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EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20160630xex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20160630xex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20160630xex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20160630xex311.htm

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

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-55430


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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
As of August 11, 2016, there were 58,242,665 outstanding shares of common stock of Resource Real Estate Opportunity REIT II, Inc.



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

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






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




PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
June 30,
2016
 
December 31,
2015
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental properties, net
 
$
653,097

 
$
388,157

Identified intangible assets, net
 
3,620

 
3,882

 
 
656,717

 
392,039

 
 
 
 
 
Cash
 
151,711

 
180,826

Restricted cash
 
6,023

 
3,901

Tenant receivables, net
 
50

 
17

Due from related parties
 
849

 
363

Subscriptions receivable
 

 
7,614

Prepaid expenses and other assets
 
1,366

 
2,260

Deferred offering costs
 

 
1,937

Total assets
 
$
816,716

 
$
588,957

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Mortgage notes payable, net
 
$
373,267

 
$
152,917

Accounts payable and accrued expenses
 
12,435

 
5,942

Due to related parties
 
1,078

 
6,035

Tenant prepayments
 
396

 
314

Security deposits
 
1,041

 
572

Distributions payable
 
8,746

 
2,778

Derivative liability
 
428

 
127

Total liabilities
 
397,391

 
168,685

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

 

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

 
1

Common stock (par value $.01; 1,000,000,000 shares authorized, 58,049,579 and 52,696,985 issued and outstanding at June 30, 2016 and December 31, 2015, respectively)
 
579

 
526

Additional paid-in capital
 
511,259

 
465,448

Accumulated other comprehensive loss
 
(200
)
 
(117
)
Accumulated deficit
 
(92,314
)
 
(45,586
)
Total stockholders’ equity
 
419,325

 
420,272

Total liabilities and stockholders’ equity
 
$
816,716

 
$
588,957

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



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share data)
(unaudited)

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Rental income
$
12,489

 
$
2,751

 
$
22,236

 
$
4,431

Total revenues
12,489

 
2,751

 
$
22,236

 
$
4,431

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Rental operating
5,983

 
1,438

 
10,901

 
2,188

Acquisition costs
3,768

 
1,263

 
6,844

 
2,159

Management fees
2,041

 
453

 
3,931

 
705

General and administrative
1,819

 
892

 
3,666

 
1,547

Loss on disposal of assets
822

 
608

 
1,849

 
1,011

Depreciation and amortization expense
7,984

 
1,844

 
14,725

 
2,782

Total expenses
22,417

 
6,498

 
41,916

 
10,392

 Loss before other income (expense)
(9,928
)
 
(3,747
)
 
(19,680
)
 
(5,961
)
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Interest income
52

 
26

 
109

 
45

Interest expense
(2,539
)
 
(229
)
 
(4,155
)
 
(453
)
Net loss
(12,415
)
 
(3,950
)
 
(23,726
)
 
(6,369
)
 
 
 
 
 
 
 
 
Other comprehensive loss:
 
 
 
 
 
 
 
Designated derivative, fair value adjustment
(48
)
 
(14
)
 
(83
)
 
(42
)
Comprehensive loss
$
(12,463
)
 
$
(3,964
)
 
$
(23,809
)
 
$
(6,411
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
57,709

 
18,935

 
57,027

 
13,605

 
 
 
 
 
 
 
 
Basic and diluted loss per common share
$
(0.22
)
 
$
(0.21
)
 
$
(0.42
)
 
$
(0.47
)















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




 
RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2016
(in thousands)
(unaudited)


 
 
Common Stock
 
Convertible Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, at January 1, 2016
 
52,697

 
526

 
50

 
1

 
465,448

 
(117
)
 
(45,586
)
 
420,272

Issuance of common stock
 
4,259

 
43

 

 

 
42,423

 

 

 
42,466

Offering costs
 

 

 

 

 
(6,263
)
 

 

 
(6,263
)
Common stock issued through distribution reinvestment plan
 
1,149

 
11

 

 

 
10,130

 

 
(10,141
)
 

Distributions declared
 

 

 

 

 

 

 
(12,861
)
 
(12,861
)
Share redemptions
 
(56
)
 
(1
)
 

 

 
(479
)
 

 

 
(480
)
Designated derivative, fair value adjustment
 

 

 

 

 

 
(83
)
 

 
(83
)
Net loss
 

 

 

 

 

 

 
(23,726
)
 
(23,726
)
Balance, at June 30, 2016
 
58,049

 
$
579

 
50

 
$
1

 
$
511,259

 
$
(200
)
 
$
(92,314
)
 
$
419,325
























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



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended 
 June 30
 
 
2016
 
2015
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(23,726
)
 
$
(6,369
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Loss on disposal of assets
 
1,849

 
1,011

Depreciation and amortization
 
14,725

 
2,782

Amortization of deferred financing costs
 
290

 
31

Amortization of mortgage premiums
 
(60
)
 

Change in fair value of interest rate swap
 
301

 

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
(824
)
 
(660
)
Tenant receivables, net
 
(33
)
 
(3
)
Due from related parties
 
(485
)
 
(185
)
Prepaid expenses and other assets
 
2,491

 
(31
)
Due to related parties
 
(3,019
)
 
(302
)
Accounts payable and accrued expenses
 
5,718

 
883

Tenant prepayments
 
44

 
64

Security deposits
 
(17
)
 
3

Net cash (used in) provided by operating activities
 
(2,746
)
 
(2,776
)
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Property acquisitions
 
(239,427
)
 
(79,057
)
Capital expenditures
 
(13,746
)
 
(1,873
)
Restricted cash - capital reserves
 
(850
)
 
(284
)
Net cash (used in) provided by investing activities
 
(254,023
)
 
(81,214
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock, net of redemptions
 
49,599

 
188,123

Payment of deferred financing costs
 
(2,752
)
 
(540
)
Increase in borrowings
 
194,607

 
20,200

Repayments on borrowings
 
(500
)
 

