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EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20170331xex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20170331xex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20170331xex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT II, Inc.rreoii-20170331xex311.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, 2017
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
reit2logoa03a01a05.jpg


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, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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
 
 
Emerging growth company þ
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

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 8, 2017, there were 59,815,423 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)
 
 
March 31,
2017
 
December 31,
2016
 
 
(unaudited)
 
 
ASSETS
 
 
 
 
Investments:
 
 
 
 
Rental properties, net
 
$
752,799

 
$
754,588

Identified intangible assets, net
 
1,144

 
2,689

 
 
753,943

 
757,277

 
 
 
 
 
Cash
 
128,834

 
104,889

Restricted cash
 
6,746

 
6,620

Tenant receivables, net
 
44

 
68

Due from related parties
 
874

 
604

Prepaid expenses and other assets
 
3,211

 
1,852

Total assets
 
$
893,652

 
$
871,310

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Liabilities:
 
 
 
 
Mortgage notes payable, net
 
$
492,452

 
$
455,361

Accounts payable and accrued expenses
 
12,896

 
11,997

Due to related parties
 
892

 
2,648

Tenant prepayments
 
555

 
546

Security deposits
 
1,130

 
1,097

Distributions payable
 
8,920

 
8,769

Total liabilities
 
516,845

 
480,418

 
 
 
 
 
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, 59,631,325 and 59,160,177 issued and outstanding at March 31, 2017 and December 31, 2016, respectively)
 
596

 
591

Additional paid-in capital
 
524,728

 
520,746

Accumulated other comprehensive loss
 
(313
)
 
(74
)
Accumulated deficit
 
(148,205
)
 
(130,372
)
Total stockholders’ equity
 
376,807

 
390,892

Total liabilities and stockholders’ equity
 
$
893,652

 
$
871,310

 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
 
March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental income
$
17,809

 
$
9,747

Total revenues
17,809

 
9,747

 
 
 
 
Expenses:
 
 
 
Rental operating
7,262

 
4,891

Acquisition costs
60

 
3,076

Management fees
3,007

 
1,890

General and administrative
2,389

 
1,874

Loss on disposal of assets
292

 
1,027

Depreciation and amortization expense
9,424

 
6,741

Total expenses
22,434

 
19,499

 Loss before other income (expense)
(4,625
)
 
(9,752
)
 
 
 
 
Other income (expense):
 
 
 
Interest income
46

 
57

Interest expense
(4,328
)
 
(1,616
)
Net loss
(8,907
)
 
(11,311
)
 
 
 
 
Other comprehensive loss:
 
 
 
Designated derivatives, fair value adjustment
(239
)
 
(35
)
Comprehensive loss
$
(9,146
)
 
$
(11,346
)
 
 
 
 
Weighted average common shares outstanding
59,538

 
56,330

 
 
 
 
Basic and diluted net loss per common share
$
(0.15
)
 
$
(0.20
)















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 THRE MONTHS ENDED MARCH 31, 2017
(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, 2017
 
59,160

 
$
591

 
50

 
$
1

 
$
520,746

 
$
(74
)
 
$
(130,372
)
 
$
390,892

Common stock issued through distribution reinvestment plan
 
592

 
6

 

 

 
5,084

 

 

 
5,090

Distributions declared
 

 

 

 

 

 

 
(8,926
)
 
(8,926
)
Common stock redemptions
 
(121
)
 
(1
)
 

 

 
(1,102
)
 

 

 
(1,103
)
Designated derivatives, fair value adjustment
 

 

 

 

 

 
(239
)
 

 
(239
)
Net loss
 

 

 

 

 

 

 
(8,907
)
 
(8,907
)
Balance, at March 31, 2017
 
59,631

 
$
596

 
50

 
$
1

 
$
524,728

 
$
(313
)
 
$
(148,205
)
 
$
376,807
























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)
 
 
Three Months Ended 
 March 31
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net loss
 
$
(8,907
)
 
$
(11,311
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Loss on disposal of assets
 
292

 
1,027

Depreciation and amortization
 
9,424

 
6,741

Amortization of deferred financing costs
 
276

 
112

Amortization of mortgage premiums
 
(29
)
 
(30
)
Change in fair value of interest rate swap
 
19

 
277

Changes in operating assets and liabilities:
 
