Company records its preferred equity investments at amortized cost. Investments carried at amortized cost are evaluated for impairment at each reporting date. When an investment is impaired and that impairment is considered other than temporary, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to its estimated fair value.

Dividend income is recognized when earned based on the contractual terms of the preferred equity agreement.

Allocation of the Purchase Price of Acquired and Foreclosed Assets

The cost of rental properties acquired directly as fee interests and through foreclosing on a loan are allocated to net tangible and intangible assets based on their relative fair values. The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and to identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships. Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports along with the aforementioned information available to the Company's management is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.

In allocating the purchase price, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period. Management also estimates costs to execute similar leases, including leasing commissions and legal and other related expenses, to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.

The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.

The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant. Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.

The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

Company’s existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The Company amortizes the value of in-place leases to expense over the average remaining term of the respective leases. The value of customer relationship intangibles are amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles associated with that tenant would be charged to expense in that period.

The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income. Initial purchase price allocations are subject to change until all information is finalized, which is generally within one year of the acquisition date.

Goodwill

The Company records the excess of the cost of an acquired entity over the difference between the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment at a level of reporting referred to as a reporting unit during the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Revenue Recognition

The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period in which the related expenses are incurred.

The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are $53.3 million and $434,000 for the 12 month periods ending March 31, 2017 and 2018, respectively, and none thereafter. The future minimum rental payments to be received from noncancelable operating leases for commercial rental properties and antenna rentals are $366,000, $286,000, $190,000, $124,000, $41,000, and $0 for the 12 month periods ending March 31, 2017, 2018, 2019, 2020, 2021, and thereafter, respectively.

Tenant Receivables

Tenant receivables are stated in the financial statements as amounts due from tenants net of an allowance for uncollectible receivables. Payment terms vary and receivables outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the general economy and the industry as a whole. The Company writes off receivables when they become uncollectible. At March 31, 2016 and December 31, 2015, there were allowances for uncollectible receivables of $4,189 and $24,100, respectively.

Income Taxes

To maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests. As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it fails its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

The dividends-paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Generally, taxable income differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.

The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, the Company’s TRSs may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. As of March 31, 2016 and December 31, 2015, the Company had no TRSs.

The Company evaluates the benefits from tax positions taken or expected to be taken in its tax return. Only the largest amount of benefits from tax positions that will more likely than not be sustainable upon examination are recognized by the Company. The Company does not have any unrecognized tax benefits, nor interest and penalties, recorded in its consolidated financial statements and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next 12 months.

The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations. The Company is not currently undergoing any examinations by taxing authorities. The Company is not subject to IRS examination for tax return years 2011 and prior.

Earnings Per Share

Basic earnings per share are calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share 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. None of the 50,000 shares of convertible stock (discussed in Note 12) are included in the diluted earnings per share calculations because the necessary conditions for conversion as of March 31, 2016 (were such date to represent the end of the contingency period) have not been satisfied.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current-year presentation. The impact of the reclassifications made to prior year amounts are not material and did not affect net income.

In accordance with the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) 2015-03, "Simplifying the Presentation of Debt Issuance Costs", the Company has reclassified $6.5 million of unamortized debt issuance costs at December 31, 2015 from assets to liabilities as a direct reduction of the related mortgage notes payable. In addition, deferred finance costs related to the Company's credit facility were reclassified to prepaid and other assets (See note 9).

Adoption of New Accounting Standards

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". 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 was 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. On January 1, 2016, the Company adopted ASU No. 2015-01 and the adoption had no impact on the Company's consolidated financial statements.

In February 2015, FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis", 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. On January 1, 2016, the Company adopted ASU 2015-02 and the adoption did not have a significant impact on the Company's consolidated financial statements.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

In April 2015, FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", 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 applied the new guidance on a retrospective basis and adjusted the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance was effective and was adopted by the Company on January 1, 2016. The Company has reclassified $6.5 million of unamortized debt issuance costs at December 31, 2015 from assets to liabilities as a direct reduction of the related mortgage notes payable.

In August 2015, FASB issued ASU 2015-15, "Interest - Imputation of Interest", which clarifies that debt issuance costs associated with line of credit arrangements may continue to be accounted for as assets and not as a direct deduction from the carrying amount of the debt liabilities. This guidance was effective and was adopted by the Company on January 1, 2016. Deferred finance costs related to the Company's credit facility were reclassified to prepaid and other assets (See note 9).

In September 2015, FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments", which eliminates the requirement to retroactively revise comparative financial information for prior periods presented in financial statements due to changes in provisional amounts recorded for acquisitions in subsequent periods. Upon adoption, disclosure of the amounts recorded in current-period earnings that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized at the acquisition date are required. ASU 2015-16 was effective and adopted by the Company on January 1, 2016 and the adoption had no impact on its consolidated financial statements.

Accounting Standards Issued But Not Yet Effective

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, 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 this guidance 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 February 2016, FASB issued ASU No. 2016-02, "Leases (Topic 842)", which requires lessees to recognize at the commencement date for all leases, with the exception of short-term leases, (a) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for the Company beginning January 1, 2019. The Company is evaluating this guidance; however, it does not expect the adoption of ASU 2016-02 to have a significant impact on its consolidated financial statements.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents supplemental cash flow information (in thousands):



	Three Months Ended
	March 31,
	2016		2015
Non-cash financing and investing activities:
Stock issued from the distribution reinvestment plan	$	7,256	$	7,183
Cash distributions on common stock declared but not yet paid	—		10,516
Deferred financing costs and escrow deposits funded directly by mortgage note and revolving credit facility	—		229

Non-cash activity related to sales:
Deconsolidation of mortgage note payable	16,443		—
Deconsolidation of rental properties, net	19,319		—
Noncontrolling interest of deconsolidated subsidiary	2,876		—
Mortgage notes payable settled through sale of property	35,422		—
Sale of property used to settle mortgage notes payable	35,422		—

Assets and liabilities assumed in acquisitions:
Debt assumed	—		12,862
Other liabilities assumed	—		99
Rental properties, net	—		12,961

Cash paid during the period for:
Interest	$	5,342	$	4,573

NOTE 4 - RENTAL PROPERTIES, NET

The Company’s investments in rental properties consisted of the following (in thousands):



	March 31, 2016			December 31, 2015
Land	$	180,533		$	180,533
Building and improvements	778,441			775,239
Furniture, fixtures and equipment	30,337			28,928
Construction in progress	4,316			2,949
	993,627			987,649
Less: accumulated depreciation	(82,081		)	(71,151		)
	$	911,546		$	916,498

Depreciation expense for the three months ended March 31, 2016 and 2015 was $11.2 million and $8.8 million, respectively.

During the three months ended December 31, 2015, the Company entered into agreements to sell two rental properties, Conifer Place and Ivy at Clear Creek , with a total net book value of $43.9 million. The Company confirmed the intent and ability to sell both properties in their present condition and both properties qualified for held for sale accounting treatment upon meeting all applicable criteria prior to December 31, 2015, at which time depreciation ceased. As such, the assets associated with these properties were separately classified and included as assets held for sale on the Company's consolidated balance sheet at December 31, 2015. However, the sale of these properties did not qualify for discontinued operations, and, therefore, the operations

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

for all periods presented continue to be classified within continuing operations on the Company's consolidated statements of operations. The Company completed the sales of Conifer Place and Ivy at Clear Creek during the three months ended March 31, 2016 (see Note 6).

In December 2015, the Company agreed to sell its 70% interest in the joint venture that owns Champion Farms Apartments to its joint venture partner. The sale was completed in January 2016. As such, all assets and liabilities of the consolidated entity have been reclassified to held for sale as of December 31, 2015 in the consolidated balance sheet. In January 2016, the Company deconsolidated the entity (see Note 6).

Loss on disposal of assets. During the three months ended March 31, 2016 and 2015, the Company recorded losses of $142,000 and $1.1 million, respectively, due to the replacement of appliances at its rental properties in conjunction with unit upgrades.