Purchase of interest rate caps
 
(145
)
 
(87
)
Distributions paid on common stock
 
(6,892
)
 
(1,525
)
Offering costs
 
(6,263
)
 
(21,473
)
Net cash (used in) provided by financing activities
 
227,654

 
184,698

 
 
 
 
 
Net (decrease) increase in cash
 
(29,115
)
 
100,708

Cash at beginning of period
 
180,826

 
15,781

Cash at end of period
 
$
151,711

 
$
116,489


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



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2016
(unaudited)


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS (LOSS)
Resource Real Estate Opportunity REIT II, Inc. (the “Company”) was organized in Maryland on September 28, 2012. The Company offered up to 100,000,000 shares of common stock in its primary initial public offering for $10 per share, with volume discounts available to investors who purchased $1.0 million or more of shares through the same participating broker-dealer. Discounts were also available for other categories of investors. The Company is also offering up to 10,000,000 shares pursuant to the Company’s distribution reinvestment plan at a purchase price equal to $8.56 per share ($9.50 per share prior to June 30, 2016). The Company has adopted a fiscal year ending December 31. On February 6, 2014, the Securities and Exchange Commission (the “SEC”) declared effective the Company's Registration Statement on Form S-11, as amended (Commission File No. 333-184476) (the “Registration Statement”), relating to the offering of up to 110,000,000 shares of the Company’s common stock, including shares offered pursuant to the Company's distribution reinvestment plan. The primary portion of the offering closed on February 10, 2016.
Resource Real Estate Opportunity Advisor II, LLC (the "Advisor”) is a wholly owned subsidiary of Resource Real Estate, Inc. (the "Sponsor") and an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors. The Advisor acts as the Company's external advisor and manages the Company's day-to-day operations and its portfolio of real estate investments and provides asset-management, marketing, investor relations and other administrative services on the Company's behalf, all subject to the supervision of the Company's Board of Directors. On October 9, 2012, the Advisor contributed $200,000 to the Company in exchange for 20,000 shares of common stock. On December 20, 2013, the Advisor received 50,000 shares of convertible stock in exchange for 5,000 shares of the Company’s common stock. The Advisor purchased an additional 117,778 shares of common stock in 2014 for $1.1 million.
As of June 30, 2016, a total of 57,864,447 shares, including the additional shares purchased by the Advisor and shares issued through the distribution reinvestment plan (but excluding shares issued through stock distributions to the Advisor), have been issued in connection with the Company's public offering resulting in gross offering proceeds of $575.1 million. As of June 30, 2016, the Company had issued 2,058,150 shares for $18.8 million pursuant to its distribution reinvestment plan.
The Company’s objective is to take advantage of the Sponsor's dedicated multifamily investing and lending platforms to invest in multifamily assets across the entire spectrum of investments in order to provide stockholders with growing cash flow and increasing asset values. The Company’s targeted portfolio will consist, at the time of acquisition, of commercial real estate assets, principally (i) underperforming multifamily rental properties which the Company will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which the Company will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans the Company originates or purchases either directly or with a co-investor or joint venture partner.
The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2014. As such, to maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes at least 100% of its REIT taxable income to its stockholders. The Company also operates its business in a manner that is intended to permit it to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
The consolidated financial statements and the information and tables contained in the notes thereto, as of June 30, 2016, are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the SEC. However, in the opinion of management, these interim financial statements include all of 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 and six months ended June 30, 2016 may not necessarily be indicative of the results of operations for the full year ending December 31, 2016. The consolidated balance sheet as of December 31, 2015 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2015.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary
 
Apartment Complex
 
Number
of Units
 
Property Location
RRE Opportunity Holdings II, LLC
 
N/A
 
N/A
 
N/A
RRE Opportunity OP II, LP
 
N/A
 
N/A
 
N/A
RRE Bear Creek Holdings, LLC, or Bear Creek
 
Adair off Addison
 
152
 
Dallas, TX
RRE Oak Hill Holdings, LLC, or Oak Hill
 
Overton Trails
 
360
 
Fort Worth, TX
RRE Buckhead Holdings, LLC, or Buckhead
 
Uptown Buckhead
 
216
 
Atlanta, GA
RRE Farrington Holdings, LLC, or Farrington
 
Crosstown at Chapel Hill
 
411
 
Chapel Hill, NC
RRE Mayfair Chateau Holdings, LLC, or Mayfair Chateau
 
Mayfair Chateau
 
274
 
Homewood, AL
RRE Fairways of Bent Tree Holdings, LLC, or Fairways of Bent Tree
 
Adair off Addison Apartment Homes
 
200
 
Dallas, TX
RRE Montclair Terrace Holdings, LLC, or Montclair Holdings
 
Montclair Terrace
 
188
 
Portland, OR
RRE Grand Reserve Holdings, LLC, or Grand Reserve
 
Grand Reserve
 
319
 
Naperville, IL
RRE Canterwood Holdings, LLC, or Canterwood
 
Verdant Apartment Homes
 
216
 
Boulder, CO
RRE Spalding Crossing Holdings, LLC, or Spalding Crossing
 
1000 Spalding Apartment Homes
 
252
 
Atlanta, GA
RRE Fox Ridge Holdings, LLC, or Fox Ridge
 
Arcadia Apartment Homes
 
300
 
Centennial, CO
RRE Riverlodge Holdings, LLC, or Riverlodge
 
Riverlodge
 
498
 
Austin, TX
RRE Breckenridge Holdings, LLC, or Breckenridge
 
Breckenridge
 
357
 
Portland, OR
RRE Santa Rosa Holdings, LLC, or Santa Rosa
 
Santa Rosa
 
476
 
Irving, TX

N/A - Not Applicable
All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Real Estate Investments
The Company records acquired real estate at fair value on its acquisition date. The Company considers the period of future benefit of an asset to determine its appropriate useful life. The Company's estimated useful lives of its assets by class are as follows:


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


Buildings
27.5 years
Building improvements
3.0 to 27.5 years
Tenant improvements
Shorter of lease term or expected useful life
Lease intangibles
Remaining term of related lease
As four of the Company's multifamily properties are located in the Dallas-Fort Worth area, two properties are located in Portland, Oregon, two properties are located in the Atlanta area and two properties are located in the Denver area, our portfolio is currently particularly susceptible to adverse economic developments in these real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could negatively affect our liquidity and adversely affect our ability to fund our ongoing operations.
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for impairment. This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. These estimates consider factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
If impairment exists, due to the inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. The Company did not recognize any impairment charges as of June 30, 2016.
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, the Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, identified intangible lease assets, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases, the value of tenant relationships, and liabilities, based in each case on their fair values.
Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities. In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports, along with the aforementioned information available to the Company's management, is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the remaining term of the underlying leases. The value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases, but in no event does amortization periods for the intangible assets exceed the remaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of the in-place lease value and relationship intangibles related to that customer would be charged to expense in that period.
The determination of the fair value of the assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. These estimates are subject to change until all information is finalized, which is generally within one year of the acquisition date.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period the related expenses are incurred.
The specific timing of a sale is measured against various criteria related to the terms of the transaction and any continuing involvement associated with the property. If the criteria for profit recognition under the full-accrual method are not met, the Company defers the gain recognition and accounts for the continued operations of the property by applying the percentage-of-completion, reduced profit, deposit, installment or cost recovery methods, as appropriate, until the appropriate criteria are met.
The future minimum rental payments to be received from noncancelable operating leases are $28.1 million and $339,942 for the 12-month periods ending June 30, 2017 and 2018, respectively, and none thereafter.
Tenant Receivables
The Company makes estimates of the collectability of its tenant receivables related to base rents, including straight-line rentals, expense reimbursements and other revenue or income. The Company specifically analyzes accounts receivable and historic bad debts, tenant creditworthiness, current economic trends when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, the Company makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. At June 30, 2016 and 2015, there were allowances for uncollectible accounts of $5,686 and $0, respectively.
Income Taxes
The Company elected to be taxed as a REIT, commencing with its taxable year ended December 31, 2014. Accordingly, the Company will generally not be subject to corporate U.S. federal or state income tax to the extent that it makes qualifying distributions to its stockholders, and provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements. Taxable income, generally, will differ from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRSs”). 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.
While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. As of June 30, 2016 and December 31, 2015, the Company had no TRSs.
Earnings Per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. Due to reported losses for the current periods presented, the convertible shares (discussed in Note 11) are not included in the diluted earnings per share calculation, as they would be anti-dilutive. All common shares and per common share information in the consolidated financial statements have been adjusted retroactively for the effect of one 0.625% stock distribution issued on July 14, 2014, one 1.00% stock distribution issued October 15, 2014, one 0.83333% stock distribution issued on January 15, 2015, one 0.5% stock distribution issued on April 15, 2015, and one 0.5% stock distribution issued on July 15, 2015.
Correction of an Immaterial Error
During the second quarter ended June 30, 2016, the Company made an adjustment to correct an immaterial error related to the accrual of real estate taxes. As a result of this error, the Company adjusted accounts payable and accrued expenses and rental properties by $832,283, respectively. The adjustment impacts the Consolidated Balance Sheet, Note 5- Rental Properties, net and Note 6 - Acquisitions as of December 31, 2015. This correction had no impact of earnings or cash flows.
Organization and Offering Costs
The Company incurred organizational, accounting, and offering costs in pursuit of its financing. Organization and offering costs (other than selling commissions and dealer-manager fees) of the Company were initially paid by the Advisor on behalf of the Company. Organization costs were expensed as incurred and included all expenses incurred by the Company in connection with the formation of the Company, including, but not limited to, legal fees and other costs to incorporate the Company.
Pursuant to the Amended and Restated Advisory Agreement between the Company and the Advisor dated January 9, 2014, as amended (the “Advisory Agreement”), the Company is obligated to reimburse the Advisor for organizational and offering costs it incurred on the Company's behalf, but only to the extent that such reimbursements did not cause organizational and offering expenses (other than selling commissions and the dealer manager fees) to exceed 2.5% of the gross offering proceeds raised in the offering, when recorded by the Company. The primary portion of the offering closed on February 10, 2016, at which point total organizational and offering costs incurred did not exceed 2.5% of the gross offering proceeds raised in the offering.
Through June 30, 2016, the Company incurred $11.2 million for the payment of offering costs consisting of accounting, advertising, allocated payroll, due diligence, marketing, legal and similar costs. As of June 30, 2016, the Advisor had incurred $7.2 million of these costs on behalf of the Company. A portion of these costs was charged to equity upon the sale of each share of common stock sold under the public offering. Similarly, a portion of the proceeds received from the sales of shares in the Company's public offering was paid to the Advisor to reimburse it for the amount incurred on behalf of the Company. As of June 30, 2016, the Company had reimbursed all $7.2 million of deferred offering costs to the Advisor.
Adoption of New Accounting Standards
In January 2015, the Financial Accounting Standards Board ("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 is effective


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


for fiscal years, and interim periods within those years, beginning after December 15, 2015. On January 1, 2016, the Company adopted ASU 2015-01 and the adoption had no impact on the Company's consolidated financial statements.
In February 2015, FASB issued ASU No. 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. ASU 2015-02 is effective for the Company beginning January 1, 2016. On January 1, 2016, the Company adopted ASU 2015-02 and the adoption had no impact on the Company's consolidated financial statements.
In April 2015, FASB issued ASU No. 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. 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. Accordingly, the Company has reclassified $2.5 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 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". which is intended to improve financial reporting about leasing transactions and requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU No. 2016-02 to have a significant impact on its consolidated financial statements.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION    
The following table presents supplemental cash flow information (in thousands):
 
Six Months Ended
 
June 30,
 
2016
 
2015
Non-cash operating, financing and investing activities:
 
 
 