 
 
 
Restricted cash
 
69

 
1,035

Tenant receivables, net
 
24

 
(11
)
Due from related parties
 
(270
)
 
283

Prepaid expenses and other assets
 
(1,552
)
 
255

Due to related parties
 
(1,756
)
 
(3,043
)
Accounts payable and accrued expenses
 
903

 
1,191

Tenant prepayments
 
8

 
36

Security deposits
 
33

 
(9
)
Net cash (used in) provided by operating activities
 
(1,466
)
 
(3,447
)
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Property acquisitions
 

 
(88,525
)
Capital expenditures
 
(6,387
)
 
(5,144
)
Restricted cash - capital reserves
 
(194
)
 

Net cash (used in) provided by investing activities
 
(6,581
)
 
(93,669
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from issuance of common stock
 

 
50,079

Redemptions of common stock
 
(1,103
)
 
(75
)
Payment of deferred financing costs
 
(620
)
 
(316
)
Increase in borrowings
 
38,250

 

Repayments on borrowings
 
(784
)
 
(149
)
Purchase of interest rate caps
 
(66
)
 

Distributions paid on common stock
 
(3,685
)
 
(3,411
)
Offering costs
 

 
(6,263
)
Net cash (used in) provided by financing activities
 
31,992

 
39,865

 
 
 
 
 
Net increase (decrease) in cash
 
23,945

 
(57,251
)
Cash at beginning of period
 
104,889

 
180,826

Cash at end of period
 
$
128,834

 
$
123,575


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


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(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 $8.65 per share ($8.56 per share prior to March 31, 2017 and $9.50 per share prior to March 31, 2016). The Company has adopted a fiscal year ending December 31. The primary portion of the offering closed on February 6, 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”), 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.

RAI is a wholly owned subsidiary of C-III Capital Partners, LLC ("C-III"), a leading commercial real estate services company engaged in a broad range of activities. C-III controls our Advisor and Resource Real Estate Opportunity Manager II, LLC, the Company's property manager (the "Manager"). C-III also controls all of the shares of common stock held by RAI.
As of March 31, 2017, a total of 59,679,076 shares, including the additional shares purchased by the Advisor and shares issued through the distribution reinvestment plan (but excluding shares issued through stock distributions), have been issued in connection with the Company's public offering resulting in gross offering proceeds of $590.7 million. As of March 31, 2017, the Company had issued 3,872,779 shares for $34.3 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 has acquired and may continue to acquire 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 taxable net income (excluding net capital gains) to its stockholders as well as comply with certain other requirements. Accordingly, the Company generally will not be subject to U.S. federal income taxes to the extent that it annually distributes at least 90% of its REIT taxable income to its stockholders. The Company also 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.
    


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)

The consolidated financial statements and the information and tables contained in the notes thereto, as of March 31, 2017, are unaudited and prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with 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, 2016. The results of operations for the three months ended March 31, 2017 may not necessarily be indicative of the results of operations for the full year ending December 31, 2017. The consolidated balance sheet as of December 31, 2016 was derived from the audited consolidated financial statements as of December 31, 2016.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(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 Apartment Homes
 
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
 
The Brookwood
 
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
RRE Windbrooke Holdings, LLC, or Windbrooke Crossing
 
Windbrooke Crossing
 
236
 
Buffalo Grove, IL
RRE Woods Holdings, LLC, or The Woods of Burnsville
 
The Woods of Burnsville
 
400
 
Burnsville, MN
RRE Indigo Creek Holdings, LLC
 
N/A
 
N/A
 
N/A

N/A - Not Applicable
All intercompany accounts and transactions have been eliminated in consolidation.
Segment Reporting
The Company does not evaluate performance on a relationship-specific or transactional basis and does not distinguish its principal business or group its operations on a geographical basis for purposes of measuring performance.  Accordingly, the  Company believes it has a single operating segment for reporting purposes in accordance with GAAP.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(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 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:
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 March 31, 2017.
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


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. Management’s estimates of value are expected to be made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods. Management also estimates costs to execute similar leases including leasing commissions and legal and other related expenses to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics considered by management in allocating these values include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the remaining term of the 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 $28.9 million and $268,697 for the 12-month periods ending March 31, 2018 and 2019, 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 March 31, 2017 and December 31, 2016, there were allowances for uncollectible accounts of $1,400 and $5,009, respectively.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