NOTE 5 - OTHER INVESTMENTS

The following table presents the components of Other Investments (in thousands):



	March 31, 2016		December 31, 2015
Loan held for investment, net	$	761	$	757
Preferred equity investment, net	4,296		3,886
	$	5,057	$	4,643

Preferred equity investment:

On November 12, 2014, the Company, through its wholly owned subsidiary, RRE Spring Hill Holdings, LLC, made a $3.5 million preferred equity investment in Spring Hill Investors Limited Partner, LLC (the “Investment Vehicle”) and became the Preferred Member. An unaffiliated limited liability company, Presidium AMC Spring Hill Venture, LLC, ("Presidium"), a Texas limited liability company, owns the common equity and acts as the managing member of the Investment Vehicle. In October 2015 and March 2016, the Company funded an additional $800,000 in total. The Company is obligated to fund up to an additional $700,000 in increments of $150,000 upon request as long as no triggering event has occurred.

The Investment Vehicle is the sole member of Spring Hill Investors GP, LLC, which is the general partner of Spring Hill Investors, LP, the owner of a 606-unit multifamily residential apartment community commonly known as Spring Hill Apartments (“Spring Hill”) and located in Dallas, Texas. The Company’s preferred equity investment will be predominately utilized for capital improvements and deferred maintenance projects.

The Company is to be paid a dividend equal to 12% of the total amount invested, 7% of which must be paid monthly and of which the remaining amount accrues and is to be paid when the property cash flow allows for the repayment. The mandatory redemption date for the investment is the earliest of (i) April 2017, (ii) any earlier date upon which the mortgage loan secured by Spring Hill Apartments becomes due and payable as a result of the acceleration of the loan maturity date by the lender, or (iii) the date on which a defeasance is effected pursuant to the loan documents.

Loan held for investment:

On March 15, 2011, the Company purchased, at a discount, two non-performing promissory notes (the "Oberlin Note” and the "Heatherwood Note”) and two performing promissory notes (the "Peterson Note” and the "Trail Ridge Note”), collectively referred to as the “Notes”, each of which was secured by a first priority mortgage on multifamily rental apartment communities. The contract purchase price for the Notes was a total of $3.1 million, excluding closing costs. The Oberlin, Peterson and Heatherwood Notes were resolved in prior years.

The following table provides the aging of the Company’s loan held for investment, net (in thousands):

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



	March 31, 2016		December 31, 2015
Current	$	761	$	757

Delinquent:
30−89 days	—		—
90−180 days	—		—
Greater than 180 days	—		—
	$	761	$	757

The following table provides information about the credit quality of the Company’s loan held for investment, net (in thousands):



	March 31, 2016		December 31, 2015

Performing	$	761	$	757
Nonperforming	—		—
Total	$	761	$	757

The following table presents details of the balance and terms of the loan held for investment, at March 31, 2016 and December 31, 2015 (in thousands):



	Unpaid Principal Balance		Unamortized Discount			Deferred (fees) expenses, net		Net book value		Maturity Date	Interest Rate	Average monthly payment
Loan- Trail Ridge
March 31, 2016:	$	974	$	(220	)	$	7	$	761	10/28/2021	7.5%	$	8
December 31, 2015:	$	981	$	(231	)	$	7	$	757

The Company has individually evaluated the loan for impairment and determined that, as of March 31, 2016 and December 31, 2015, the loan held for investment was not impaired.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

NOTE 6 - DISPOSITION OF PROPERTIES AND DECONSOLIDATION OF INTERESTS

The following table presents details of our disposition and deconsolidation activity during the three months ended March 31, 2016 and 2015 (in thousands):



Multifamily Community	Location	Sale Date	Contract Sales Price		Gain on Sale		Q1 2016 Net Income Attributable to Properties Sold
2016 Dispositions:
Conifer Place ⁽¹⁾	Norcross, Georgia	January 27, 2016	$	42,500	$	9,897	$	9,942
Champion Farms ⁽²⁾	Louisville, Kentucky	January 29, 2016	7,590		1,066		1,125
The Ivy at Clear Creek	Houston, Texas	February 17, 2016	19,400		6,792		6,628
					$	17,755	$	17,695

2015 Dispositions:							Q1 2015 Net Income Attributable to Properties Sold
The Alcove Apartments	Houston, Texas	January 26, 2015	$	11,050	$	3,785	$	3,806
107th Avenue Apartments	Omaha, Nebraska	January 29, 2015	250		50		50
The Redford Apartments	Houston, Texas	February 27, 2015	32,959		15,312		15,737
Cityside Apartments	Houston, Texas	March 2, 2015	24,500		10,028		10,310
					$	29,175	$	29,903

(1) On January 27, 2016, the Company and its joint venture partner sold the Conifer Place Apartments, which resulted in the deconsolidation of the entity as of January 27, 2016. Gain on sale and net income attributable to properties sold presented in table includes $6.2 million and $6.3 million attributable to noncontrolling interests.

(2) On January 29, 2016, the Company sold its joint venture interest in Champion Farms to its joint venture partner. As such, the Company deconsolidated the entity as of January 29, 2016. The Company has no continuing involvement with this joint venture.

The table below presents a rollforward of activity in goodwill for the three months ended March 31, 2016 (in thousands):



Balance, January 1, 2016	$	1,231
Sale of Conifer and Champion	(390		)
Balance, March 31, 2016	$	841

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET

Identified intangible assets, net, consist of apartment unit rental and antennae leases. The value of the acquired in-place leases totaled $158,000 and $374,000 as of March 31, 2016 and December 31, 2015, respectively, net of accumulated amortization of $26.4 million and $28.4 million, respectively. The weighted-average remaining life of the existing apartment unit rental leases was zero months and one month as of March 31, 2016 and December 31, 2015, respectively. Expected amortization for the antennae leases at the Vista Apartment Homes is $16,000 annually through 2025. Amortization of the apartment unit rental and antennae leases for the three months ended March 31, 2016 and 2015 was $216,000 and $1.5 million, respectively.

Expected amortization for the antennae leases for the next five 12-month periods ending March 31, and thereafter, is as follows (in thousands):

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



2017	$	16
2018	16
2019	16
2020	16
2021	16
Thereafter	78
	$	158

NOTE 8 - MORTGAGE NOTES PAYABLE, NET

The following is a summary of the mortgage notes payable, net (in thousands):

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



	March 31, 2016										December 31, 2015
Collateral	Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value		Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value
Vista Apartment Homes	$	15,485	$	—		$	(206	)	$	15,279	$	15,573	$	—		$	(216	)	$	15,357
Cannery Lofts	8,106		—			(124		)	7,982		8,148		—			(131		)	8,017
Deerfield	10,477		—			(150		)	10,327		10,517		—			(159		)	10,358
Ivy at Clear Creek	—		—			—			—		8,431		—			(136		)	8,295
Trailpoint at the Woodlands	18,932		—			(248		)	18,684		19,013		—			(257		)	18,756
Verona Apartment Homes	22,288		—			(163		)	22,125		22,402		—			(179		)	22,223
Skyview Apartment Homes	17,998		—			(135		)	17,863		18,089		—			(148		)	17,941
The Nesbit Palisades	20,298		—			(299		)	19,999		20,298		—			(309		)	19,989
Maxwell Townhomes	13,788		—			(160		)	13,628		13,850		—			(167		)	13,683
Fieldstone	15,214		—			(18		)	15,196		15,332		—			(37		)	15,295
Pinehurst	4,077		—			—			4,077		4,111		—			—			4,111
Pheasant Run	6,250		86			(18		)	6,318		6,250		100			(20		)	6,330
Retreat of Shawnee	13,041		144			(38		)	13,147		13,090		164			(44		)	13,210
Conifer Place	—		—			—			—		27,074		—			—			27,074
Evergreen at Coursey Place	27,438		118			(114		)	27,442		27,548		123			(120		)	27,551
Pines of York	15,200		(347		)	(66		)	14,787		15,267		(363		)	(69		)	14,835
The Estates at Johns Creek	50,000		—			(496		)	49,504		50,000		—			(526		)	49,474
Chisholm Place	11,587		—			(158		)	11,429		11,587		—			(163		)	11,424
Perimeter Circle	17,568		—			(187		)	17,381		17,657		—			(202		)	17,455
Perimeter 5550	13,865		—			(155		)	13,710		13,935		—			(167		)	13,768
Aston at Cinco Ranch	23,671		—			(313		)	23,358		23,772		—			(328		)	23,444
Sunset Ridge 1	20,016		313			(248		)	20,081		20,121		329			(261		)	20,189
Sunset Ridge 2	2,989		42			(32		)	2,999		3,002		45			(34		)	3,013
Calloway at Las Colinas	35,576		—			(355		)	35,221		35,740		—			(372		)	35,368
South Lamar Village	12,621		—			(171		)	12,450		12,682		—			(184		)	12,498
Heritage Pointe	26,280		—			(359		)	25,921		26,280		—			(370		)	25,910
Yorba Linda	67,500		—			(811		)	66,689		67,500		—			(860		)	66,640
Villages at Bonita Glen	27,175		2,198			(378		)	28,995		27,265		2,276			(391		)	29,150
Stone Ridge	5,319		—			(148		)	5,171		5,350		—			(153		)	5,197
The Westside Apartments	23,000		—			(320		)	22,680		23,000		—			(351		)	22,649
Tech Center Square	12,500		—			(145		)	12,355		12,500		—			(159		)	12,341
	$	558,259	$	2,554		$	(6,015	)	$	554,798	$	595,384	$	2,674		$	(6,513	)	$	591,545