Cash distributions on common stock declared but not yet paid
$
8,746

 
$
3,448

Stock issued pursuant to distribution reinvestment plan
10,141

 
2,417

Stock distributions issued

 
1,070

Deferred offering costs

 
1,559

Due to related parties

 
1,649

Mortgage notes payable assumed, at fair value
28,765

 

Other assets acquired through assumed mortgage notes payable, at fair value
61

 

Rental property acquired through assumed mortgage notes payable, at fair value
28,704

 

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,950

 
$
368

NOTE 4 - RESTRICTED CASH
Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. A summary of the components of restricted cash follows (in thousands):
 
June 30,
2016
 
December 31,
2015
Real estate taxes
$
2,937

 
$
1,586

Insurance
204

 
293

Capital improvements
2,882

 
2,022

 
$
6,023

 
$
3,901

NOTE 5 - RENTAL PROPERTIES, NET
The Company’s investments in rental properties consisted of the following (in thousands):
 
June 30,
2016
 
December 31,
2015
Land
$
100,053

 
$
66,487

Building and improvements
540,848

 
314,716

Furniture, fixtures and equipment
21,624

 
10,539

Construction in progress
4,669

 
1,710


667,194

 
393,452

Less: accumulated depreciation
(14,097
)
 
(5,295
)

$
653,097

 
$
388,157

    
Depreciation expense for the three and six months ended June 30, 2016 was $4.9 million, and $8.8 million, respectively. Depreciation expense for the three and six months ended June 30, 2015 was $902,373 and $1.4 million, respectively.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


NOTE 6 - ACQUISITIONS
As of June 30, 2016, the Company owned 14 properties. In order to finalize the fair values of the acquired assets and liabilities, the Company obtained third-party appraisals. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property. All valuations have been finalized as of June 30, 2016.
The table below summarizes these acquisitions and the respective fair values assigned (in thousands):    
Multifamily
Community Name
 
City and State
 
Date of
Acquisition
 
Contractual Purchase
Price
(1)
 
Land
 
Building and
Improvements
 
Furniture, Fixture and Equipment
 
Intangible Assets
 
Debt assumed
 
Other
Liabilities
 
Fair Valued
Assigned
Adair off Addison
 
Dallas, Texas
 
6/4/2014
 
$
9,500

 
$
1,889

 
$
7,061

 
$
199

 
$
351

 
$

 
$
(85
)
 
$
9,415

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

 
4,834

 
40,486

 
504

 
1,176

 

 
(60
)
 
46,940

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

 
6,464

 
24,993

 
399

 
644

 

 
(117
)
 
32,383

Crosstown at Chapel Hill
 
Chapel Hill, North Carolina
 
5/19/2015
 
46,750

 
7,098

 
37,947

 
608

 
1,097

 

 
(231
)
 
46,519

Mayfair Chateau
 
Homewood, Alabama
 
8/21/2015
 
30,050

 
3,595

 
25,997

 
411

 
766

 
(22,189
)
 
(148
)
 
8,432

Adair off Addison Apartment Homes
 
Dallas, Texas
 
8/27/2015
 
21,250

 
2,532

 
17,831

 
304

 
583

 

 
(229
)
 
21,021

1000 Spalding Apartment Homes
 
Atlanta, Georgia
 
9/24/2015
 
41,000

 
5,030

 
34,765

 
399

 
806

 

 
(51
)
 
40,949

Montclair Terrace
 
Portland, Oregon
 
10/29/2015
 
32,750

 
3,545

 
28,282

 
304

 
619

 

 
(80
)
 
32,670

Grand Reserve
 
Naperville, Illinois
 
12/18/2015
 
66,700

 
12,132

 
52,982

 
1,097

 
1,322

 

 
(98
)
 
67,435

Verdant Apartment Homes
 
Boulder, Colorado
 
12/18/2015
 
65,200

 
19,527

 
44,140

 
514

 
1,019

 

 
(344
)
 
64,856

Arcadia Apartment Homes
 
Centennial, Colorado
 
1/22/2016
 
60,250

 
8,578

 
49,990

 
492

 
1,191

 

 
(126
)
 
60,125

Riverlodge
 
Austin, Texas
 
3/23/2016
 
57,000

 
6,776

 
47,992

 
698

 
1,534

 
(28,765
)
 
(393
)
 
27,842

Breckenridge
 
Portland, Oregon
 
5/17/2016
 
81,500

 
9,642

 
69,701

 
812

 
1,345

 

 
(181
)
 
81,319

Santa Rosa
 
Irvine, Texas
 
6/28/2016
 
70,000

 
8,410

 
59,326

 
718

 
1,546

 

 
(616
)
 
69,384


(1) Contractual purchase price excludes closing costs and acquisition expenses.
    


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


The table below summarizes the total revenues, net loss, and acquisition costs and fees of the Company's 2016 acquisitions (in thousands):
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Multifamily Community
 
2016
 
2016
Arcadia Apartment Homes
 
 
 
 
 
Total Revenues
 
$
1,257

 
$
2,187

 
Net Loss
 
(612
)
 
(1,225
)
 
Acquisition Costs
 

 
52

 
Acquisition Fee
 
13

 
1,371

Riverlodge
 
 
 
 
 
Total Revenues
 
1,574

 
1,708

 
Net Loss
 
(885
)
 
(1,879
)
 
Acquisition Costs
 

 
197

 
Acquisition Fee
 

 
1,380

Breckenridge
 
 
 
 
 
Total Revenues
 
671

 
671

 
Net Loss
 
(1,179
)
 
(1,179
)
 
Acquisition Costs
 
158

 
158

 
Acquisition Fee
 
1,798

 
1,798

Santa Rosa
 
 
 
 
 
Total Revenues
 
51

 
51

 
Net Loss
 
(169
)
 
(169
)
 