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.
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 March 31, 2017 and December 31, 2016, the Company had no TRSs.
Earnings Per Share
Basic earnings (loss) per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings (loss) 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. None of the convertible shares (discussed in Note 11) are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of March 31, 2017 (were such date to represent the end of the contingency period). Due to reported losses for the three months ended March 31, 2017 and 2016, common shares potentially issuable to settle accrued distributions are excluded from the calculation of diluted earnings per share calculations, as their inclusion would be anti-dilutive.
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 6, 2016, at which point total organizational and offering costs incurred did not exceed 2.5% of the gross offering proceeds raised in the offering.
During the offering period which closed in 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. During the offering period, the Advisor had incurred $7.2 million of these costs on behalf of the Company, all of which had been reimbursed. 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.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


Adoption of New Accounting Standards
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 February 2016, FASB issued ASU No. 2016-02, "Leases (Topic 842)", 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.

In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”, which requires measurement and recognition of expected credit losses for financial assets held. ASU No. 2016-13 will be effective for the Company beginning January 1, 2019. The Company is evaluating this guidance; however, it does not expect the adoption of ASU No. 2016-13 to have a significant impact on its consolidated financial statements.

In August 2016, FASB issued ASU No. 2016-15 "Classification of Certain Cash Receipts and Cash Payments", which addresses eight specific cash flow issues with the objective of reducing existing diversity in practice.  The guidance is effective for the Company as of January 1, 2018. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on the reporting of the Company's consolidated cash flows.       

In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 850): Clarifying the Definition of Business", which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses.  ASU No. 2017-01 will be effective for the Company beginning January 1, 2018. Early application is permitted. The Company is evaluating this guidance and assessing the impact of this guidance on its consolidated financial statements.
    
In January 2017, FASB issued ASU No. 2017-04, "Intangibles- Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment", which alters the current goodwill impairment testing procedures to eliminate Step 2. ASU No. 2017-04 will be effective for the Company beginning December 15, 2019. Early application is permitted. The Company is evaluating this guidance and assessing the impact of this guidance on its consolidated financial statements.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION    
The following table presents supplemental cash flow information (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Non-cash operating, financing and investing activities:
 
 
 
Distributions on common stock declared but not yet paid
$
8,920

 
$
8,212

Stock issued pursuant to distribution reinvestment plan
5,090

 
4,996

Rental property and other assets acquired through assumption of mortgage notes payable

 
28,704

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
3,785

 
$
1,278

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):
 
March 31,
2017
 
December 31,
2016
Real estate taxes
$
3,319

 
$
3,252

Insurance
535

 
671

Capital improvements
2,892

 
2,697

 
$
6,746

 
$
6,620


In addition, the Company had unrestricted cash earmarked for capital expenditures of $61.2 million and $71.7 million as of March 31, 2017 and December 31, 2016.
NOTE 5 - RENTAL PROPERTIES, NET
The Company’s investments in rental properties consisted of the following (in thousands):
 
March 31,
2017
 
December 31,
2016
Land
$
108,587

 
$
108,587

Building and improvements
629,200

 
629,060

Furniture, fixtures and equipment
42,323

 
36,307

Construction in progress
7,492

 
7,641


787,602

 
781,595

Less: accumulated depreciation
(34,803
)
 
(27,007
)

$
752,799

 
$
754,588

    
Depreciation expense for the three months ended March 31, 2017 and 2016 was $7.9 million and $3.9 million, respectively.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


NOTE 6 - ACQUISITIONS
During the three months ended March 31, 2017, the Company owned 16 properties. In order to finalize the fair values of the acquired assets and liabilities, the Company obtained third-party appraisals. The Company has up to12 months from the date of acquisition to finalize the valuation for each property. All valuations had been finalized as of December 31, 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

The Brookwood
 
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

Windbrooke Crossing
 
Buffalo Grove, Illinois
 
12/22/2016
 
48,250

 
4,634

 
42,576

 
608

 
1,059

 

 
(660
)
 
48,217

The Woods at Burnsville
 
Burnsville, Minnesota
 
12/23/2016
 
51,000

 
3,900

 
45,053

 
821

 
1,225

 
 
 
(84
)
 
50,915


(1) Contractual purchase price excludes closing costs and acquisition expenses and other immaterial settlement date adjustments and pro-rations.
    