The following table includes additional information about our mortgage notes payable, net (in thousands, except percentages):

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



Collateral	Maturity Date	Annual Interest Rate		Average Monthly Debt Service
Vista Apartment Homes	1/1/2022	2.73%	(1)(5)	$65
Cannery Lofts	9/1/2020	3.74%	(1)(5)	40
Deerfield	11/1/2020	4.66%	(2)(5)	54
Trailpoint at the Woodlands	11/1/2023	2.85%	(1)(4)	69
Verona Apartment Homes	1/1/2019	3.60%	(2)(5)	106
Skyview Apartment Homes	1/1/2019	3.60%	(2)(5)	85
The Nesbit Palisades	7/1/2024	2.39%	(1)(3)	59
Maxwell Townhomes	1/1/2022	4.32%	(2)(5)	71
Fieldstone	6/26/2016	2.84%	(1)(4)	76
Pinehurst	1/1/2017	2.94%	(1)(6)	23
Pheasant Run	10/1/2017	5.95%	(2)(3)	32
Retreat of Shawnee	2/1/2018	5.58%	(2)(5)	78
Evergreen at Coursey Place	8/1/2021	5.07%	(2)(5)	154
Pines of York	12/1/2021	4.46%	(2)(5)	80
The Estates at Johns Creek	7/1/2020	3.38%	(2)(3)	215
Chisholm Place	6/1/2024	2.83%	(1)(3)	39
Perimeter Circle	7/1/2019	3.42%	(2)(5)	81
Perimeter 5550	7/1/2019	3.42%	(2)(5)	64
Aston at Cinco Ranch	10/1/2021	4.34%	(2)(5)	120
Sunset Ridge 1	11/1/2020	4.58%	(2)(5)	113
Sunset Ridge 2	11/1/2020	4.54%	(2)(5)	16
Calloway at Las Colinas	12/1/2021	3.87%	(2)(5)	171
South Lamar Village	8/1/2019	3.64%	(2)(5)	59
Heritage Pointe	4/1/2025	2.32%	(1)(3)	88
Yorba Linda	6/1/2020	2.19%	(1)(3)	156
Villages at Bonita Glen	10/1/2023	5.33%	(2)(5)	152
Stone Ridge	12/1/2022	2.30%	(1)(5)	21
The Westside Apartments	12/27/2017	2.39%	(1)(3)	59
Tech Center Square	12/20/2018	2.69%	(1)(4)	47


(1)	Variable rate based on one-month LIBOR of 0.4375% (as of March 31, 2016) plus a fixed margin.


(2)	Fixed rate.


(3)	Monthly interest-only payment currently required.


(4)	Monthly fixed principal plus interest payment required.


(5)	Fixed monthly principal and interest payment required.


(6)	On January 1, 2016, this loan automatically extended for one year at a variable rate based on one-month LIBOR plus a fixed margin.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

Loans assumed as part of the Villages at Bonita Glen, South Lamar Village, Paladin (Fieldstone, Pinehurst, Pheasant Run, Retreat of Shawnee, Conifer Place, Evergreen at Coursey Place, Pines of York), Sunset Ridge and Maxwell acquisitions were recorded at their fair values. The premium or discount is amortized over the remaining term of the loans and included in interest expense. For the three months ended March 31, 2016 and 2015, interest expense was reduced by $120,000 and $190,000, respectively, for the amortization of the premium or discount.

All mortgage notes are collateralized by a first mortgage lien on the assets of the respective property as named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty on the majority of mortgages held.

As of March 31, 2016 and December 31, 2015, the Company had $6.5 million and $10.0 million of restricted cash related to escrow deposits held by mortgage lenders for real estate taxes, insurance and capital reserves.

Annual principal payments on the mortgage notes payable, excluding the amortization of the fair value adjustments, for each of the next five 12-month periods ending March 31, and thereafter, are as follows (in thousands):



2017	$	26,215
2018	49,758
2019	58,564
2020	48,777
2021	155,221
Thereafter	219,724
	$	558,259

The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. The Company has guaranteed the mortgage notes by executing a guarantee with respect to the properties. These exceptions are referred to as “carveouts.” In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents. The exceptions also require the Company to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary. The Company has also guaranteed the completion and payment of costs of completion of no less than $7.0 million for renovations to The Estates at Johns Creek by July 1, 2018, which were substantially completed during the three months ended March 31, 2016.

The mortgage obtained in connection with the acquisition of Yorba Linda in June 2015 includes a $7.5 million earn-out holdback which may be borrowed when certain debt service coverage and loan to value criteria are met. The Yorba Linda mortgage loan includes a net worth and liquidity covenant. The Company was in compliance with all covenants at March 31, 2016. The loan also includes an additional debt service coverage covenant that is only required to be met as of December 31, 2017 and periods thereafter.

For the Fieldstone mortgage, the property must maintain a certain level of debt service coverage. The Company was in compliance with the debt covenants for the Fieldstone mortgage at March 31, 2016.

On December 20, 2013, the Company, through a wholly-owned subsidiary, entered into a loan ("Tech Center Loan") with PNC Bank, National Association. The Company provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance). In March 2016, the Company amended the loan, removing any additional borrowing capacity and requiring monthly principal repayments beginning April 1, 2016. The interest rate on the loan was also increased from one-month LIBOR plus 2.0% to one-month LIBOR plus 2.25%.

The Tech Center Loan includes both a debt service coverage covenant and a tangible net worth covenant. In accordance with the March 2016 loan amendment, the debt service coverage covenant is only required to be complied with as of September 30, 2016 and periods thereafter. The Company was in compliance with all debt covenants at March 31, 2016 related to this loan.

On December 27, 2013, the Company, through a wholly-owned subsidiary, entered into a loan ("Westside Loan") with U.S. Bank National Association for $29.7 million. The Company may draw the remaining $6.7 million when certain debt service coverage and loan to value criteria are met. Amounts repaid on the loan may not be reborrowed. The Company provided a $6.5

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

million repayment guarantee. The Westside Loan includes a net worth, liquidity, leverage and debt service coverage covenants. The Company was in compliance with all covenants at March 31, 2016.