Acquisition Costs
 
163

 
163

 
Acquisition Fee
 
1,627

 
1,627



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of in-place rental leases. The value of acquired in-place leases totaled $14.0 million and $8.4 million as of June 30, 2016 and December 31, 2015, respectively, net of accumulated amortization of $10.4 million and $4.5 million, respectively. The weighted average remaining life of the rental leases is nine months as of June 30, 2016. Amortization for the three months ended June 30, 2016 and 2015 was $3.0 million and $942,070, respectively. Amortization expense for the six months ended June 30, 2016 and 2015 was $5.9 million and $1.4 million, respectively. As of June 30, 2016, expected amortization for the in-place rental leases for the next 12 months is $3.6 million and none thereafter.
NOTE 8 - MORTGAGE NOTES PAYABLE
The following is a summary of the Company's mortgage notes payable (in thousands):
 
 
Outstanding borrowings
 
Premium
 
Deferred Finance Costs, net
 
Carrying Value
 
Outstanding borrowings
 
Premium
 
Deferred Finance Costs, net
 
Carrying Value
Collateral
 
June 30, 2016
 
December 31, 2015
Overton Trails Apartment Homes
 
$
31,075

 
$

 
$
(360
)
 
$
30,715

 
$
31,075

 
$

 
$
(382
)
 
30,693

Uptown Buckhead
 
20,200

 

 
(302
)
 
19,898

 
20,200

 

 
(320
)
 
19,880

Crosstown at Chapel Hill
 
32,000

 

 
(428
)
 
31,572

 
32,000

 

 
(491
)
 
31,509

Mayfair Chateau - Key Bank
 
18,427

 
566

 
(266
)
 
18,727

 
18,603

 
621

 
(293
)
 
18,931

Mayfair Chateau - Capital One
 
2,719

 
43

 
(46
)
 
2,716

 
2,739

 
47

 
(50
)
 
2,736

Adair off Addison and Adair off Addison Apartment Homes
 
25,500

 

 
(523
)
 
24,977

 
25,500

 

 
(583
)
 
24,917

1000 Spalding Apartment Homes
 
24,600

 

 
(320
)
 
24,280

 
24,600

 

 
(349
)
 
24,251

Riverlodge
 
28,610

 

 
(433
)
 
28,177

 

 

 

 

Verdant Apartment Homes
 
37,300

 

 
(373
)
 
36,927

 

 

 

 

Arcadia Apartment Homes
 
40,200

 

 
(409
)
 
39,791

 

 

 

 

Grand Reserve
 
42,832

 

 
(483
)
 
42,349

 

 

 

 

Montclair Terrace
 
21,300

 

 
(383
)
 
20,917

 

 

 

 

Breckenridge
 
52,975

 

 
(754
)
 
52,221

 

 

 

 

 
 
$
377,738

 
$
609

 
$
(5,080
)
 
$
373,267

 
$
154,717

 
$
668

 
$
(2,468
)
 
$
152,917



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


 
 
Maturity
Date
 
Annual Interest Rate
 
Average
Monthly Debt
Service
 
 
 
Average
Monthly Escrow
Overton Trails Apartment Homes
 
1/1/2025
 
2.37
%
 
99

 
(1) (3)
 
155

Uptown Buckhead
 
7/1/2025
 
2.69
%
 
66

 
(1) (3)
 
70

Crosstown at Chapel Hill
 
7/10/2020
 
2.17
%
 
74

 
(1) (4)
 

Mayfair Chateau - Key Bank
 
11/1/2021
 
4.73
%
 
104

 
(2)
 
27

Mayfair Chateau - Capital One
 
11/1/2021
 
5.40
%
 
16

 
(2)
 

Adair off Addison and Adair off Addison Apartment Homes
 
1/1/2021
 
2.02
%
 
74

 
(1) (3)
 

1000 Spalding Apartment Homes
 
1/1/2022
 
3.88
%
 
104

 
(2)
 
39

Riverlodge
 
5/1/2022
 
3.76
%
 
144

 
(2)
 
130

Verdant Apartment Homes
 
5/1/2023
 
3.89
%
 
152

 
(2)
 
26

Arcadia Apartment Homes
 
5/1/2023
 
3.89
%
 
164

 
(2)
 
19

Grand Reserve
 
6/1/2023
 
3.04
%
 
173

 
(1)
 
88

Montclair Terrace
 
6/1/2023
 
2.92
%
 
84

 
(1)
 
21

Breckenridge
 
7/1/2023
 
2.83
%
 
183

 
(1)
 
54


(1)
Variable rate based on one-month LIBOR of 0.4651% (as of June 30, 2016) plus a fixed margin
(2)
Fixed rate
(3)
Variable rate hedged with interest rate cap cash flow hedge
(4)
Variable rate hedged with variable-for-fixed interest rate swap
On June 4, 2014, in connection with the acquisition of Adair off Addison, the Company entered into a $7.5 million, secured mortgage loan with Berkadia Commercial Mortgage, LLC (the "Adair Mortgage Loan"), secured by Adair off Addison. The Adair Mortgage Loan, was set to mature on July 1, 2024, bearing interest at a floating rate of one-month LIBOR plus 2.37%. The Adair Mortgage Loan was refinanced on December 9, 2015 with the Adair off Addison Apartment Homes Mortgage Loan (discussed below).    
On December 19, 2014, in connection with the acquisition of Overton Trails Apartment Homes, the Company entered into a $31.1 million, secured mortgage loan with M&T Realty Capital Corporation (the "Overton Mortgage Loan"), secured by Overton Trails Apartment Homes. The Overton Mortgage Loan, which matures on January 1, 2025, bears interest at a floating rate of one-month LIBOR plus 1.91%. Monthly payments are initially interest only. Beginning with the February 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $109,000 per month.
On June 30, 2015, the Company entered into a $20.2 million secured mortgage loan with Prudential Multifamily Mortgage, LLC (the "Uptown Buckhead Mortgage Loan"), secured by Uptown Buckhead. The Uptown Buckhead Mortgage Loan, which matures on July 1, 2025, bears interest at a floating rate of one-month LIBOR plus 2.22%. Monthly payments are initially interest only. Beginning with the August 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $74,000 per month.
On July 28, 2015, the Company entered into a $32.0 million secured mortgage loan with Bank of America, N.A. (the "Crosstown at Chapel Hill Mortgage Loan"), secured by Crosstown at Chapel Hill. The Crosstown at Chapel Hill Mortgage Loan, which matures on July 10, 2020, bears interest at a floating rate of one-month LIBOR plus 1.70%. Monthly payments are initially interest only. Beginning with the August 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $85,000 per month.
On August 21, 2015, in connection with the acquisition of Mayfair Chateau, the Company assumed a $18.4 million secured first mortgage loan with Key Bank (the "Mayfair Key Bank Mortgage Loan"), secured by Mayfair Chateau. The Mayfair Chateau Key Bank Mortgage Loan, which matures November 1, 2021, bears interest at a fixed rate of 4.73%. Monthly payments include interest and principal, in the amount of approximately $104,000 per month.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