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of in-place rental leases. The gross value of acquired in-place leases totaled $16.3 million as of March 31, 2017 and December 31, 2016, net of accumulated amortization of $15.1 million and $13.6 million, respectively. The weighted average remaining life of the rental leases is four months as of March 31, 2017. Amortization expense for the three months ended March 31, 2017 and 2016 was $1.5 million and $2.9 million, respectively. As of March 31, 2017, expected amortization for the in-place rental leases for the next 12 months is $1.1 million and none thereafter.
NOTE 8 - MORTGAGE NOTES PAYABLE, NET
The following is a summary of the Company's mortgage notes payable (in thousands):
 
 
Outstanding borrowings
 
Premium, net
 
Deferred Finance Costs, net
 
Carrying Value
 
Outstanding borrowings
 
Premium, net
 
Deferred Finance Costs, net
 
Carrying Value
Collateral
 
March 31, 2017
 
December 31, 2016
Overton Trails Apartment Homes
 
$
30,967

 
$

 
$
(325
)
 
$
30,642

 
$
31,075

 
$

 
$
(344
)
 
$
30,731

Uptown Buckhead
 
20,200

 

 
(275
)
 
19,925

 
20,200

 

 
(284
)
 
19,916

Crosstown at Chapel Hill
 
32,000

 

 
(346
)
 
31,654

 
32,000

 

 
(373
)
 
31,627

The Brookwood - Key Bank
 
18,152

 
481

 
(226
)
 
18,407

 
18,247

 
508

 
(239
)
 
18,516

The Brookwood - Capital One
 
2,689

 
37

 
(39
)
 
2,687

 
2,699

 
39

 
(41
)
 
2,697

Adair off Addison and Adair off Addison Apartment Homes
 
25,422

 

 
(435
)
 
24,987

 
25,500

 

 
(464
)
 
25,036

1000 Spalding Apartment Homes
 
24,600

 

 
(275
)
 
24,325

 
24,600

 

 
(289
)
 
24,311

Riverlodge
 
28,126

 

 
(374
)
 
27,752

 
28,292

 

 
(393
)
 
27,899

Verdant Apartment Homes
 
37,300

 

 
(331
)
 
36,969

 
37,300

 

 
(345
)
 
36,955

Arcadia Apartment Homes
 
40,200

 

 
(363
)
 
39,837

 
40,200

 

 
(379
)
 
39,821

Grand Reserve
 
42,176

 

 
(427
)
 
41,749

 
42,395

 

 
(446
)
 
41,949

Montclair Terrace
 
20,974

 

 
(331
)
 
20,643

 
21,083

 

 
(345
)
 
20,738

Breckenridge
 
52,975

 

 
(670
)
 
52,305

 
52,975

 

 
(697
)
 
52,278

Santa Rosa
 
45,700

 

 
(626
)
 
45,074

 
45,700

 

 
(643
)
 
45,057

Windbrooke Crossing
 
38,320

 

 
(469
)
 
37,851

 
38,320

 

 
(490
)
 
37,830

Woods of Burnsville
 
38,250

 

 
(605
)
 
37,645

 

 

 

 

 
 
$
498,051

 
$
518

 
$
(6,117
)
 
$
492,452

 
$
460,586

 
$
547

 
$
(5,772
)
 
$
455,361



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


 
 
Maturity
Date
 
Margin over LIBOR
 
Annual Interest Rate
 
Average
Monthly Debt
Service
 
Average
Monthly Escrow
 
 
Overton Trails Apartment Homes
 
1/1/2025
 
1.91
%
 
2.89
%
 
118

 
155

 
(1) (3) (6)
Uptown Buckhead
 
7/1/2025
 
2.22
%
 
3.20
%
 
78

 
70

 
(1) (3) (5)
Crosstown at Chapel Hill
 
7/10/2020
 
1.70
%
 
2.68
%
 
97

 

 
(1) (4) (5)
The Brookwood - Key Bank
 
11/1/2021
 
N/A

 
4.73
%
 
104

 
27

 
(2) (7)
The Brookwood - Capital One
 
11/1/2021
 
N/A

 
5.40
%
 
16

 

