Pacific Oak Strategic Opportunity REIT, Inc. - FORM 8-K - EX-99.3 - PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017 (AUDITED) - March 12, 2018

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EX-99.2 - FINANCIAL STATEMENTS DECEMBER 31, 2017 (AUDITED) - Pacific Oak Strategic Opportunity REIT, Inc.kbssorex992.htm
EX-99.1 - CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2017 (AUDITED) - Pacific Oak Strategic Opportunity REIT, Inc.kbssorex991.htm
8-K - FORM 8-K - Pacific Oak Strategic Opportunity REIT, Inc.kbssor8k.htm
Exhibit 99.3





KBS SOR (BVI) HOLDINGS, LTD.


PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS


AS OF DECEMBER 31, 2017


AUDITED


U.S. DOLLARS IN THOUSANDS




INDEX


 
Page
 
 
 
 
Board of Directors' Explanations for Pro Forma Consolidated Financial Statements
2
-
3
 

 
 
Report of Independent Auditors
4
 
 
 
 
Pro Forma Consolidated Statements of Operations
5
-
7
 
 
 
 
Pro Forma Consolidated Statements of Comprehensive Income
8
 
 
 
 
Notes to Pro Forma Consolidated Financial Statements
9




- - - - - - - - - - -


KBS SOR (BVI) HOLDINGS LTD.
BOARD OF DIRECTORS' EXPLANATIONS FOR PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
 
 

A.    GENERAL

Presented below are pro forma consolidated financial statements for the years ended December 31, 2017, 2016 and 2015 (together the "Pro Forma Periods"), in accordance with Regulation 9a of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970 (the "Pro Forma Statements").

The Pro Forma Consolidated Statements of Operations and Pro Forma Consolidated Statements of Comprehensive Income have been prepared to give effect to the disposition of the Singapore Portfolio on November 8, 2017, as if such disposition occurred on January 1, 2015. The Pro Forma Statements have been prepared under certain assumptions, which are set forth in Note 2b to the Pro Forma Statements. It is clarified that the Pro Forma Statements do not reflect the actual results of the Company; rather, they have been prepared in order to provide additional information, based on different assumptions.

On November 8, 2017, the Company through 11 wholly owned subsidiaries, sold 11 of its properties (the "Singapore Portfolio") to various subsidiaries of Keppel-KBS US REIT, a newly formed Singapore real estate investment trust that was listed on the Singapore Stock Exchange (the "Singapore Transaction"). The Singapore Portfolio consists of the following properties: 1800 West Loop, Westech 360 (part of the Austin Suburban Portfolio), Great Hills Plaza (part of the Austin Suburban Portfolio), Westmoor Center, Iron Point Business Park, the Plaza Buildings, Bellevue Technology Center, Northridge Center I and II, West Loop I and II, Powers Ferry Landing, and Maitland Promenade II. The sale price of the Singapore Portfolio was $804 million, before closing credits. In addition to the selling of the properties in the Singapore Portfolio, the Company paid off existing mortgages of the properties which their outstanding principal balance as of the transaction date was approximately $401.7 million.

In connection with the sale, the Company received $321.6 million in cash, after deducting transaction costs, and $52.5 million of Keppel-KBS US REIT units (comprising of 53,713,600 units or approximately 9.5% of Keppel-KBS US REIT) in lieu of cash. The Company accounts for its holding of Keppel-KBS US REIT units as financial assets at fair value through profit or loss. The underwriters exercised an over-allotment option, and on December 15, 2017, purchased 15,714,100 of the Keppel-KBS US REIT units from the Company at $0.88 per unit. As of December 31, 2017, the Company owned 43,999,500 units of Keppel-KBS US REIT, representing a 7.0% ownership interest.

B.    ANALYSIS OF PRO FORMA RESULTS OF OPERATIONS

1.
Below is an analysis of the pro forma results of operations for the year ended December 31, 2017 and 2016:

Rental income and tenant reimbursements increased from $42.4 million and $6.6 million for the year ended December 31, 2016 to $53.5 million and $8.1 million for the year ended December 31, 2017, respectively, primarily as a result of the acquisitions of investment properties.