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the three months ended March 31, 2016 and March 31, 2015, $497,000 and $357,000, respectively, of amortization of deferred financing costs was included in interest expense. Accumulated amortization as of March 31, 2016 and December 31, 2015 was $2.6 million and $2.4 million, respectively. Estimated amortization of the existing deferred financing costs for the next five 12-month periods ending March 31, and thereafter, is as follows (in thousands):



2017	$	1,444
2018	1,351
2019	1,131
2020	877
2021	528
Thereafter	684
	$	6,015

NOTE 9 - CREDIT FACILITY

The following is a summary of the credit facility (in thousands, except percentages):

Weighted Average Interest Rate

Balance

Outstanding at

Current

Availability at

Balance
Outstanding at

Maturity
Date

Interest Rate Basis (1)

Current
Interest Rate

Three Months Ended
March 31,

Lender

March 31, 2016

December 31, 2015

2016

2015

Bank of America

11,394

16,232

21,894

5/23/2017

LIBOR plus 3%

3.44%

3.43%

3.17%


(1)	Variable rate based on one-month LIBOR of 0.4375% (as of March 31, 2016).

Draws under the secured revolving credit facility (the “Bank of America Credit Facility”) with Bank of America, N.A. (“Bank of America”) are secured by certain of the Company's properties with an aggregate value of $55.5 million as of March 31, 2016 and are guaranteed by the Company. Weighted average borrowings for the three months ended March 31, 2016 and 2015 were $15.1 million and $912,000, respectively.

The Bank of America Credit Facility, as amended, matures on May 23, 2017, and may be extended to May 23, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Bank of America Credit Facility. The Company is required to make monthly interest-only payments. The Company also may prepay the Bank of America Credit Facility in whole or in part at any time without premium or penalty.

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


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


•	the Company must also maintain unencumbered liquid assets with a market value of not less than the greater of (i) $5.0 million or (ii) 20% of the outstanding principal amount of the Bank of America Credit Facility; and


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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

The Company was in compliance with all loan covenants at March 31, 2016.

The Company has $319,000 and $389,000 of deferred finance costs included in Prepaid expenses and other assets on the consolidated balance sheets related to the Bank of America Credit Facility as of March 31, 2016 and December 31, 2015, respectively, which is being amortized over the term of the debt. During the three months ended March 31, 2016 and 2015, $70,000 and $56,000, respectively, of amortization of deferred finance costs was included in interest expense related to this facility. Estimated amortization of the existing deferred financing costs is $278,000 and $41,000 for the 12-month periods ending March 31, 2017 and 2018, respectively and none thereafter.

Annual principal payments on the credit facility for each of the next five 12-month periods ending March 31, and thereafter are as follows (in thousands):



2017	$	—
2018	11,394
2019	—
2020	—
2021	—
Thereafter	—
	$	11,394

NOTE 10 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in each component of accumulated other comprehensive loss for the three months ended March 31, 2016 (in thousands):



	Net unrealized loss on derivatives
January 1, 2016	$	(440	)
Reclassification adjustment for realized loss on designated derivative	72
Unrealized loss on designated derivatives	(16		)
March 31, 2016	$	(384	)

NOTE 11 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In the ordinary course of its business operations, the Company has ongoing relationships with several related parties.

Relationship with RAI

Self-insurance funds held in escrow. Substantially all of the receivables from related parties represents escrow funds held by RAI for self insurance. The Company's properties participate in insurance pools with other properties directly and indirectly managed by RAI for both property insurance and general liability. RAI holds the escrow funds related to the insurance pools on its books. The insurance pool for the property insurance covers losses up to $2.5 million and the insurance pool for the general liability covers losses up to the first $25,000 per incident up to $1.0 million in the aggregate. Catastrophic insurance would cover property losses in excess of the insurance pool up to $140.0 million. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results.

Internal audit fees. RAI performs internal audit services for the Company.

Relationship with the Advisor

In September 2009, the Company entered into an advisory agreement (the “Advisory Agreement”) pursuant to which the Advisor provides the Company with investment management, administrative and related services. The Advisory Agreement was amended in January 2010 and further amended in January 2011 and March 2015. 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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

board of directors. The Company renewed the Advisory Agreement for another year on September 15, 2015. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:

Acquisition fees. The Company pays the Advisor an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments.

Asset management fees. The Company pays the Advisor a monthly asset management fee equal to one-twelfth of 1.0% of the higher of the cost or the independently appraised value of each asset, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all or a majority of an asset and does not manage or control the asset.

Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.75% of the contract sales price.

Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.

Expense reimbursements and Overhead allocation. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its ongoing distribution reinvestment plan offering.

Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out of pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.

Relationship with Resource Real Estate Opportunity Manager

The Manager manages the Company's real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.

Property management fees. The Manager earns 4.5% of the gross receipts from our properties, provided that for properties that are less than 75% occupied, the manager receives a minimum fee for the first 12 months of ownership for performing certain property management and leasing activities.

Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.

Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.

Information Technology fees and Operating 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 Other Related Parties

The Company has also made payment for legal services to the law firm of Ledgewood P.C. (“Ledgewood”). Until 1996, the Chairman of RAI was of counsel to Ledgewood. In connection with the termination of his affiliation with Ledgewood and its redemption of his interest, the Chairman continues to receive certain payments from Ledgewood. Until March 2006, a current executive of RAI was the managing member of Ledgewood. This executive remained of counsel to Ledgewood through June 2007, at which time he became an Executive Vice President of RAI.

The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), whose principal owner is the father of RAI’s Chief Financial Officer.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

The amounts payable to/receivable from and the fees earned/expenses paid to such related parties are summarized in the following tables (in thousands):



	March 31, 2016		December 31, 2015
Receivables from related parties:
RAI and affiliates	$	260	$	1,421

Payables to related parties:
Advisor:
Operating expense reimbursements	$	539	$	286

Resource Real Estate Opportunity Manager, LLC:
Property management fees	432		440
Other reimbursements	345		459

Other	9		—
	$	1,325	$	1,185



	Three Months Ended
	March 31,
	2016		2015
Fees earned / expenses paid to related parties:
Advisor:
Acquisition fees ⁽¹⁾	$	8	$	1,482
Asset management fees ⁽²⁾	$	2,707	$	2,247
Disposition fees ⁽³⁾	$	193	$	761
Debt financing fees ⁽⁴⁾	$	—	$	196
Overhead allocation ⁽⁵⁾	$	1,275	$	888
Internal audit fees ⁽⁵⁾	$	—	$	7

Resource Real Estate Opportunity Manager LLC:
Property management fees ⁽²⁾	$	1,290	$	1,107
Construction management fees ⁽⁶⁾	$	242	$	356
Information technology fees ⁽⁵⁾	$	109	$	83
Operating expense reimbursements ⁽⁷⁾	$	68	$	67
Debt servicing fees ⁽²⁾	$	4	$	5

Other:
Ledgewood ⁽⁵⁾	$	10	$	61
Graphic Images ⁽⁵⁾	$	—	$	3


(1)	Included in Acquisition costs on the consolidated statements of operations and comprehensive loss.


(2)	Included in Management fees on the consolidated statements of operations and comprehensive loss.


(3)	Included in Net gain on dispositions on the consolidated statements of operations and comprehensive loss.


(4)	Included in Mortgage notes payable, net, on the consolidated balance sheets.


(5)	Included in General and administrative costs on the consolidated statements of operations and comprehensive loss.


(6)	Included in Rental Properties, net, on the consolidated balance sheets.


(7)	Included in Rental operating expenses on the consolidated statements of operations and comprehensive loss.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

NOTE 12 - EQUITY

Preferred Stock

The Company’s charter authorizes the Company to issue 10.0 million shares of its $0.01 par value preferred stock. As of March 31, 2016 and December 31, 2015, no shares of preferred stock were issued and outstanding.

Common Stock

As of March 31, 2016, the Company had issued shares of its $0.01 par value common stock as follows (dollars in thousands):



	Shares Issued		Gross Proceeds
Shares issued through private offering	1,263,727		$	12,582
Shares issued through primary public offering ⁽¹⁾	62,485,461		622,077
Shares issued through stock distributions	2,132,266		—
Shares issued through distribution reinvestment plan	7,116,802		70,149
Shares issued in conjunction with the Advisor's initial investment, net of 4,500 share conversion	15,500		155
Total	73,013,756		$	704,963
Shares redeemed	(1,061,878	)
Total shares outstanding as of March 31, 2016	71,951,878

(1) Includes 276,056 shares issued to the Advisor.