On August 21, 2015, in connection with the acquisition of Mayfair Chateau, the Company assumed a $2.7 million secured second mortgage loan with Capital One (the "Mayfair Capital One Mortgage Loan"), secured by Mayfair Chateau. The Mayfair Chateau Capital One Mortgage Loan, which matures November 1, 2021, bears interest at a fixed rate of 5.40%. Monthly payments include interest and principal, in the amount of approximately $16,000 per month.
On August 21, 2015, the Company recorded a fair value adjustment, which represented the fair value of the debt assumed over its principal amount in connection with Mayfair Chateau acquisition. The fair value will be amortized to interest expense over the term of the related mortgages loans using the effective interest method. As of June 30, 2016, the net unamortized fair value of debt assumed adjustment was $609,000 and was included as a component of mortgage loans payable in the accompanying consolidated balance sheets.
On December 9, 2015, the Company entered into a $25.5 million secured mortgage loan with Capital One (the "Adair off Addison Apartment Homes Mortgage Loan"), secured by Adair off Addison and Adair off Addison Apartment Homes. The Adair off Addison Apartment Home Mortgage Loan refinanced the existing Adair off Addison Mortgage Loan (discussed above). The Adair off Addison Apartment Home Mortgage Loan, which matures on January 1, 2021, bears interest at a floating rate of one-month LIBOR plus 1.55%. Monthly payments are initially interest only. Beginning with the February 2017 payment, monthly payments will include interest and principal, which based upon current interest rates, amount to approximately $78,000 per month.
On December 18, 2015, the Company entered into a $24.6 million secured mortgage loan with Allstate Life Insurance Company, Allstate Life Insurance Company of New York and Allstate Assurance Company (the "Spalding Mortgage Loan"), secured by Spalding Crossing. The Spalding Mortgage Loan, which matures on January 1, 2022, bears interest at a fixed rate of 3.88%. Monthly payments are initially interest only. Beginning with the February 2018 payment, monthly payments include interest and principal, in the amount of approximately $116,000.
On March 23, 2016, in connection with the acquisition of Riverlodge, the Company assumed a $28.8 million secured mortgage loan with CBRE Capital Markets, Inc. (the "Riverlodge Mortgage Loan"), secured by Riverlodge. The Riverlodge Mortgage Loan, which matures May 1, 2022, bears interest at a fixed rate of 3.76%. Monthly payments include interest and principal, in the amount of approximately $144,000 per month. The contract fixed interest rate was in line with the market rates, therefore the Company did not record either a premium or discount in conjunction with the loan assumption.
On April 14, 2016, the Company entered into a $37.3 million secured mortgage loan with Allstate Life Insurance Company, Allstate Life Insurance Company of New York and Allstate Assurance Company (the "Verdant Mortgage Loan"), secured by Verdant Apartment Homes. The Verdant Mortgage Loan, which matures on May 1, 2023, bears interest at a fixed rate of 3.89%. Monthly payments are initially interest only. Beginning with the June 2019 payment, monthly payments include interest and principal, in the amount of approximately $176,000.
On April 14, 2016, the Company entered into a $40.2 million secured mortgage loan with Allstate Life Insurance Company, Allstate Life Insurance Company of New York and Allstate Assurance Company (the "Arcadia Mortgage Loan"), secured by Arcadia Apartment Homes. The Arcadia Mortgage Loan, which matures on May 1, 2023, bears interest at a fixed rate of 3.89%. Monthly payments are initially interest only. Beginning with the June 2019 payment, monthly payments include interest and principal, in the amount of approximately $189,000.
On May 16, 2016, the Company entered into a $42.8 million secured mortgage loan with Berkadia (the "Grand Reserve Mortgage Loan"), secured by Grand Reserve. The Grand Reserve Mortgage Loan, which matures on June 1, 2023, bears interest at a floating rate of one-month LIBOR plus 2.57%. Monthly payments include interest and principal, which based upon current rates, amounts to approximately $173,000 per month.
On May 17, 2016, the Company entered into a $21.3 million secured mortgage loan with HFF, L.P. (the "Montclair Mortgage Loan"), secured by Montclair Terrace. The Montclair Mortgage Loan, which matures on June 1, 2023, bears interest at a floating rate of one-month LIBOR plus 2.45%. Monthly payments include interest and principal, which based upon current rates, amounts to approximately $84,000 per month.
On June 24, 2016, the Company entered into a $53.0 million secured mortgage loan with CBRE (the "Breckenridge Mortgage Loan"), secured by Breckenridge. The Breckenridge Mortgage Loan, which matures on July 1, 2023, bears interest at a floating rate of one-month LIBOR plus 2.36%. Monthly payments are initially interest only. Beginning with the August 2018 payment, monthly payments will include interest and principal, which based upon current rates, amounts to approximately $216,000 per month.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


Annual principal payments on the mortgage notes payable, excluding amortization of the mortgage premium, for each of the next five 12-month periods ending June 30 and thereafter, are as follows (in thousands):
2017
$
2,848