 
(2) (7)
Adair off Addison and Adair off Addison Apartment Homes
 
1/1/2021
 
1.55
%
 
2.53
%
 
88

 

 
(1) (3) (5)
1000 Spalding Apartment Homes
 
1/1/2022
 
N/A

 
3.88
%
 
109

 
39

 
(2) (5)
Riverlodge
 
5/1/2022
 
N/A

 
3.76
%
 
144

 
130

 
(2) (7)
Verdant Apartment Homes
 
5/1/2023
 
N/A

 
3.89
%
 
156

 
26

 
(2) (5)
Arcadia Apartment Homes
 
5/1/2023
 
N/A

 
3.89
%
 
168

 
19

 
(2)
Grand Reserve
 
6/1/2023
 
2.57
%
 
3.55
%
 
184

 
88

 
(1) (3) (6)
Montclair Terrace
 
6/1/2023
 
2.45
%
 
3.43
%
 
93

 
21

 
(1) (3) (7)
Breckenridge
 
7/1/2023
 
2.36
%
 
3.34
%
 
216

 
54

 
(1) (3) (5)
Santa Rosa
 
9/1/2026
 
2.11
%
 
3.09
%
 
147

 
98

 
(1) (3) (5)
Windbrooke Crossing
 
1/1/2024
 
2.69
%
 
3.67
%
 
196

 
70

 
(1) (3) (5)
Woods of Burnsville
 
2/1/2024
 
2.13
%
 
3.11
%
 
165

 
67

 
(1) (3) (5)

(1)
Variable rate based on one-month LIBOR of 0.9828% (as of March 31, 2017) plus a fixed margin
(2)
Fixed rate
(3)
Variable rate hedged with interest rate cap cash flow hedge
(4)
Fixed rate interest swap associated with the variable rate debt
(5)
Monthly interest-only payment currently required
(6)
Monthly fixed principal plus interest payment required
(7)
Fixed monthly payment of principal and interest payment required
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 The Brookwood Apartment Homes 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 March 31, 2017, the net unamortized fair value of debt assumed adjustment was $518,000 and was included as a component of mortgage loans payable in the accompanying consolidated balance sheets.
At March 31, 2017, the weighted average interest rate of all the Company's outstanding indebtedness was 3.43%.
All mortgage notes are collateralized by a first and second 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 the mortgages held.
As of March 31, 2017 and December 31, 2016, the Company had $6.7 million and $6.6 million of restricted cash related to escrow deposits held by mortgage lenders for real estate taxes, insurance and capital reserves (see Note 5).
Annual principal payments on the mortgage notes payable, excluding amortization of the mortgage premium, for each of the next five 12-month periods ending March 31 and thereafter, are as follows (in thousands):
2018
$
4,313

2019
6,987

2020
9,819

2021
64,245

2022
51,123

Thereafter
361,564

Total principal payments
$
498,051



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


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, all of which were completed as of March 31, 2017. 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 March 31, 2017 and December 31, 2016, accumulated amortization of deferred financing costs was $1.2 million and $877,000, respectively. Amortization of deferred financing costs for the next five 12-month periods ending March 31 and thereafter, is as follows (in thousands):
2018
$
1,100

2019
1,086

2020
1,068

2021
947

2022
773

Thereafter
1,143

 
$
6,117




RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


NOTE 9 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss (in thousands):
 
Net unrealized loss
on derivatives
January 1, 2016
$
(117
)
Designated derivatives, fair value adjustment
43

Balance, December 31, 2016
(74
)
Designated derivatives, fair value adjustment
(239
)
Balance, March 31, 2017
$
(313
)
NOTE 10 - RELATED PARTY TRANSACTIONS
Relationship with the Advisor
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 is 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. During the offering period, which closed in 2016, the Advisor had incurred costs on a cumulative basis on behalf of the Company of approximately $7.2 million, all of which had been reimbursed.
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 included 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