Convertible Stock

As of March 31, 2016 and December 31, 2015, the Company had 50,000 shares of $0.01 par value convertible stock outstanding of which the Advisor and affiliated persons own 49,063 shares and outside investors own 937 shares. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 10% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on the 31st trading day after listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold.

Each of these two events is a “Triggering Event.” Upon a Triggering Event, the Company's convertible stock will, unless its advisory agreement has been terminated or not renewed on account of a material breach by its Advisor, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:


(A)	the lesser of

(i) 25% of the amount, if any, by which


(1)	the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds


(2)	the sum of the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, or

(ii) 15% of the amount, if any, by which


(1)	the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then-outstanding shares of its common stock exceeds

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)


(2)	the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by


(B)	the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion.

Redemption of Securities

During the three months ended March 31, 2016, the Company redeemed 345,343 of its common shares. The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. The Company's board of directors will determine at least quarterly whether it has sufficient excess cash to repurchase shares. Generally, the cash available for redemptions will be limited to proceeds from the Company's distribution reinvestment plan plus, if the Company has positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year. All redemption requests tendered were honored during the three months ended March 31, 2016.

The Company's Board of Directors, in its sole discretion, may suspend, terminate or amend the Company's share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in the Company's best interest. The Company's board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund the Company's share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.

Distributions

For the three months ended March 31, 2016, the Company paid aggregate distributions of $10.7 million, including $3.5 million of distributions paid in cash and $7.3 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):



Record Date	Per Common Share	Distribution Date	Distributions Invested in Shares of Common Stock		Aggregate Cash Distribution		Total Aggregate Distribution
January 28, 2016	$0.05	January 29, 2016	$	2,423	$	1,151	$	3,574
February 26, 2016	0.05	February 29, 2016	2,418		1,167		3,585
March 30, 2016	0.05	March 31, 2016	2,415		1,172		3,587
	$0.15		$	7,256	$	3,490	$	10,746

Since its formation, the Company's Board of Directors has declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of its common stock outstanding. In connection with these stock distributions, the Company had increased its accumulated deficit by $21.3 million as of March 31, 2016.

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.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

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.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects that changes in classifications between levels will be rare.

Rental properties obtained through a foreclosed note are measured at fair value on a non-recurring basis. The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.

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

The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):



	Level 1		Level 2		Level 3		Total
March 31, 2016
Assets:
Interest rate caps	$	—	$	11	$	—	$	11
	$	—	$	11	$	—	$	11

December 31, 2015
Assets:
Interest rate caps	$	—	$	32	$	—	$	32
	$	—	$	32	$	—	$	32

The carrying and fair values of the Company’s loans held for investment, net, preferred equity investments, mortgage note payable, mortgage note payable -included in other liabilities associated with rental properties held for sale and credit facilities were as follows (in thousands):

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)



	March 31, 2016						December 31, 2015
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Loan held for investment, net	$	761		$	1,151		$	757		$	1,151

Preferred equity investment	$	4,296		$	4,296		$	3,886		$	3,908

Mortgage notes payable	$	(558,259	)	$	(543,609	)	$	(595,384	)	$	(573,693	)

Mortgage note payable- included in other liabilities associated with rental properties held for sale	$	—		$	—		$	(16,443	)	$	(16,597	)

Credit facility	$	(11,394	)	$	(11,394	)	$	(21,894	)	$	(21,894	)

The fair values of the loan held for investment, net and preferred equity investment were estimated using rates available to the Company for debt with similar terms and remaining maturities. (Level 3)

The carrying amount of the mortgage notes payable presented is the outstanding borrowings excluding premium or discount and deferred finance costs, net. The fair value of the mortgage notes payable was estimated using rates available to the Company for debt with similar terms and remaining maturities. (Level 3)

The fair value of the credit facility equals the carrying amounts because the variable interest rate is considered a market rate. (Level 3)

NOTE 14 - DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also served to protect the lender.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into a total of seven interest rate caps that were designated as cash flow hedges during 2013, 2014 and 2015. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2016 and the year ended December 31, 2015, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2016, the Company had a loss of $72,388 due to hedge ineffectiveness due to the sale of Ivy at Clear Creek.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

MARCH 31, 2016

(unaudited)

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.

As of March 31, 2016, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):



Interest Rate Derivative	Number of Instruments	Notional Amount		Maturity Dates
Interest Rate Caps	7	$	107,363	January 1, 2018 to April 1, 2019

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

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in prepaid expenses and other assets on the Balance Sheet as of March 31, 2016 and December 31, 2015 (in thousands):

Asset Derivatives

Liability Derivatives

March 31, 2016

December 31, 2015

March 31, 2016

December 31, 2015

Balance Sheet

Fair Value

Balance Sheet

Fair Value

Balance Sheet

Fair Value

Balance Sheet

Fair Value

Interest rate caps

—

NOTE 15 - OPERATING EXPENSE LIMITATION

Under its charter, the Company must limit its total operating expenses to the lesser of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the conflicts committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four quarters ended March 31, 2016 were in compliance with the charter imposed limitation.

NOTE 16 - SUBSEQUENT EVENTS

In April 2016, the Company's Board of Directors declared a $0.05 per share cash distribution to its common stockholders of record at the close of business on each of the following record dates: April 28, 2016, May 27, 2016 and June 29, 2016. Such distributions were or are to be paid on April 29, 2016, May 31, 2016 and June 30, 2016.

In May 2016, the Company refinanced the mortgage loan of $12.5 million secured by Tech Center Square.

In May 2016, the Company entered into an agreement to sell Affinity at Winter Park, located in Winter Park, Florida, for $17.5 million with an expected closing in June 2016. The Company expects to record a gain on the sale during the three months ended June 30, 2016.

In May 2016, the Company entered into an agreement to sell The Nesbit Palisades, located in Alpharetta, Georgia, for $45.5 million with an expected closing in July 2016. The Company expects to record a gain on the sale during the three months ended September 30, 2016.

The Company has evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.

(Back to Index)


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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT, Inc. and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2015. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT, Inc., a Maryland corporation, and, as required by context, Resource Real Estate Opportunity OP, LP, a Delaware limited partnership, and to their subsidiaries.

Overview

We were formed on June 3, 2009. We commenced active real estate operations on September 7, 2010 when we raised the minimum offering amount in our initial public offering.

We have acquired a diversified portfolio of discounted U.S. commercial real estate and real estate-related debt that has been significantly discounted due to the effects of recent economic events and high levels of leverage on U.S. commercial real estate, including properties that may benefit from extensive renovations that may increase their long-term values. Our targeted portfolio consists of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”). However, we are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate and, accordingly, we may invest in other real estate assets or debt secured by real estate assets. At March 31, 2016, we held approximately 42% of our total assets in categories (i) and 58% of our total assets in category (ii).

We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent our Advisor presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code and to maintain our exclusion from regulation as an investment company pursuant to the Investment Company Act, our portfolio composition may vary from what we have initially disclosed.

The primary portion of our initial public offering commenced on June 16, 2010 and closed on December 13, 2013. We continue to offer shares to our existing stockholders pursuant to our distribution reinvestment plan. We describe these offerings further in “Liquidity and Capital Resources” below.

Results of Operations

As of March 31, 2016, we owned interests in a total of 33 multifamily properties. During the three months ended March 31, 2016, we disposed of our interests in three 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.

(Back to Index)

Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015:

The following table sets forth the results of our operations (in thousands):



	Three Months Ended
	March 31,
	2016			2015
Revenues:
Rental income	$	30,391		$	27,571
Interest and dividend income	165			163
Total revenues	30,556			27,734

Expenses:
Rental operating - expenses	7,609			7,935
Rental operating- payroll	3,857			4,207
Rental operating- real estate taxes	3,626			3,018
Subtotal - Rental operating expenses	15,092			15,160
Acquisition costs	—			1,701
Management fees	4,055			3,461
General and administrative	3,515			3,522
Loss on disposal of assets	142			1,109
Depreciation and amortization expense	11,394			10,297
Total expenses	34,198			35,250
Loss before other income (expense)	(3,642		)	(7,516		)

Other income (expense):
Net gains on dispositions of properties and joint venture interests	17,755			29,175
Interest expense	(5,773		)	(4,867		)
Insurance proceeds in excess of cost basis	140			247
Total other income (expense)	12,122			24,555

Net income	8,480			17,039
Net income attributable to noncontrolling interests	(6,281		)	(11		)
Net income attributable to stockholders	$	2,199		$	17,028

(Back to Index)

The following table presents the results of operations separated into two categories: the results of operations of the 29 properties that we owned for the entirety of both periods presented and all other properties (including company level expenses to aid in comparability) for the three months ended March 31, 2016 and 2015 (in thousands):



	For the three months ended									For the three months ended
	March 31, 2016									March 31, 2015
	Properties owned both periods			All other			Total			Properties owned both periods			All other			Total
Revenues:
Rental income	$	24,615		$	5,776		$	30,391		$	21,698		$	5,873		$	27,571
Interest and dividend income	1			164			165			1			162			163
Total revenues	24,616			5,940			30,556			21,699			6,035			27,734

Expenses:
Rental operating - expenses	6,367			1,242			7,609			5,932			2,003			7,935
Rental operating - payroll	3,148			709			3,857			3,385			822			4,207
Rental operating- real estate taxes	2,867			759			3,626			2,575			443			3,018
Subtotal- Rental operating expenses	12,382			2,710			15,092			11,892			3,268			15,160
Acquisition costs	—			—			—			—			1,701			1,701
Management fees	1,092			2,963			4,055			965			2,496			3,461
General and administrative	975			2,540			3,515			968			2,554			3,522
Loss on disposal of assets	130			12			142			202			907			1,109
Depreciation and amortization expense	9,509			1,885			11,394			9,193			1,104			10,297
Total expenses	24,088			10,110			34,198			23,220			12,030			35,250
Income (loss) before other income (expense)	528			(4,170		)	(3,642		)	(1,521		)	(5,995		)	(7,516		)

Other income (expense):
Net gains on dispositions of properties and joint venture interests	—			17,755			17,755			—			29,175			29,175
Interest expense	(4,161		)	(1,612		)	(5,773		)	(4,176		)	(691		)	(4,867		)
Insurance proceeds in excess of cost basis	140			—			140			247			—			247
Total other income (expense)	(4,021		)	16,143			12,122			(3,929		)	28,484			24,555

Net (loss) income	(3,493		)	11,973			8,480			(5,450		)	22,489			17,039
Net income attributable to noncontrolling interests	(14		)	(6,267		)	(6,281		)	(11		)	—			(11		)
Net (loss) income attributable to stockholders	$	(3,507	)	$	5,706		$	2,199		$	(5,461	)	$	22,489		$	17,028

(Back to Index)

Revenues: The $2.9 million increase in rental income for the 29 properties we owned during both the three months ended March 31, 2016 and the three months ended March 31, 2015 reflects implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations and was primarily comprised of:



Multifamily Community Name	Rental Increase (in thousands)	Increase/(Decrease) In Occupancy	Increase In Effective Monthly Revenue Per Unit (in dollars)
Maxwell Townhomes	$374	29.0%	$112
Meridian Pointe	339	21.5%	112
The Nesbit Palisades	264	11.0%	112
The Westside Apartments	253	10.9%	100
Affinity at Winter Park	189	26.7%	95
Trailpoint at the Woodlands	164	12.5%	66
The Estates at Johns Creek	154	(1.5)%	166
Tech Center Square	125	11.4%	105
Verona Apartment Homes	110	1.6%	134
Retreat at Rocky Ridge	109	14.4%	61
All other, net	836	1.9%	37
	$2,917

Expenses: Our rental operating expenses for the 29 properties we owned during both the three months ended March 31, 2016 and the three months ended March 31, 2015 increased by $490,000 and was comprised primarily of insurance and real estate tax costs at these properties. Rental operating expenses for the All other category decreased by $558,000 primarily due to the sale of properties in 2015 and 2016.

Acquisition costs decreased by $1.7 million for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 as we purchased no properties during the three months ended March 31, 2016.

Management fees increased by $594,000 for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 primarily related to the increase in the asset management fee paid to the Advisor due to additional property acquisitions during 2015. In June 2015, we purchased two properties with a total purchase price of $167.0 million. The asset management fee is based on the higher of the cost or appraised value of real estate investments.

Loss on the disposal of assets decreased by $1.0 million for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 due to the timing of the replacement of appliances at our rental properties in conjunction with unit upgrades.

Depreciation and amortization is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases which are amortized over a period of approximately six to eight months after acquisition. The increases (decreases) in the components of depreciation and amortization during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, were as follows:



	Properties owned both periods		All other	Total
Depreciation	1,653		697	2,350
Amortization of intangibles	(1,337	)	84	(1,253	)
	316		781	1,097

The increase in depreciation for Properties owned both periods is due to the additional $32.2 million in capital improvements made during the periods in accordance with our planned renovations. The increase in depreciation in the All other category was due to the acquisition of Yorba Linda and the Villages at Bonita Glen in June 2015, for which we recorded $1.1 million of depreciation in the three months ended March 31, 2016.

(Back to Index)

Net gains on dispositions of properties and joint venture interests included in other income (expense) decreased by $11.4 million for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, which reflects the sale and deconsolidation of three properties during the three months ended March 31, 2016 as compared to the sale of four properties during the three months ended March 31, 2015, as follows (in thousands):



Multifamily Community	Location	Sale Date	Contract Sales Price		Gain on Sale
2016 Dispositions:
Conifer Place	Norcross, Georgia	January 27, 2016	$	42,500	$	9,897
Champion Farms	Louisville, Kentucky	January 29, 2016	7,590		1,066
The Ivy at Clear Creek	Houston, Texas	February 17, 2016	19,400		6,792
			$	69,490	$	17,755

2015 Dispositions:
The Alcove Apartments	Houston, Texas	January 26, 2015	$	11,050	$	3,785
107th Avenue Apartments	Omaha, Nebraska	January 29, 2015	250		50
The Redford Apartments	Houston, Texas	February 27, 2015	32,959		15,312
Cityside Apartments	Houston, Texas	March 2, 2015	24,500		10,028
			$	68,759	$	29,175

The gain on sale of Conifer Place includes $6.2 million which is attributable to noncontrolling interests.

Interest expense increased by $906,000 for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, as a result of the five additional mortgages either entered into or assumed during or after the three months ended March 31, 2015. Interest expense for the three months ended March 31, 2016 also includes $133,000 of amortization of deferred finance fees and $72,000 realized loss on the change in the fair value of the interest rate cap related to the sale of Ivy at Clear Creek.

Liquidity and Capital Resources

We have derived the capital required to purchase real estate investments and conduct our operations from the proceeds of our private and public offerings, secured financings from banks, proceeds from the sale of real estate, and cash flows generated by our real estate and real estate-related investments.

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

Capital Expenditures

We deployed a total of $6.7 million during the three months ended March 31, 2016 for capital expenditures. The properties in which we deployed the most capital during the three months ended March 31, 2016 ended are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):



	Capital deployed during the three months ended		Remaining capital budgeted
Property	March 31, 2016		Remaining capital budgeted
South Lamar Village	$	892	$	2,240
Sunset Ridge	829		1,050
Calloway at Las Colinas	794		4,043
Heritage Pointe	534		6,367
Yorba Linda	496		9,105
All other properties	3,120		16,661
	$	6,665

(Back to Index)

Initial Public Offering

The primary portion of our initial public offering closed on December 13, 2013. On December 26, 2013, the unsold primary offering shares were deregistered and, on December 30, 2013, the registration of the shares issuable pursuant to the distribution reinvestment plan was continued pursuant to a Registration Statement on Form S-3.

We continue to offer up to 7.5 million shares of common stock pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares at $10.59 per share, through March 29, 2016 and at $10.83 per share for periods thereafter.

Gross offering proceeds

As of March 31, 2016, shares of our $0.01 par value common stock have been issued as follows (dollars in thousands):



	Shares Issued		Gross Proceeds
Shares issued through private offering	1,263,727		$	12,582
Shares issued through primary public offering ⁽¹⁾	62,485,461		622,077
Shares issued through stock distributions	2,132,266		—
Shares issued through distribution reinvestment plan	7,116,802		70,149
Shares issued in conjunction with the Advisor's initial investment, net of 4,500 share conversion	15,500		155
Total	73,013,756		$	704,963
Shares redeemed	(1,061,878	)
Total shares outstanding at March 31, 2016	71,951,878

(1) Includes 276,056 shares issued to the Advisor.

Credit Facility

The following is a summary of our credit facility:



											Weighted Average Interest Rate
	Balance Outstanding at		Current Availability at		Balance Outstanding at		Maturity Date	Interest Rate Basis	Current Interest Rate		Three Months Ended March 31,
Lender	March 31, 2016				December 31, 2015		Maturity Date	Interest Rate Basis	Current Interest Rate		2016		2015
Bank of America	$	11,394	$	16,232	$	21,894	5/23/2017	LIBOR plus 3%	3.44	%	3.43	%	3.17	%

Draws under the Bank of America Credit Facility are secured by certain of our properties with an aggregate value of $55.5 million and are guaranteed by us. We were in compliance with all covenants under this facility as of March 31, 2016.

(Back to Index)

Mortgage Debt



	March 31, 2016										December 31, 2015
Collateral	Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value		Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value
Vista Apartment Homes	$	15,485	$	—		$	(206	)	$	15,279	$	15,573	$	—		$	(216	)	$	15,357
Cannery Lofts	8,106		—			(124		)	7,982		8,148		—			(131		)	8,017
Deerfield	10,477		—			(150		)	10,327		10,517		—			(159		)	10,358
Ivy at Clear Creek	—		—			—			—		8,431		—			(136		)	8,295
Trailpoint at the Woodlands	18,932		—			(248		)	18,684		19,013		—			(257		)	18,756
Verona Apartment Homes	22,288		—			(163		)	22,125		22,402		—			(179		)	22,223
Skyview Apartment Homes	17,998		—			(135		)	17,863		18,089		—			(148		)	17,941
The Nesbit Palisades	20,298		—			(299		)	19,999		20,298		—			(309		)	19,989
Maxwell Townhomes	13,788		—			(160		)	13,628		13,850		—			(167		)	13,683
Fieldstone	15,214		—			(18		)	15,196		15,332		—			(37		)	15,295
Pinehurst	4,077		—			—			4,077		4,111		—			—			4,111
Pheasant Run	6,250		86			(18		)	6,318		6,250		100			(20		)	6,330
Retreat of Shawnee	13,041		144			(38		)	13,147		13,090		164			(44		)	13,210
Conifer Place	—		—			—			—		27,074		—			—			27,074
Evergreen at Coursey Place	27,438		118			(114		)	27,442		27,548		123			(120		)	27,551
Pines of York	15,200		(347		)	(66		)	14,787		15,267		(363		)	(69		)	14,835
The Estates at Johns Creek	50,000		—			(496		)	49,504		50,000		—			(526		)	49,474
Chisholm Place	11,587		—			(158		)	11,429		11,587		—			(163		)	11,424
Perimeter Circle	17,568		—			(187		)	17,381		17,657		—			(202		)	17,455
Perimeter 5550	13,865		—			(155		)	13,710		13,935		—			(167		)	13,768
Aston at Cinco Ranch	23,671		—			(313		)	23,358		23,772		—			(328		)	23,444
Sunset Ridge 1	20,016		313			(248		)	20,081		20,121		329			(261		)	20,189
Sunset Ridge 2	2,989		42			(32		)	2,999		3,002		45			(34		)	3,013
Calloway at Las Colinas	35,576		—			(355		)	35,221		35,740		—			(372		)	35,368
South Lamar Village	12,621		—			(171		)	12,450		12,682		—			(184		)	12,498
Heritage Pointe	26,280		—			(359		)	25,921		26,280		—			(370		)	25,910
Yorba Linda	67,500		—			(811		)	66,689		67,500		—			(860		)	66,640
Villages at Bonita Glen	27,175		2,198			(378		)	28,995		27,265		2,276			(391		)	29,150
Stone Ridge	5,319		—			(148		)	5,171		5,350		—			(153		)	5,197
The Westside Apartments	23,000		—			(320		)	22,680		23,000		—			(351		)	22,649
Tech Center Square	12,500		—			(145		)	12,355		12,500		—			(159		)	12,341
	$	558,259	$	2,554		$	(6,015	)	$	554,798	$	595,384	$	2,674		$	(6,513	)	$	591,545

For related interest rates and maturity dates, see Note 8.

(Back to Index)

At March 31, 2016, the weighted average interest rate of all our outstanding indebtedness was 3.51%.

Based on current lending market conditions, we expect that the debt financing we incur, on a total portfolio basis, will not exceed 50% to 55% of the cost of our real estate investments (before deducting depreciation or other non-cash reserves) plus the value of our other assets (51% as of March 31, 2016). We may also increase the amount of debt financing we use with respect to an investment over the amount originally incurred if the value of the investment increases subsequent to our acquisition and if credit market conditions permit us to do so. Our charter limits us from incurring debt such that our total liabilities may not exceed 75% of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets, although we may exceed this limit under certain circumstances. We expect that our primary liquidity source for acquisitions and long-term funding will include proceeds from dispositions and, to the extent we co-invest with other entities, capital from any future joint venture partners. We may also pursue a number of potential other funding sources, including mortgage loans, portfolio level credit lines and government financing.

Operating 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 operating stage, 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.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended March 31, 2016 did not exceed the charter imposed limitation.

Distributions

For the three months ended March 31, 2016, we paid aggregate distributions of $10.7 million, including $3.5 million of distributions paid in cash and $7.3 million of distributions reinvested in shares of common stock through our distribution reinvestment plan, as follows (in thousands, except per share data):



Record Date	Per Common Share	Distribution Date	Distributions Invested in Shares of Common Stock		Net Cash Distribution		Total Aggregate Distribution
January 28, 2016	$0.05	January 29, 2016	$	2,423	$	1,151	$	3,574
February 26, 2016	0.05	February 29, 2016	2,418		1,167		3,585
March 30, 2016	0.05	March 31, 2016	2,415		1,172		3,587
	$0.15		$	7,256	$	3,490	$	10,746

Distributions declared, distributions paid and cash flows used in operating activities were as follows for the three months ended March 31, 2016 (dollars in thousands):



	Distributions Paid								Distributions Declared			Sources of Distributions Paid
2016	Cash		Distributions Reinvested (DRIP)		Total		Cash Provided By/ (Used In) Operating Activities		Total		Per Share	Amount Paid from Operating Activities/Percent of Total Distributions Paid	Amount Paid from Debt Financing/Percent of Total Distributions Paid	Amount Paid from Dispositions/Percent of Total Distributions Paid
First Quarter	$	3,490	$	7,256	$	10,746	$	4,884	$	10,746	$0.05	$4,884 / 45%	—	$5,862/ 55%

Our net income attributable to common stockholders' for the three months ended March 31, 2016 was $2.2 million and net cash provided by operating activities of continuing operations was $4.9 million. Our cumulative cash distributions and net loss attributable to common shareholders from inception through March 31, 2016 were $102.5 million and $98.3 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from disposal of real estate and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities or proceeds from asset sales,

(Back to Index)

we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

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

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

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


(1)	acquisition fees and expenses;


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


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


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


(5)	impairment charges;


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


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


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


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


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


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

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

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

(Back to Index)

•

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

•

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

•

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

•

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

•

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

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

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

(Back to Index)

analysts in the assessment of our operating performance as it is reflective of the impact that regular, strategic property dispositions have on our continuing operations.

Core to our business plan is the acquisition of distressed assets at deep discounts. These assets are operationally distressed at the time of purchase. Such assets often require substantial investments of capital and increased operating costs after acquisition to convert these assets into stable, cash flowing properties. These capital expenditures are central to our revitalization strategy and are critical to creating value and restoring assets to their optimal performance. These planned expenditures are necessary primarily in the first 12 to 24 months after we take operating control of an asset and often result in negative, or reduced, net operating income, MFFO and AFFO during this turnaround stage.

Neither FFO, MFFO nor AFFO should be considered as an alternative to net income attributable to common stockholders, 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 may continue to acquire properties as part of our ongoing operations, acquisition costs and other adjustments that are increases to MFFO and AFFO are, and may continue to be, a significant use of cash. Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements. Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs.

The following section presents our calculation of FFO, MFFO and AFFO and provides additional information related to our operations (in thousands, except per share amounts). Amounts reported in the table below include adjustments attributable to noncontrolling interests.



	Three Months Ended
	March 31,
	2016			2015
Net income attributable to stockholders – GAAP	$	2,199		$	17,028
Net gains on dispositions of properties and joint venture interests	(11,532		)	(29,175		)
Depreciation expense	11,142			8,635
FFO attributable to common stockholders	1,809			(3,512		)
Adjustments for straight-line rents ⁽¹⁾	(14		)	—
Amortization of intangible lease assets	216			1,468
Realized loss on change in fair value of interest rate cap	72			—
Debt premium amortization	(120		)	(125		)
Acquisition costs	—			1,701
MFFO attributable to common stockholders	$	1,963		$	(468	)
Net gains on dispositions of properties and joint venture interests	11,532			29,175
AFFO attributable to common stockholders	$	13,495		$	28,707

Basic and diluted income per common share - GAAP	$	0.03		$	0.25
FFO per common share	$	0.03		$	(0.05	)
MFFO per common share	$	0.03		$	(0.01	)
AFFO per common share	$	0.19		$	0.41

Weighted average shares outstanding	71,719			69,485

(1) Adjustment to prior periods to conform to current period presentation.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which

(Back to Index)

form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2015 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”

Off-Balance Sheet Arrangements

As of March 31, 2016 and December 31, 2015, we were obligated to fund up to an additional $700,000 and $1.1 million, respectively, for the Spring Hill preferred equity investment in increments of $150,000 upon request as long as no triggering event has occurred. We did not have any other off-balance sheet arrangements or obligations.

Subsequent Events

In April 2016, our Board of Directors declared a $0.05 per share cash distribution to our common stockholders of record at the close of business on each of the following record dates: April 28, 2016, May 27, 2016 and June 29, 2016. Such distributions were or are to be paid on April 29, 2016, May 31, 2016 and June 30, 2016.

In May 2016, we refinanced the mortgage loan of $12.5 million secured by Tech Center Square.

In May 2016, we entered into an agreement to sell Affinity at Winter Park, located in Winter Park, Florida, for $17.5 million with an expected closing in June 2016. We expect to record a gain on the sale during the three months ended June 30, 2016.

In May 2016, we entered into an agreement to sell The Nesbit Palisades, located in Alpharetta, Georgia, for $45.5 million with an expected closing in July 2016. We expect to record a gain on the sale during the three months ended September 30, 2016.

We have evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.

(Back to Index)


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from our financial instruments primarily from changes in market interest rates. We do not have exposure to any other significant market risks. We monitor interest rate risk as an integral part of our overall risk management, which recognizes the unpredicatability of financial markets and seeks to reduce the potentially adverse effect on our results of operations. Our operating results are affected by changes in interest rates, primarily changes in LIBOR as a result of borrowings under our credit facility and outstanding mortgage loans.

We enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into a total of seven interest rate caps that were designated as cash flow hedges during 2013, 2014 and 2015. 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.

As of March 31, 2016 and December 31, 2015, we had $239.7 million and $282.0 million, respectively, in variable rate debt outstanding. If interest rates on the variable rate debt had been 100 basis points higher during the three months ended March 31, 2016 and the year ended December 31, 2015, our annual interest expense would have increased by approximately $2.6 million and $2.2 million, respectively.

In addition, changes in interest rates affect the fair value of our fixed rate mortgage notes payable. Fixed rate mortgage notes payable with an aggregate carrying value of $330.0 million and $351.6 million at March 31, 2016 and December 31, 2015, respectively, had an estimated aggregate fair value of $341.1 million and $359.7 million, respectively, computed using rates available to us for debt with similar terms and remaining maturities. If interest rates had been 100 basis points higher as of March 31, 2016 and December 31, 2015, the fair value of this fixed rate debt would have decreased by $13.4 million and $14.0 million, respectively.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon, and as of the date of, that evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(Back to Index)

PART II.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sale of Equity Securities

All securities sold by us during the three months ended March 31, 2016 were sold in an offering registered under the Securities Act of 1933, as amended (the "Securities Act").

Redemption of Securities

During the three months ended March 31, 2016, we redeemed shares of our common stock as follows:



Period	Total Number of Shares Redeemed (1)	Average Price Paid per Share	Total 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 2016	149,754	$10.59	149,754	(3)
February 2016	—	$—	—	(3)
March 2016	195,589	$10.59	195,589	(3)
	345,343


(1)	All redemptions of equity securities in the three months ended March 31, 2016 were made pursuant to our share redemption program. All redemption requests tendered were honored during the three months ended March 31, 2016.


(2)	The share redemption program commenced on June 16, 2010 and was subsequently amended on September 29, 2011.


(3)	We currently limit the dollar value and number of shares that may be redeemed under the program as described below.

We will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. Our board of directors will determine at least quarterly whether it has sufficient excess cash to redeem shares. Generally, the cash available for redemptions will be limited to proceeds from our distribution reinvestment plan plus, if we have positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.

Our share redemption program, including redemptions sought upon a stockholder's death or disability or upon confinement of a stockholder to a long-term care facility, will be available only for stockholders who purchase their shares directly from us or the transferees mentioned below, and is not intended to provide liquidity to any stockholder who acquired his or her shares by purchase from another stockholder. In connection with a request for redemption, the stockholder or his or her estate, heir or beneficiary will be required to certify to us that the stockholder acquired the shares to be repurchased either (1) directly from us or (2) from the original investor by way of (i) a bona fide gift not for value to, or for the benefit of, a member of the investor's immediate or extended family (including the investor's spouse, parents, siblings, children or grandchildren and including relatives by marriage), (ii) through a transfer to a custodian, trustee or other fiduciary for the account of the investor or members of the investor's immediate or extended family in connection with an estate planning transaction, including by bequest or inheritance upon death or (iii) operation of law.

Our board of directors, in its sole discretion, may suspend, terminate or amend our share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in our best interest. Our board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon the stockholder's death, qualifying disability or confinement to a long-term care facility.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES


(a)	There have been no defaults with respect to any of our indebtedness.


(b)	Not applicable.

(Back to Index)


ITEM 6.	EXHIBITS



Exhibit No.			Description
2.1			Agreement and Plan of Merger, dated July 18, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.2			Second Amendment to Agreement and Plan of Merger, dated September 13, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.3			Third Amendment to Agreement and Plan of Merger, dated December 16, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to Post-Effective Amendment No. 15 to the Company's Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
3.1			Amended and Restated Articles of Incorporation (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
3.2			Bylaws (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
4.1			Form of Distribution Reinvestment Plan Enrollment Form, included as Appendix B to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
4.2			Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed November 12, 2009)
4.3			Amended and Restated Distribution Reinvestment Plan, included as Appendix A to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)



31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2			Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1			Amended and Restated Share Redemption Program (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 14, 2011)
101.1			Interactive Data Files

(Back to Index)

SIGNATURES

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



		RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

May 13, 2016	By:	/s/ Alan F. Feldman
		ALAN F. FELDMAN
		Chief Executive Officer
		(Principal Executive Officer)

May 13, 2016	By:	/s/ Steven R. Saltzman
		STEVEN R. SALTZMAN
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

(Back to Index)

Resource Real Estate Opportunity REIT, Inc. - FORM 10-Q - May 13, 2016

Attached files

Resource Real Estate Opportunity REIT, Inc. Reports