2018
4,489

2019
6,253

2020
7,769

2021
61,724

Thereafter
294,655

Total principal payments
$
377,738

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 $1.8 million for renovations at Uptown Buckhead by June 30, 2017, of which $2.4 million were completed at June 30, 2016 . For the Crosstown at Chapel Hill Mortgage Loan, beginning with the calendar quarter ending December 31, 2017, the property must maintain a certain level of debt service coverage.
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. As of June 30, 2016 and December 31, 2015, accumulated amortization of deferred financing costs was $424,116 and $139,722, respectively. Amortization of deferred financing costs for the next five 12-month periods ending June 30 and thereafter, is as follows (in thousands):
2017
$
873

2018
863

2019
850

2020
834

2021
656

Thereafter
1,004

 
$
5,080




RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss (in thousands):
 
Unrealized loss
on derivatives
 
June 30, 2016
 
June 30, 2015
Beginning of period
$
(117
)
 
$
(35
)
Designated derivative, fair value adjustment
(83
)
 
(42
)
End of period
$
(200
)
 
$
(77
)
NOTE 10 - RELATED PARTY TRANSACTIONS
Pursuant to the terms of the Advisory Agreement, the Advisor provides the Company with the services of its management team, including its officers, along with appropriate support personnel. The Advisor will be reimbursed for the Company’s allocable share of costs for Advisor personnel, including allocable personnel salaries and benefits. Each of the Company’s officers is an employee of the Sponsor or one of its affiliates. The Company does not have any employees. The Advisor is not obligated to dedicate any specific portion of its time or the time of its personnel to the Company’s business. The Advisor is at all times subject to the supervision and oversight of the Company’s Board of Directors and has only such functions and authority as the Company delegates to it.
During the course of the primary offering, the Advisor provided offering-related services to the Company and advanced funds to the Company for both operating costs and organization and offering costs. These amounts are reimbursed to the Advisor from the proceeds from the offering. As of June 30, 2016, the Advisor has incurred costs on a cumulative basis on behalf of the Company of approximately $7.2 million, all of which had been reimbursed.
Relationship with the Advisor
The Advisory Agreement has a one-year term and renews for an unlimited number of successive one-year terms upon the approval of the conflicts committee of the Company's Board of Directors. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:
Acquisition fees. The Advisor earns an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments.
Asset management fees. The Advisor earns a monthly asset management fee equal to one-twelfth of 1.0% of the cost of each asset, without deduction for depreciation, bad debts or other non-cash reserves. The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all of an asset and does not manage or control the asset.
Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.0% of the contract sales price.
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its distribution reinvestment plan offering. This includes all organization and offering costs of up to 2.5% of gross offering proceeds. Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out-of-pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment. However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


Relationship with RAI
On May 22, 2016 RAI agreed to be acquired by C-III Capital Partners LLC ("C-III"), a leading commercial real estate services company engaged in a broad range of activities.  The proposed merger is expected to close late in the third quarter of 2016 and is subject to approval by the stockholders of RAI, regulatory approvals and other customary closing conditions. Upon closing of the transaction, C-III will control our Advisor and will control all of the shares currently held by RAI. 
Self-insurance funds held in escrow. The receivable from related party includes escrow funds held by RAI for self-insurance. The Company's properties participate in an insurance pool with other properties directly and indirectly managed by RAI for both property insurance and general liability. RAI holds the escrow funds related to the insurance pools on its books. The insurance pool covers losses up to $2.5 million and the pool for the general liability covers losses up to the first $50,000 per incident. Catastrophic insurance would cover 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. In the six months ended June 30, 2016, the Company paid $799,183 into the insurance pools.
Internal audit fees. RAI performs internal audit services for the Company.
Relationship with Resource Real Estate Opportunity Manager II
Resource Real Estate Opportunity Manager II, LLC (the “Manager”), an affiliate of the Advisor, manages real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns a property management fee equal to 4.5% of actual gross cash receipts from the operations of real property investments.
Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.
Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment. No debt servicing fees were earned during the six months ended June 30, 2016 and 2015.
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company.
Relationship with Resource Securities
Resource Securities, Inc. (“Resource Securities”), an affiliate of the Advisor, serves as the Company’s dealer-manager and was responsible for marketing the Company’s shares during the primary portion of its public offering. Pursuant to the terms of the dealer-manager agreement with Resource Securities, the Company paid Resource Securities a selling commission of up to 7% of gross primary offering proceeds and a dealer-manager fee of up to 3% of gross primary offering proceeds. Resource Securities reallowed all selling commissions earned and a portion of the dealer-manager fee as a marketing fee to participating broker-dealers. No selling commissions or dealer-manager fees are earned by Resource Securities in connection with sales under the distribution reinvestment plan.
Relationship with Other Related Party
The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), the principal owner of which is the father of RAI’s Chief Financial Officer.
    


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


The fees earned/expenses incurred and the amounts payable to such related parties are summarized in the following tables (in thousands):
 
June 30,
2016
 
December 31,
2015
Due from related parties:
 
 
 
Resource Securities
$

 
$
37

RAI - self-insurance funds held in escrow
849

 
326

 
$
849

 
$
363

 
 
 
 
Due to related parties:
 
 
 
Advisor
 
 
 
Acquisition fees
$

 
$
2,646

Asset management fees

 
309

Organization and offering costs

 
1,938

Operating expense reimbursements
248

 
115

 
 
 
 
Manager
 
 
 
Property management fees
365

 
99

Other reimbursements
465

 
217

 
 
 
 
Resource Securities
 
 
 
Selling commissions and dealer-manager fees

 
711

 
$
1,078

 
$
6,035

 
 
 
 
Graphic Images (1)
$

 
$
3

 
(1)
Included in Accrued expenses on the consolidated balance sheets.
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Fees earned / expenses incurred:
 
 
 
 
 
 
 
Advisor
 
 
 
 
 
 
 