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


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 RAI and C-III
On September 8, 2016, RAI was acquired by C-III. As a result, C-III now controls the Advisor and all of the shares currently held by the Advisor.
Self-insurance funds held in escrow.The receivables from related parties includes insurance deposits held in escrow by RAI and C-III for self-insurance, which if unused, will be returned to the Company. The Company's properties participate in insurance pools with other properties directly and indirectly managed by RAI and C-III for both property insurance and general liability. RAI and C-III hold the deposits in escrow to fund future insurance claims. The insurance pool for property 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 $250.0 million and $51.0 million, respectively. 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. During the three months ended March 31, 2017, the Company paid $379,800 into the insurance pools.
Internal audit fees. RAI performs internal audit services for the Company.
Relationship with Resource Real Estate Opportunity Manager II
The Manager 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 three months ended March 31, 2017 and 2016.
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
MARCH 31, 2017
(unaudited)


The fees earned/expenses incurred and the amounts payable to such related parties are summarized in the following tables (in thousands):
 
March 31,
2017
 
December 31,
2016
Due from related parties:
 
 
 
RAI - self-insurance funds held
$
874

 
$
604

 
$
874

 
$
604

 
 
 
 
Due to related parties:
 
 
 
Advisor
 
 
 
Acquisition fees
$

 
$
1,022

Operating expense reimbursements
93

 
1,078

 
 
 
 
Manager
 
 
 
Property management fees
496

 
244

Operating expense reimbursements
303

 
304

 
 
 
 
 
$
892

 
$
2,648


 
Three Months Ended
 
March 31,
 
2017
 
2016
Fees earned / expenses incurred:
 
 
 
Advisor
 
 
 
Acquisition fees (1)
$

 
$
2,969

Asset management fees (2)
$
2,217

 
$
1,317

Debt financing fees (3)
$
191

 
$
144

Organization and offering costs (4)
$

 
$
86

Operating expense reimbursements (5)
$
1,089

 
$
523

 
 
 
 
Manager
 
 
 
Property management fees (2)
$
790

 
$
400

Construction management fees (7)
$
388

 
$
181

Operating expense reimbursements (5)
$

 
$
29

Information technology fees (5)
$

 
32

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

 
$
4,192

 
 
 
 
Other
 
 
 
Graphic Images (4)
$

 
$
3



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


(1)     Included in Acquisition costs on the consolidated statements of operations and comprehensive loss per income statement.
(2)     Included in Management fees on the consolidated statements of operations and comprehensive loss per income statement.
(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 per income statement.
(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 March 31, 2017, no shares of preferred stock were issued or outstanding.
Convertible Stock
As of March 31, 2017, the Company had 50,000 shares of $0.01 par value convertible stock outstanding, which are owned by the Advisor. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 7% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on or after the 31st trading day following the listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 7% return threshold.
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)    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 7% 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
MARCH 31, 2017
(unaudited)


Common Stock
As of March 31, 2017, the Company had an aggregate of 59,631,325 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
Shares issued through initial public offering
 
55,791,297

 
$
556,197

Shares issued through stock distributions
 
246,365

 

Shares issued through distribution reinvestment plan
 
3,872,779

 
34,337

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

 
150

Total shares redeemed and retired
 
(294,116
)
 
(2,557
)
 
 
59,631,325

 
$
588,127


Redemptions
During the three months ended March 31, 2017, the Company redeemed shares as follows (in thousands, except per share data):
Month
 
Total Number
of Shares
Redeemed
 
Average Price Paid per Share
 
Cumulative Number
of Shares Purchased
as Part of a Publicly
Announced Plan or
Program
(1)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
January 2017
 
 
$—
 
 
(2) 
February 2017
 
 
$—
 
 
(2) 
March 2017
 
121
 
$8.74
 
121
 
(2) 

(1)
All purchases of equity securities by the Company in the three months ended March 31, 2017 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 three months ended March 31, 2017.
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
MARCH 31, 2017
(unaudited)


Distributions
For the three months ended March 31, 2017, the Company paid aggregate distributions of $8.8 million, including $3.7 million of distributions paid in cash and $5.1 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 15, 2016
 
$
0.00164384

 
December 30, 2016 through January 30, 2017
 
January 31, 2017
 
$
1,748

 
$
1,265

 
$
3,013

December 15, 2016
 
0.00164384

 
January 31, 2017 through February 27, 2017
 
February 28, 2017
 
1,587

 
1,144

 
2,731

December 15, 2016
 
0.00164384

 
February 28, 2017 through March 30, 2017
 
March 31, 2017
 
1,755

 
1,276

 
3,031

 
 
 
 
 
 
 
 
$
5,090

 
$
3,685

 
$
8,775


On March 28, 2017, 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 March 28, 2017 through and including June 29, 2017, payable on April 28, 2017, May 31, 2017 and June 30, 2017.

The following is a reconciliation of total aggregate distributions paid to total distributions declared for the three months ended March 31, 2017 (in thousands):
Total aggregate distributions paid
 
$
8,775

Less: distribution payable at December 31, 2016
 
(8,769
)
Add: distribution payable at March 31, 2017
 
8,920

Total distributions declared
 
$
8,926


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.


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


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

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

The following table presents information about the Company's assets measured at fair value on a recurring basis and
indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2017
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
183

 
$

 
$
183

Cancelable swap

 
62

 

 
62

 
$

 
$
245

 
$

 
$
245

Liabilities:
 
 
 
 
 
 
 
Cancelable swap
 
 

 
 
 

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2016
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$

 
$
365

 
$

 
$
365

Canceleable swap
 
 
43

 
 
 
43

 
$

 
$
408

 
$

 
$
408

Liabilities:
 
 
 
 
 
 
 
Cancelable swap
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Interest rate caps and the cancelable swap are included in Prepaid expenses and other assets on the consolidated balance sheets.
The outstanding balance and estimated fair value of the Company’s mortgage notes payable are as follows (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Outstanding Balance
 
Estimated Fair
Value
 
Outstanding Balance
 
Estimated Fair
Value
Mortgage notes payable
$
498,051

 
$
476,204

 
$
460,586

 
$
449,977

The carrying amount of the mortgage notes payable presented is the outstanding borrowings excluding premium 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).


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


NOTE 13 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition of the Company’s mortgage loans, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also serve to protect the lender.
Interest Rate Caps
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 interest rate caps that were designated as cash flow hedges. 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, 2017, such derivatives were used to hedge the variable cash flows, indexed to London InterBank Offered Rate ("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, 2017, the Company did not record any hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next 12 months, the Company estimates that an additional $73,374 will be reclassified as an increase to interest expense.
Cancelable swap
To manage its exposure to interest rate movements, the Company has also entered into a cancelable interest rate swap    that was not designated as a hedging instrument. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting requirements.
As of March 31, 2017, the Company had the following outstanding interest rate derivatives (dollars in thousands):
Interest Rate Derivatives
 
Number of Instruments
 
Notional
Amount
 
Maturity Dates
Derivatives designated as hedging instruments:
Interest rate caps
 
9
 
$
318,152

 
January 1, 2018 through September 1, 2020
Derivatives not designated as hedging instruments
Cancelable swap
 
1
 
$
32,000

 
July 28, 2020


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


Tabular Disclosure of Fair Value of Derivative Instrument on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of March 31, 2017 and December 31, 2016 (in thousands):
Asset Derivatives
 
Liabilities Derivatives
March 31, 2017
 
December 31, 2016
 
March 31, 2017
 
December 31, 2016
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate caps
 
$
183

 
Interest rate caps
 
$
365

 
NA
 
$

 
NA
 
$

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Cancelable swap
 
$
62

 
Cancelable swap
 
43

 
NA
 

 
NA
 

Interest rate caps and the cancelable swap are included in Prepaid expenses and other assets on the consolidated balance sheets.
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations and comprehensive loss for the three months ended March 31, 2017 and 2016 (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized in Income for the Three Months Ended
Derivatives Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income
 
March 31, 2017
 
March 31, 2016
Interest rate caps
 
Interest expense
 
$
(8
)
 
(10
)
 
 
 
 
Amount of Gain (Loss) Recognized in Income for the Three Months Ended
Derivatives Not Designated as Hedging Instruments
 
Location of Gain (Loss) Recognized in Income
 
March 31, 2017
 
March 31, 2016
Cancelable swap
 
Interest expense
 
$
(68
)
 
(394
)
Derivatives in Cash Flow Hedging Relationships
 
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion) for the Three Months Ended
 
Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) for the Three Months Ended
 
March 31, 2017
 
March 31, 2016
 
 
March 31, 2017
 
March 31, 2016
Interest rate products
 
$
(248
)
 
$
33

 
Interest expense
 
$
(8
)
 
$
(10
)
Credit-risk-related Contingent Features
The Company has agreements with its derivative counterparties that contain provisions where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of March 31, 2017, the Company has not posted any collateral related to these agreements.



RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
MARCH 31, 2017
(unaudited)


NOTE 14 - OPERATING EXPENSE LIMITATION
As required under the Company's charter, the Advisor must reimburse the Company the amount by which the aggregate total operating expenses for the four fiscal quarters then ended exceed the greater of 2% of the average invested assets or 25% of net income, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. “Average invested assets” means the average monthly book value of assets invested, directly or indirectly, in equity interests in and loans secured by real estate during the 12-month period before deducting depreciation, bad debts or other non-cash reserves. “Total operating expenses” means all expenses paid or incurred by the Company, as determined under GAAP, that are in any way related to operations, including advisory fees, but excluding (a) the expenses of raising capital such as organization and offering expenses, legal, audit, accounting, underwriting, brokerage, listing, registration and other fees, printing and other such expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and stock exchange listing of stock; (b) interest payments; (c) taxes; (d) non-cash expenditures such as depreciation, amortization and bad debt reserves; (e) reasonable incentive fees based on the gain in the sale of assets; and (f) acquisition fees, acquisition expenses (including expenses relating to potential investments that do not close), disposition fees on the resale of property and other expenses connected with the acquisition, disposition and ownership of real estate interests, loans or other property (including the costs of foreclosure, insurance premiums, legal services, maintenance, repair and improvement of property). Operating expenses for the four quarters ended March 31, 2017 did not exceed the charter imposed limitation.
Allocated payroll associated with a portion of the compensation paid by the Advisor or its affiliates to the Company’s executive officers was included in general and administrative expenses in the consolidated statements of operations and comprehensive loss and was reimbursed to the Advisor during the three months ended March 31 2017 and 2016.
Allocated payroll expense from the Manager is included in rental operating expenses in the consolidated statements of operations and comprehensive loss. Allocated payroll for the three months ended March 31 2017 and 2016 was $213,992 and $212,876, respectively.
NOTE 15 - SUBSEQUENT EVENTS

On April 4, 2017, the Company purchased a 408-unit multifamily community located in Glendale, Arizona from an unaffiliated seller for $55.2 million.

On April 28, 2017, the Company entered into a seven-year secured mortgage loan with Berkadia Commercial Mortgage, an unaffiliated lender, for borrowings of approximately $40.8 million secured by Indigo Creek (the "Indigo Creek Mortgage Loan"). The Indigo Creek Mortgage Loan matures May 1, 2024.

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





ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (unaudited)
The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT II, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT II, Inc., a Maryland corporation, and, as required by context, RRE Opportunity OP II, LP, a Delaware limited partnership, and to their subsidiaries.
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.
Overview
We are a Maryland corporation that invests in multifamily assets across the entire spectrum of investments in order to provide investors with growing cash flow and increasing asset values. Our targeted portfolio consists of commercial real estate assets, principally (i) underperforming multifamily rental properties which we will renovate and stabilize in order to increase rents, (ii) distressed real estate owned by financial institutions, usually as a result of foreclosure, and non-performing or distressed loans, including first- and second-priority mortgage loans and other loans which we will resolve, and (iii) performing loans, including first- and second-priority mortgage loans and other loans we originate or purchase either directly or with a co-investor or joint venture partner. We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent that Resource Real Estate Opportunity Advisor II, LLC, our external advisor, or the Advisor, presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code, and to maintain our exclusion from regulation as an investment company under the Investment Company Act of 1940, our portfolio composition may vary from what we initially expect.
We commenced the public offering of our common stock in February 2014 and terminated the primary portion of the offering in February 2016. We describe this offering in “Liquidity and Capital Resources,” below.




Results of Operations
As of March 31, 2017, we owned 16 multifamily properties. Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or income to be derived from the operation of such assets or those that we expect to acquire.
Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016
The following table sets forth the results of our operations (in thousands):
 
Three Months Ended
 
March 31,
 
2017
 
2016
Revenues:
 
 
 
Rental income
$
17,809

 
$
9,747

Total revenues
17,809

 
9,747

 
 
 
 
Expenses:
 
 
 
Rental operating
7,262

 
4,891

Acquisition costs
60