Operating, maintenance, and management fees and real estate taxes and insurance increased from $18.2 million and $6.7 million for the year ended December 31, 2016 to $21.4 million and $7.9 million, respectively, primarily as a result of the acquisitions of investment properties.

The fair value adjustment of investment properties increased from a $13.1 million fair value gain adjustment for the year ended December 31, 2016 to $26.9 million fair value gain adjustment for the year ended December 31, 2017, primarily as a result of an increased valuation on investment properties in 2017.

Equity in income of unconsolidated joint ventures increased from $13.5 million for the year ended December 31, 2016 to $24.1 million for the year ended December 31, 2017, primarily as a result of an increased valuation of 110 William Street in 2017.


- 2 -
KBS SOR (BVI) HOLDINGS LTD.
BOARD OF DIRECTORS' EXPLANATIONS FOR PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
 
 

Asset management fees to affiliate increased from $4.6 million for the year ended December 31, 2016 to $6.3 million for the year ended December 31, 2017, primarily as a result of the acquisitions of investment properties and real estate equity securities.

Finance income increased from $40 thousand for the year ended December 31, 2016 to $13.6 million for the year ended December 31, 2017, primarily as a result an unrealized gain of $8.0 million related to real estate equity securities, dividend income of $2.5 million from Whitestone REIT securities and $2.1 million of income distributions from the NIP Joint Venture.

Finance expenses increased from $17.2 million for the year ended December 31, 2016 to $25.9 million for the year ended December 31, 2017, primarily as a result of mortgage loans on recent acquisitions and increased rates on variable rate debt.

Foreign currency transaction loss adjustments increased from $3.0 million for the year ended December 31, 2016 to $15.3 million for the year ended December 31, 2017, primarily as a result of a change in foreign currency rates and the effect of foreign currency hedges.

Below is an analysis of the pro forma results of operations for the year ended December 31, 2016 and 2015:

Rental income and tenant reimbursements increased from $30.6 million and $4.6 million for the year ended December 31, 2015 to $42.4 million and $6.6 million for the year ended December 31, 2016, respectively, primarily as a result of the acquisition of an investment property.

Operating, maintenance, and management fees and real estate taxes and insurance increased from $14.2 million and $4.7 million for the year ended December 31, 2015 to $18.2 million and $6.7 million, respectively, primarily as a result of the acquisition of an investment property.

Equity in income of unconsolidated joint ventures decreased from $37.4 million for the year ended December 31, 2015 to $13.5 million for the year ended December 31, 2016, primarily as a result of an increased valuation of 110 William Street in 2015.

Asset management fees to affiliate increased from $3.5 million for the year ended December 31, 2015 to $4.6 million for the year ended December 31, 2016, primarily as a result of the acquisition of investment property.

Finance expenses increased from $4.2 million for the year ended December 31, 2015 to $17.2 million for the year ended December 31, 2016, primarily as a result of the issuance of the debentures and mortgage loans on recent acquisitions.

Foreign currency transaction loss adjustments increased to $3.0 million for the year ended December 31, 2016, as a result of the issuance of the debentures.




March 8, 2018
 
/s/ Peter McMillan III
 
/s/ Keith David Hall
Date of approval of the pro forma financial statements
 
McMillan III, Peter
Chairman of Board of Directors
 
Hall, Keith David
Chief Executive Officer

- 3 -
KBS SOR (BVI) HOLDINGS LTD.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 



Kost Forer Gabbay & Kasierer
144a Menachem Begin Rd.
Tel-Aviv 6492102, Israel
 
Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com





AUDITORS' REPORT

To the Shareholders of

KBS SOR (BVI) Holdings Ltd.


We have audited the accompanying pro forma consolidated statements of operations and statements of comprehensive income for each of the three years in the period ended December 31, 2017 of KBS SOR (BVI) Holdings Ltd. ("the Company"). The company's board of directors and management are responsible for the preparation and presentation of pro forma financial statements in accordance with the accounting policy described in note 1, and in accordance with certain assumptions set forth in Note 2b to the pro forma financial statements, and are responsible for the preparation of pro forma financial statements in accordance with the disclosure requirements of regulation 9a of the Securities Regulations (Periodic and Immediate Reports), 1970, Our responsibility is to express an opinion on these pro forma financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in Israel, including standards prescribed by the Auditor's Regulations (Auditor's Mode of Performance), 1973. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the pro forma financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the pro forma financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the board of directors and management, as well as evaluating the overall pro forma financial statement presentation. We believe that our audit and the reports of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audit, the pro forma financial statements referred to above present fairly, in all material respects, the results of their pro forma consolidated operations for each of the three years in the period ended December 31, 2017, in conformity with International Financial Reporting Standards (IFRS), with Regulation 9a to the Israeli Securities Regulations (Periodic and Immediate Reports), 1970, in accordance with the accounting policy described in Note 1 to the pro forma consolidated financial statements, and in accordance with the assumptions described in Note 2b to the pro forma consolidated financial statements.




Tel-Aviv, Israel
KOST FORER GABBAY & KASIERER
March 8, 2018
A Member of Ernst & Young Global


- 4 -
KBS SOR (BVI) HOLDINGS LTD.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 


 
 
Year ended December 31, 2017
 
 
As previously reported
 
Pro Forma
Adjustments
 
Pro Forma Total
 
 
U.S. dollars in thousands
 
 
 
 
 
 
 
Revenues and other income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
108,113

 
$
(54,612
)
 
$
53,501

Tenant reimbursements
 
21,710

 
(13,601
)
 
8,109

Interest income from debt investments
 
1,782

 
—

 
1,782

Other operating income
 
4,001

 
(3,197
)
 
804

Total revenues and other income
 
135,606

 
(71,410
)
 
64,196

 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating, maintenance, and management fees
 
(42,611
)
 
21,178

 
(21,433
)
Real estate taxes and insurance
 
(17,404
)
 
9,460

 
(7,944
)
Total expenses
 
(60,015
)
 
30,638

 
(29,377
)
 
 
 
 
 
 
 
Gross profit
 
75,591

 
(40,772
)
 
34,819

 
 
 
 
 
 
 
Fair value adjustment of investment properties, net
 
4,755

 
22,179

 
26,934

Loss on deconsolidation
 
(667
)
 
—

 
(667
)
Loss on extinguishment of debt
 
(478
)
 
478

 
—

Equity in income of unconsolidated joint ventures
 
24,130

 
—

 
24,130

Asset management fees to affiliate
 
(10,686
)
 
4,422

 
(6,264
)
General and administrative expenses
 
(2,852
)
 
45

 
(2,807
)
 
 
 
 
 
 
 
Operating profit
 
89,793

 
(13,648
)
 
76,145

 
 
 
 
 
 
 
Finance income
 
13,661

 
(12
)
 
13,649

Finance expenses
 
(37,149
)
 
11,285

 
(25,864
)
Foreign currency transaction adjustments, net
 
(15,298
)
 
—

 
(15,298
)
 
 
 
 
 
 
 
Net income
 
$
51,007

 
$
(2,375
)
 
$
48,632

 
 
 
 
 
 
 
Net income attributable to owner
 
$
48,317

 
$
(2,375
)
 
$
45,942

Net income attributable to non-controlling interests
 
2,690

 
—

 
2,690

 
 
 
 
 
 
 
Net income
 
$
51,007

 
$
(2,375
)
 
$
48,632


March 8, 2018
 
/s/ Jeffrey Waldvogel
 
/s/ Peter McMillan III
 
/s/ Keith David Hall
Date of approval of the pro forma financial statements
 
Waldvogel, Jeffrey
Chief Financial Officer
 
McMillan, Peter III
Chairman of Board of Directors
 
Hall, Keith David
Chief Executive Officer

The accompanying notes are an integral part of the pro forma consolidated financial statements.


- 5 -
KBS SOR (BVI) HOLDINGS LTD.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 


 
 
Year ended December 31, 2016
 
 
As previously reported
 
Pro Forma
Adjustments
 
Pro Forma Total
 
 
U.S. dollars in thousands
 
 
 
 
 
 
 
Revenues and other income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
104,000

 
$
(61,631
)
 
$
42,369

Tenant reimbursements
 
20,762

 
(14,159
)
 
6,603

Interest income from debt investments
 
3,765

 
—

 
3,765

Other operating income
 
3,387

 
(3,220
)
 
167

Total revenues and other income
 
131,914

 
(79,010
)
 
52,904

 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating, maintenance, and management fees
 
(41,906
)
 
23,670

 
(18,236
)
Real estate taxes and insurance
 
(16,887
)
 
10,206

 
(6,681
)
Total expenses
 
(58,793
)
 
33,876

 
(24,917
)
 
 
 
 
 
 
 
Gross profit
 
73,121

 
(45,134
)
 
27,987

 
 
 
 
 
 
 
Fair value adjustment of investment properties, net
 
28,926

 
(15,855
)
 
13,071

Equity in income of unconsolidated joint venture
 
13,462

 
—

 
13,462

Asset management fees to affiliate
 
(9,628
)
 
4,998

 
(4,630
)
General and administrative expenses
 
(2,749
)
 
39

 
(2,710
)
 
 
 
 
 
 
 
Operating profit
 
103,132

 
(55,952
)
 
47,180

 
 
 
 
 
 
 
Finance income
 
43

 
(3
)
 
40

Finance expenses
 
(29,249
)
 
12,068

 
(17,181
)
Foreign currency transaction adjustments, net
 
(2,997
)
 
—

 
(2,997
)
 
 
 
 
 
 
 
Net income
 
$
70,929

 
$
(43,887
)
 
$
27,042

 
 
 
 
 
 
 
Net income attributable to owner
 
$
70,526

 
$
(43,887
)
 
$
26,639

Net income attributable to non-controlling interests
 
403

 
—

 
403

 
 
 
 
 
 
 
Net income
 
$
70,929

 
$
(43,887
)
 
$
27,042



The accompanying notes are an integral part of the pro forma consolidated financial statements.

- 6 -
KBS SOR (BVI) HOLDINGS LTD.

PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 


 
 
Year ended December 31, 2015
 
 
As previously reported
 
Pro Forma
Adjustments
 
Pro Forma Total
 
 
U.S. dollars in thousands
 
 
 
 
 
 
 
Revenues and other income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
 
$
87,897

 
$
(57,282
)
 
$
30,615

Tenant reimbursements
 
18,313

 
(13,750
)
 
4,563

Interest income from debt investments
 
1,968

 
—

 
1,968

Other operating income
 
3,304

 
(3,117
)
 
187

Total revenues and other income
 
111,482

 
(74,149
)
 
37,333

 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating, maintenance, and management fees
 
(37,512
)
 
23,357

 
(14,155
)
Real estate taxes and insurance
 
(14,565
)
 
9,871

 
(4,694
)
Total expenses
 
(52,077
)
 
33,228

 
(18,849
)
 
 
 
 
 
 
 
Gross profit
 
59,405

 
(40,921
)
 
18,484

 
 
 
 
 
 
 
Fair value adjustment of investment properties, net
 
37,304

 
(20,315
)
 
16,989

Equity in income of unconsolidated joint venture
 
37,424

 
—

 
37,424

Asset management fees to affiliate
 
(8,348
)
 
4,867

 
(3,481
)
General and administrative expenses
 
(568
)
 
102

 
(466
)
 
 
 
 
 
 
 
Operating profit
 
125,217

 
(56,267
)
 
68,950

 
 
 
 
 
 
 
Finance income
 
17

 
(12
)
 
5

Finance expenses
 
(14,986
)
 
10,832

 
(4,154
)
 
 
 
 
 
 
 
Net income
 
$
110,248

 
$
(45,447
)
 
$
64,801

 
 
 
 
 
 
 
Net income attributable to owner
 
$
109,805

 
$
(45,447
)
 
$
64,358

Net income attributable to non-controlling interests
 
443

 
—

 
443

 
 
 
 
 
 
 
Net income
 
$
110,248

 
$
(45,447
)
 
$
64,801



The accompanying notes are an integral part of the pro forma consolidated financial statements.


- 7 -
KBS SOR (BVI) HOLDINGS LTD.

PRO FORMA CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 


 
 
Year ended December 31, 2017
 
 
As previously reported
 
Pro Forma
Adjustments
 
Pro Forma Total
 
 
U.S. dollars in thousands
 
 
 
 
 
 
 
Net income
 
$
51,007

 
$
(2,375
)
 
$
48,632

 
 
 
 
 
 
 
Total comprehensive income
 
51,007

 
(2,375
)
 
48,632

 
 
 
 
 
 
 
Total comprehensive income attributable to owner
 
$
48,317

 
$
(2,375
)
 
$
45,942

Total comprehensive income attributable to non-controlling interests
 
2,690

 
—

 
2,690

 
 
 
 
 
 
 
Total comprehensive income
 
$
51,007

 
$
(2,375
)
 
$
48,632

 
 
Year ended December 31, 2016
 
 
As previously reported
 
Pro Forma
Adjustments
 
Pro Forma Total
 
 
U.S. dollars in thousands
 
 
 
 
 
 
 
Net income
 
$
70,929

 
$
(43,887
)
 
$
27,042

 
 
 
 
 
 
 
Total comprehensive income
 
70,929

 
(43,887
)
 
27,042

 
 
 
 
 
 
 
Total comprehensive income attributable to owner
 
$
70,526

 
$
(43,887
)
 
$
26,639

Total comprehensive income attributable to non-controlling interests
 
403

 
—

 
403

 
 
 
 
 
 
 
Total comprehensive income
 
$
70,929

 
$
(43,887
)
 
$
27,042

 
 
Year ended December 31, 2015
 
 
As previously reported
 
Pro Forma
Adjustments
 
Pro Forma Total
 
 
U.S. dollars in thousands
 
 
 
 
 
 
 
Net income
 
$
110,248

 
$
(45,447
)
 
$
64,801

 
 
 
 
 
 
 
Total comprehensive income
 
110,248

 
(45,447
)
 
64,801

 
 
 
 
 
 
 
Total comprehensive income attributable to owner
 
$
109,805

 
$
(45,447
)
 
$
64,358

Total comprehensive income attributable to non-controlling interests
 
443

 
—

 
443

 
 
 
 
 
 
 
Total comprehensive income
 
$
110,248

 
$
(45,447
)
 
$
64,801


The accompanying notes are an integral part of the pro forma consolidated financial statements.

- 8 -
KBS SOR (BVI) HOLDINGS LTD.

NOTES TO PRO FORMA INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 
 
 

NOTE 1:
SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies applied in the Pro Forma Statements are consistent with those applied in preparing the Company's annual financial statements as of December 31, 2017.

NOTE 2:
PRO FORMA ASSUMPTIONS

a.
General

The Pro Forma Consolidated Statements of Operations and Pro Forma Consolidated Statements of Comprehensive Income have been prepared to give effect to the disposition of the Singapore Portfolio, as if such disposition occurred on January 1, 2015. The Pro Forma Statements have been prepared under certain assumptions, which are set forth below. It is clarified that the Pro Forma Statements do not reflect the actual results of the Company; rather, they have been prepared in order to provide additional information, based on different assumptions.

b.
Principal assumptions used in preparing the Pro Forma Statements

The Pro Forma Statements have been prepared under the following assumptions:
1.
The Singapore Transaction occurred on January 1, 2015 for the Pro Forma Consolidated Statements of Operations and Pro Forma Consolidated Statements of Comprehensive Income.
2.
A reversal has been made for the historical operations of the Singapore Portfolio as reflected in the Company's historical statements of operations and statements of comprehensive income for the years ended December 31, 2017, 2016 and 2015.




- 9 -

Pacific Oak Strategic Opportunity REIT, Inc. Reports