Acquisition fees (1)
$
3,438

 
$
1,263

 
$
6,450

 
$
2,159

Asset management fees (2)
$
1,638

 
$
334

 
$
2,955

 
$
512

Debt financing fees (3)
$
973

 
$
101

 
$
1,117

 
$
101

Organization and offering costs (4)
$

 
$
462

 
$
86

 
$
954

Operating expense reimbursements (5)
$
780

 
$
300

 
$
1,303

 
$
545

 
 
 
 
 
 
 
 
Manager
 
 
 
 
 
 
 
Property management fees (2)
$
530

 
$
118

 
$
930

 
$
193

Construction management fees (7)
$
340

 
$
77

 
$
521

 
$
77

Operating expense reimbursements (5)
$
32

 
$
23

 
$
61

 
$
68

Information technology fees (5)
$
40

 

 
$
72

 
$

 
 
 
 
 
 
 
 
Resource Securities
 
 
 
 
 
 
 
Selling commissions and dealer-manager fees (6)
$

 
$
5,649

 
$
4,192

 
$
14,614

 
 
 
 
 
 
 
 
Other
 
 
 
 
 
 
 
Graphic Images (4)
$

 
$
258

 
$
3

 
$
264



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


(1)     Included in Acquisition costs on the consolidated statements of operations and comprehensive (loss) income.
(2)     Included in Management fees on the consolidated statements of operations and comprehensive (loss) income.
(3)    Included in Mortgage notes payable, net on the consolidated balance sheets.
(4)     Included in Deferred offering costs and Stockholders' Equity on the consolidated balance sheets.
(5)     Included in General and administrative on the consolidated statements of operations and comprehensive (loss) income.
(6)     Included in Stockholders' equity on the consolidated balance sheets.
(7)     Included in Rental Properties, net on the consolidated balance sheets.
NOTE 11 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10,000,000 shares of its $0.01 par value preferred stock. As of June 30, 2016, no shares of preferred stock were issued or outstanding.
Convertible Stock
As of June 30, 2016, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor and affiliated persons. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 7% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on or after the 31st trading day following the listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 7% return threshold.
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
(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.      


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


Common Stock
As of June 30, 2016, the Company had an aggregate of 58,049,579 shares of $0.01 par value common stock outstanding, including the Advisor's additional purchase of 117,778 shares of common stock for $1.1 million, as follows (dollars in thousands):
 
 
Shares Issued
 
Gross Proceeds
Initial public offering
 
55,791,297

 
$
556,197

Shares issued through stock distributions
 
246,365

 

Shares issued through distribution reinvestment plan
 
2,058,150

 
18,785

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

 
150

Redemptions
 
(61,233
)
 
(536
)
 
 
58,049,579

 
$
574,597


Redemptions
During the six months ended June 30, 2016, the Company redeemed shares as follows (in thousands, except per share data):
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price Paid per Share
 
Cumulative Number
of Shares Purchased
as Part of a Publicly
Announced Plan or
Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
January 2016
 
 
$—
 
 
(2) 
February 2016
 
 
$—
 
 
(2) 
March 2016
 
8
 
$9.64
 
8
 
(2) 
April 2016
 
 
$—
 
 
(2) 
May 2016
 
 
$—
 
 
(2) 
June 2016
 
48
 
$9.75
 
48
 
(2) 

(1)
All purchases of equity securities by the Company in the six months ended June 30, 2016 were made pursuant to the Company's share redemption program.
(2)
The Company currently limits the dollar value and number of shares that may be repurchased under the program, as discussed below.
All redemption requests tendered were honored during the six months ended June 30, 2016.
The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption.  Generally, the cash available for redemption will be limited to proceeds from the distribution reinvestment plan plus, if the Company had positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous fiscal year.  These limitations apply to all redemptions, including redemptions sought upon a stockholder’s death, qualifying disability or confinement to a long-term care facility. 

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


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


Distributions
For the six months ended June 30, 2016, the Company paid aggregate distributions of $17.0 million, including $6.9 million of distributions paid in cash and $10.1 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):
Authorization Date
 
Per
Common
Share
 
Record Dates
 
Distribution Date
 
Distributions
reinvested in shares
of Common Stock
 
Net Cash Distributions
 
Total Aggregate
Distributions
December 17, 2015
 
$
0.00164384

 
December 31, 2015 through January 28, 2016
 
January 29, 2016
 
$
1,540

 
$
1,040

 
$
2,580

December 17, 2015
 
0.00164384

 
January 29, 2016 through February 26, 2016
 
February 29, 2016
 
1,618

 
1,103

 
2,721

February 24, 2016
 
0.00164384

 
February 27, 2016 through March 30, 2016
 
March 31, 2016
 
1,838

 
1,267

 
3,105

March 29, 2016
 
0.00164384

 
March 31, 2016 through April 29, 2016
 
April 30, 2016
 
1,635

 
1,106

 
2,741

March 29, 2016
 
0.00164384

 
April 30, 2016 through May 30, 2016
 
May 31, 2016
 
1,640

 
1,106

 
2,746

March 29, 2016
 
0.00164384

 
May 31, 2016 through June 29, 2016
 
June 30, 2016
 
1,870

 
1,270

 
3,140

 
 
 
 
 
 
 
 
$
10,141

 
$
6,892

 
$
17,033


On June 15, 2016, the Board of Directors approved distributions in an amount of $0.00164384 per share of common stock for stockholders of record each day in the period from June 30, 2016 through and including September 29, 2016, payable on July 30, 2016, August 31, 2016 and September 30, 2016.
NOTE 12 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
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.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
JUNE 30, 2016
(unaudited)


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

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

The following table presents information about the Company's assets measured at fair value on a recurring basis and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
50

 
$

 
$
50

 
$

 
$
50

 
$

 
$
50

Liabilities:
 
 
 
 
 
 
 
Cancelable swap
 
 
(428
)
 
 
 
(428
)
 
$

 
$
(428
)
 
$

 
$
(428
)
 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
52

 
$

 
$
52

 
$

 
$
52

 
$

 
$
52

Liabilities: