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

Attached files

file	filename
EX-10.1 - EXHIBIT 10.1 - Resource Real Estate Opportunity REIT, Inc.	advisoryagreementrenewal20.htm
EX-32.2 - EXHIBIT 32.2 - Resource Real Estate Opportunity REIT, Inc.	rreo-20180930xex322.htm
EX-32.1 - EXHIBIT 32.1 - Resource Real Estate Opportunity REIT, Inc.	rreo-20180930xex321.htm
EX-31.2 - EXHIBIT 31.2 - Resource Real Estate Opportunity REIT, Inc.	rreo-20180930xex312.htm
EX-31.1 - EXHIBIT 31.1 - Resource Real Estate Opportunity REIT, Inc.	rreo-20180930xex311.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 September 30, 2018


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

For the transition period from __________ to __________

Commission File Number 000-54369

Resource Real Estate Opportunity REIT, Inc.

(Exact name of registrant as specified in its charter)



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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company., or an emerging growth company. See the 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	þ	Smaller reporting company	o
		Emerging growth company	o

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

As of November 5, 2018, there were 70,771,301 outstanding shares of common stock of Resource Real Estate Opportunity REIT, Inc.

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

INDEX TO ANNUAL REPORT

ON FORM 10-Q



		PAGE
PART 1	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets - September 30, 2018 (unaudited) and December 31, 2017	3

	Consolidated Statements of Operations and Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	4

	Consolidated Statement of Changes in Stockholders' Equity - Nine Months Ended September 30, 2018 (unaudited)	5

	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2018 and 2017 (unaudited)	6

	Notes to Consolidated Financial Statements - September 30, 2018 (unaudited)	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4.	Controls and Procedures	46

PART II

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	48

Item 6.	Exhibits	49

SIGNATURES		50

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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.

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS (in thousands, except share data)



	September 30, 2018			December 31, 2017
	(unaudited)
ASSETS
Investments:
Rental properties, net	$	1,027,610		$	998,889
Loan held for investment, net	790			782
Identified intangible assets, net	553			1,796
Assets held for sale - rental properties	15,254			—
Total investments	1,044,207			1,001,467

Cash	50,314			117,660
Restricted cash	14,360			13,401
Subtotal- cash and restricted cash	64,674			131,061
Due from related parties	146			371
Tenant receivables, net	195			251
Deposits	229			227
Prepaid expenses and other assets	3,271			1,745
Goodwill	594			670
Total assets	$	1,113,316		$	1,135,792

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage notes payable, net	$	839,220		$	794,671
Accounts payable	729			791
Accrued expenses and other liabilities	7,324			8,074
Accrued real estate taxes	11,316			9,195
Due to related parties	720			719
Tenant prepayments	1,192			1,178
Security deposits	2,713			2,572
Total liabilities	$	863,214		$	817,200

Stockholders' Equity:
Preferred stock (par value $.01; 10,000,000 shares authorized, none issued)	—			—
Common stock (par value $.01; 1,000,000,000 shares authorized; 70,563,588 and 71,299,467 shares issued and outstanding, respectively)	706			713
Convertible stock (“promote shares”; par value $.01; 50,000 shares authorized; 49,995 shares issued and outstanding)	1			1
Additional paid-in capital	627,854			635,748
Accumulated other comprehensive loss	(441		)	(562		)
Accumulated deficit	(378,018		)	(317,308		)
Total stockholders’ equity	250,102			318,592
Total liabilities and stockholders' equity	$	1,113,316		$	1,135,792

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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Revenues:
Rental income	$	33,791		$	29,847		$	96,995		$	86,557
Utility income	2,060			1,847			6,079			5,275
Ancillary tenant fees	664			565			1,683			1,571
Interest and dividend income	65			74			240			165
Total revenues	36,580			32,333			104,997			93,568

Expenses:
Rental operating - expenses	8,419			7,162			23,477			20,009
Rental operating - payroll	3,662			3,306			10,523			10,385
Rental operating - real estate taxes	4,286			3,794			12,501			11,096
Subtotal - Rental operating expenses	16,367			14,262			46,501			41,490
Acquisition costs	—			1,290			9			3,065
Management fees	4,920			4,323			14,312			12,530
General and administrative	2,625			2,874			8,161			8,546
Loss on disposal of assets	286			537			590			729
Depreciation and amortization expense	14,851			13,193			44,234			38,527
Total expenses	39,049			36,479			113,807			104,887
Loss before other income (expense)	(2,469		)	(4,146		)	(8,810		)	(11,319		)

Other income (expense):
Net gains on dispositions of properties and joint venture interests	6,195			14,300			6,195			22,735
Interest expense	(9,526		)	(7,963		)	(26,709		)	(21,351		)
Insurance proceeds in excess of cost basis	169			—			515			98
Total other (expense) income	(3,162		)	6,337			(19,999		)	1,482

Net (loss) income	$	(5,631	)	$	2,191		$	(28,809	)	$	(9,837	)

Other comprehensive income (loss):
Reclassification adjustment for realized loss on designated derivatives	62			42			144			117
Designated derivatives, fair value adjustments	(9		)	(55		)	(23		)	(344		)
Total other comprehensive income (loss)	53			(13		)	121			(227		)
Comprehensive (loss) income	$	(5,578	)	$	2,178		$	(28,688	)	$	(10,064	)

Weighted average common shares outstanding	70,790			71,703			71,064			71,967
Basic and diluted loss per common share:
Net (loss) income per common share	$	(0.09	)	$	0.03		$	(0.41	)	$	(0.13	)

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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(in thousands)

(unaudited)



	Common Stock					Convertible Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
	Shares		Amount			Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity
Balance at January 1, 2018	71,299		$	713		50	$	1	$	635,748		$	(562	)	$	(317,308	)	$	318,592
Common stock issued through the distribution reinvestment plan	1,869		19			—	—		19,541			—			—			19,560
Distributions declared	—		—			—	—		—			—			(31,901		)	(31,901		)
Common stock redemptions	(2,604	)	(26		)	—	—		(27,435		)	—			—			(27,461		)
Other comprehensive income	—		—			—	—		—			121			—			121
Net loss	—		—			—	—		—			—			(28,809		)	(28,809		)
Balance at September 30, 2018	70,564		$	706		50	$	1	$	627,854		$	(441	)	$	(378,018	)	$	250,102

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

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

	Nine Months Ended
	September 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(28,809	)	$	(9,837	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Loss on disposal of assets	590			729
Casualty (gains) losses	(788		)	89
Net gains on dispositions of properties and joint venture interests	(6,195		)	(22,735		)
Depreciation and amortization	44,234			38,527
Amortization of deferred financing costs	1,319			1,595
Amortization of debt premium (discount)	(260		)	(359		)
Realized loss on change in fair value of interest rate cap	144			117
Accretion of discount and direct loan fees and costs	(24		)	(30		)
Changes in operating assets and liabilities, net of acquisitions:
Tenant receivables, net	56			(214		)
Deposits	(2		)	31
Prepaid expenses and other assets	(1,353		)	793
Due to/from related parties, net	226			(68		)
Accounts payable and accrued expenses	73			1,887
Tenant prepayments	4			77
Security deposits	113			(42		)
Net cash provided by operating activities	9,328			10,560

Cash flows from investing activities:
Proceeds from disposal of properties and joint venture interests, net of closing costs	9,635			31,403
Property acquisitions	(25,218		)	(29,239		)
Insurance proceeds received for casualty losses	1,783			—
Capital expenditures	(16,651		)	(16,632		)
Principal payments received on loans held for investment	16			21
Net cash used in investing activities	(30,435		)	(14,447		)



Cash flows from financing activities:
Redemptions of common stock	(27,461		)	(25,452		)
Payment of deferred financing costs	(329		)	(469		)
Borrowings on mortgages	—			85,136
Principal repayments on mortgages	(5,149		)	(4,921		)
Distributions paid on common stock	(12,341		)	(11,893		)
Net cash (used in) provided by financing activities	(45,280		)	42,401
Net (decrease) increase in cash and restricted cash	(66,387		)	38,514
Cash and restricted cash at beginning of period	131,061			125,119
Cash and restricted cash at end of period	$	64,674		$	163,633



Reconciliation to consolidated balance sheets
Cash	$	50,314	$	151,384
Restricted cash	14,360		12,249
Cash and restricted cash at end of period	$	64,674	$	163,633

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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018

(unaudited)

NOTE 1 - NATURE OF BUSINESS AND OPERATIONS

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

RAI is a wholly-owned subsidiary of C-III Capital Partners LLC, ("C-III"), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III controls both our Advisor and Resource Real Estate Opportunity Manager, LLC (the "Manager"), the Company's property manager; C-III also controls all of the shares of common stock held by the Advisor.

Through its private offering and primary public offering, which concluded on December 13, 2013, the Company raised aggregate gross offering proceeds of $645.8 million, which resulted in the issuance of 64.9 million shares of common stock, including approximately 276,056 shares purchased by the Advisor and 1.2 million shares sold in the Company's distribution reinvestment plan. During the years ended December 31, 2017 and 2016, the Company issued approximately 5.1 million additional shares for $55.6 million pursuant to its distribution reinvestment plan. During the nine months ended September 30, 2018, the Company issued approximately 1.9 million additional shares for $19.6 million pursuant to its distribution reinvestment plan. The Company's distribution reinvestment plan offering is ongoing.

The Company has acquired, and may continue to acquire, real estate and real estate-related debt. The Company has a particular focus on owning and operating multifamily assets, and it has targeted, and intends to continue to target, this asset class while also possibly acquiring interests in other types of commercial property assets consistent with its investment objectives. The Company’s portfolio predominantly consists of multifamily rental properties to which the Company has added or will add value with a capital infusion (referred to as “value add properties”). However, the Company is not limited in the types of real estate assets in which it may invest and, accordingly, it may invest in other real estate-related assets either directly or together with a co-investor or joint venture partner.

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

The consolidated financial statements and the information and tables contained in the notes to the consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2017. 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, 2017. The results of operations for the nine months ended September 30, 2018 may not necessarily be indicative of the results of operations for the full year ending December 31, 2018.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Basis of Presentation

The accompanying consolidated financial statements have been prepared in conformity with GAAP. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)



Subsidiary	Apartment Complex	Number of Units	Property Location
RRE Opportunity Holdings, LLC	N/A	N/A	N/A
Resource Real Estate Opportunity OP, LP	N/A	N/A	N/A
RRE Charlemagne Holdings, LLC	N/A	N/A	N/A
RRE Iroquois, LP (“Vista”)	Vista Apartment Homes	133	Philadelphia, PA
RRE Iroquois Holdings, LLC	N/A	N/A	N/A
RRE Cannery Holdings, LLC (“Cannery”)	Cannery Lofts	156	Dayton, OH
RRE Williamsburg Holdings, LLC (“Williamsburg”)	Williamsburg	976	Cincinnati, OH
RRE Autumn Wood Holdings, LLC ("Autumn Wood")	Retreat at Rocky Ridge	206	Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")	Trailpoint at the Woodlands	271	Houston, TX
RRE Brentdale Holdings, LLC ("Brentdale")	The Westside Apartments	412	Plano, TX
RRE Jefferson Point Holdings, LLC ("Jefferson Point")	Tech Center Square	208	Newport News, VA
RRE Centennial Holdings, LLC ("Centennial")	Verona Apartment Homes	276	Littleton, CO
RRE Pinnacle Holdings, LLC ("Pinnacle")	Skyview Apartment Homes	224	Westminster, CO
RRE River Oaks Holdings, LLC ("River Oaks")	Maxwell Townhomes	316	San Antonio, TX
RRE Nicollet Ridge Holdings, LLC ("Nicollet Ridge")	Meridian Pointe	339	Burnsville, MN
RRE Addison Place Holdings, LLC ("Addison Place")	The Estates at Johns Creek	403	Alpharetta, GA
PRIP Coursey, LLC ("Evergreen at Coursey Place") (a)	Evergreen at Coursey Place	352	Baton Rouge, LA
PRIP 500, LLC ("Pinehurst") (a)	Pinehurst	146	Kansas City, MO
PRIP 1102, LLC ("Pheasant Run") (a) (b)	Pheasant Run	—	Lee's Summit, MO
PRIP 11128, LLC ("Retreat at Shawnee") (a)	Retreat at Shawnee	342	Shawnee, KS
PRIP Pines, LLC ("Pines of York") (a)	Pines of York	248	Yorktown, VA
RRE Berkeley Run Holdings, LLC ("Berkley Run")	Perimeter Circle	194	Atlanta, GA
RRE Berkeley Trace Holdings LLC ("Berkley Trace")	Perimeter 5550	165	Atlanta, GA
RRE Merrywood Holdings, LLC ("Merrywood")	Aston at Cinco Ranch	228	Katy, TX
RRE Sunset Ridge Holdings, LLC ("Sunset Ridge")	Sunset Ridge	324	San Antonio, TX
RRE Parkridge Place Holdings, LLC ("Parkridge Place")	Calloway at Las Colinas	536	Irving, TX
RRE Woodmoor Holdings, LLC ("Woodmoor")	South Lamar Village	208	Austin, TX
RRE Gilbert Holdings, LLC ("Springs at Gilbert")	Heritage Pointe	458	Gilbert, AZ
RRE Bonita Glen Holdings, LLC ("Bonita")	Point Bonita Apartment Homes	295	Chula Vista, CA
RRE Yorba Linda Holdings, LLC ("Yorba Linda")	The Bryant at Yorba Linda	400	Yorba Linda, CA
RRE Providence Holdings, LLC ("Providence in the Park")	Providence in the Park	524	Arlington, TX
RRE Green Trails Holdings, LLC ("Green Trails")	Green Trails Apartment Homes	440	Lisle, IL
RRE Terraces at Lake Mary Holdings, LLC ("Lake Mary")	Terraces at Lake Mary	284	Lake Mary, FL
RRE Courtney Meadows Holdings, LLC ("Courtney Meadows")	Courtney Meadows Apartments	276	Jacksonville, FL
RRE Sandy Springs Holdings, LLC ("Sandy Springs")	Addison at Sandy Springs	236	Sandy Springs, GA
RRE Grapevine Holdings, LLC ("Bristol Grapevine")	Bristol Grapevine	376	Grapevine, TX
		9,952

N/A - Not Applicable

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

(b) Underlying investment sold on September 14, 2018.

All intercompany accounts and transactions have been eliminated in consolidation.

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

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.

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 the accompanying notes. Actual results could differ from those estimates.

Adoption of New Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers” ("ASU No. 2014-09"), which replaces most existing revenue recognition guidance in GAAP. Under the new standard, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. 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. The Company adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective approach. The majority of the Company’s revenue is derived from residential rental income and other lease income, which are scoped out from this standard and included in the current lease accounting framework, and will be accounted for under ASU No. 2016-02, "Leases", as discussed below. Revenue streams that are in the scope of the new standards include (but are not limited to) administrative and late fees and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties. The accounting for these revenue streams were not affected by the adoption of ASU 2014-09, nor was there a cumulative effect of initially applying the standard.

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. On January 1, 2018, the Company adopted ASU No. 2016-15, and the adoption did not have a material impact on its consolidated financial statements and disclosures.

In November 2016, FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU No. 2016-18”), which provides guidance on the classification of restricted cash in the statement of cash flows. The Company adopted ASU No. 2016-18 as of January 1, 2018, and the adoption did not have a material effect on the Company's consolidated financial statements and disclosures. As a result of adopting the new guidance, $723,000 and $81,000 of restricted cash, which were previously included as operating cash outflows and investing cash outflows within the consolidated statements of cash flows for the nine months ended September 30, 2017, respectively, have been removed and are now included in the cash and restricted cash line items at the beginning and end of the period.

In January 2017, FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): 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. The Company adopted ASU No. 2017-01 as of January 1, 2018. Acquisitions during the nine months ended September 30, 2018 were evaluated under the new standard and accounted for as asset acquisitions. The Company believes any future property acquisitions will be accounted for as asset acquisitions, not business combinations.

Accounting Standards Issued But Not Yet Effective

In February 2016, FASB issued ASU No. 2016-02, "Leases" ("ASU No. 2016-02") and amended by ASU No. 2018-09 "Codification Improvements" in July 2018, 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. In September 2017, the FASB issued ASU No. 2017-13, "Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842)", which provides additional implementation guidance on the previously issued ASU No. 2016-02. 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, the Company expects that its operating leases where it is the lessor will be accounted for on its balance sheet similar to its current accounting with the underlying leased asset recognized as real estate. For leases in which the Company is the lessee, primarily consisting of a parking

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

space lease and office equipment leases, the Company expects to recognize a right-of-use asset and a lease liability equal to the present value of the minimum lease payments with rental payments being applied to the lease liability and to interest expense and the right-of-use asset being amortized to expense on a straight-line basis over the term of the lease.

In July 2018, FASB issued ASU No. 2018-11, “Leases: Targeted Improvements” an additional amendment to ASU No. 2016-02. Although the Company is still evaluating this guidance, the Company believes it will apply the practical expedient allowed in this new guidance to combine lease and associated nonlease components by class of underlying asset. In addition, the Company is expected to utilize the optional method for adopting the new leasing guidance and not restate comparative periods.

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 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. Step 2 required that, if the carrying amount of a reporting unit exceeded its fair value, the implied fair value of the goodwill must be compared to the carrying amount in order to determine impairment. 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.

In August 2017, FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The update to the standard is effective for the Company on January 1, 2019, with early adoption permitted in any interim period. The Company is continuing to evaluate this guidance and assessing the impact of this guidance on its consolidated financial statements.

In July 2018, FASB issued ASU No. 2018-09, "Codification Improvements". This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company is evaluating this guidance to determine the impact it may have on its consolidated financial statements.

In August 2018, FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This update removes, modifies and adds certain disclosure requirements in FASB ASC 820, “Fair Value Measurement” (“ASC 820”). ASU No. 2018-13 will be effective for the Company beginning January 1, 2020 and early adoption is permitted. The Company is continuing to evaluate this guidance; however, the Company does not expect the adoption of ASU No. 2018-13 to have a significant impact on its consolidated financial statements.

Assets Held for Sale

The Company presents rental property assets that qualify as held for sale separately in the consolidated balance sheets. Real estate assets held for sale are measured at the lower of carrying amount or fair value less cost to sell. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. As of September 30, 2018 and December 31, 2017, the Company had one and zero rental properties, respectively, included in assets held for sale.

Rental Properties

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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)



Buildings	27.5 years
Building improvements	5.0 to 27.5 years
Furniture, fixtures, and equipment	3.0 to 5.0 years
Tenant improvements	Shorter of lease term or expected useful life
Lease intangibles	Remaining term of related lease

Improvements and replacements in excess of $1,000 are capitalized when they have a useful life greater than or equal to one year. 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. These costs are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.

Contractual Obligations

The Company leases parking space and equipment under leases with varying expiration dates through 2023. As of September 30, 2018, the payments due under these obligations totaled $179,000.

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. The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.

An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of a property to be held and used. For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset. There were no impairment losses recorded on long-lived assets during the three and nine months ended September 30, 2018 and 2017.

Loans Held for Investment, Net

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

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

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

The Company may acquire real estate loans at a discount due to the credit quality of such loans and the respective borrowers under such loans. Revenues from these loans are recorded under the effective interest method. Under this method, an effective interest rate (“EIR”) is applied to the cost basis of the real estate loan held for investment. The EIR that is calculated when the loan held for investment is acquired remains constant and is the basis for subsequent impairment testing and income recognition. However, if the amount and timing of future cash collections are not reasonably estimable, the Company accounts

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

for the real estate receivable on the cost recovery method. Under the cost recovery method of accounting, no income is recognized until the basis of the loan held for investment has been fully recovered.

Allocation of the Purchase Price of Acquired and Foreclosed Assets

On January 1, 2018, the Company adopted ASU 2017-01. Acquisitions that do not meet the definition of a business under this guidance are accounted for as asset acquisitions. In most cases, the Company believes acquisitions of real estate will no longer be considered a business combination, as in most cases substantially all of the fair value is concentrated in a single identifiable asset or group of tangible assets that are physically attached to each other (land and building). However, if the Company determines that substantially all of the fair value of the gross assets acquired is not concentrated in either a single identifiable asset or in a group of similar identifiable assets, the Company will then perform an assessment to determine whether the set is a business by using the framework outlined in the ASU. If the Company determines that the acquired asset is not a business, the Company will allocate the cost of the acquisition, including transaction costs, to the assets acquired or liabilities assumed based on their related fair value.

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.

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

The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant. Management’s estimates of value are determined by independent appraisers (e.g., discounted cash flow analysis). Factors to be considered in the 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 in-place lease values and customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.

The Company amortizes the value of in-place leases to expense over the average remaining term of the respective leases. The value of customer relationship intangibles are amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.

The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.

Goodwill

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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

frequently if events or changes in circumstances indicate that the asset might be impaired. There have been no such events or changes in circumstances during the three and nine months ended September 30, 2018.

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.

The future minimum rental payments to be received from noncancelable operating leases for residential rental properties are $74.1 million and $196,000 for the 12 month periods ending September 30, 2019 and 2020, respectively, and none thereafter. The future minimum rental payments to be received from noncancelable operating leases for commercial rental properties and antenna rentals are $447,000, $398,000, $302,000, $239,000, and $86,000 for the 12 month periods ending September 30, 2019, through September 30, 2023, respectively, and $202,000 thereafter.

Revenue is primarily derived from the rental of residential housing units for which the Company receives minimum rents and utility reimbursements pursuant to underlying tenant lease agreements. The Company also receives other ancillary tenant fees for administration of leases, late payments, amenities, and revenue sharing arrangements of cable income from contracts with cable providers at the Company's properties. As discussed earlier, the Company adopted ASU No. 2014-09 beginning January 1, 2018. A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company records utility reimbursement income and ancillary charges in the period when the performance obligation is completed, either at a point in time or on a monthly basis as the service is utilized. Included in Accrued expenses and other liabilities on the consolidated balance sheet at September 30, 2018 is a $559,000 contract liability relating to contracts with cable providers. The Company recognizes income on a straight line basis over the contract period of 10 years to 12 years. In the nine months ended September 30, 2018, approximately $60,000 of revenue from the contract liability was recognized as income.

Tenant Receivables

Tenant receivables are stated in the consolidated financial statements as amounts due from tenants net of an allowance for uncollectible receivables. Payment terms vary and receivables outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the general economy and the industry as a whole. The Company writes off receivables when they become uncollectible. As of September 30, 2018 and December 31, 2017, there were allowances for uncollectible receivables of $7,756 and $149,300, respectively.

Income Taxes

The Company elected to be taxed as a REIT commencing with its taxable year ended December 31, 2010. To maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests. As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it fails its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.

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

The Company may elect to treat any 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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

is required and the Company can increase book equity of the consolidated entity. As of September 30, 2018 and December 31, 2017, the Company had no TRSs.

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

The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations. The Company is not currently undergoing any examinations by taxing authorities. The Company is not subject to IRS examination for tax return years 2013 and prior.

Legislation commonly known as the Tax Cuts and Jobs Act ("TCJA") was signed into law on December 22, 2017. The TCJA makes significant changes to the U.S. federal income tax rules for taxation of individuals and corporations (including REITs), generally effective for taxable years beginning after December 31, 2017. The Company is continuing to evaluate this legislation, but does not expect it to have a significant impact.

Earnings Per Share

Basic earnings per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. None of the 49,995 shares of convertible stock (see Note 14) are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of September 30, 2018 (were such date to represent the end of the contingency period).

Reclassifications

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

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION

The following table presents the Company's supplemental cash flow information (in thousands):



	Nine Months Ended
	September 30,
	2018		2017
Non-cash financing and investing activities:
Stock issued from the distribution reinvestment plan	$	19,560	$	20,421
Deferred financing costs funded directly by mortgage notes	57		449
Accruals for construction in progress	937		922

Non-cash activity related to dispositions:
Mortgage notes payable settled directly with proceeds from sale of rental property	6,250		26,976

Non-cash activity related to acquisitions:
Mortgage notes payable used to acquire rental property	55,672		93,750
Cash paid during the period for:
Interest	$	25,055	$	19,328

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

NOTE 4 - RESTRICTED CASH

Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. The following table presents a summary of the components of the Company's restricted cash (in thousands):



	September 30, 2018		December 31, 2017
Real estate taxes	$	10,040	$	8,876
Insurance	1,349		1,995
Capital improvements	2,971		2,530
Total	$	14,360	$	13,401

In addition, the Company had unrestricted cash earmarked for capital expenditures of $25.4 million and $31.3 million as of September 30, 2018 and December 31, 2017, respectively.

NOTE 5 - RENTAL PROPERTIES, NET

The following table presents the Company’s investments in rental properties (in thousands):



	September 30, 2018			December 31, 2017
Land	$	200,848		$	196,765
Building and improvements	962,968			905,739
Furniture, fixtures and equipment	43,372			37,796
Construction in progress	1,472			6,297
	1,208,660			1,146,597
Less: accumulated depreciation	(181,050		)	(147,708		)
	$	1,027,610		$	998,889

Depreciation expense for the three and nine months ended September 30, 2018 was $14.0 million and $41.1 million, respectively, and for the three and nine months ended September 30, 2017 depreciation expense was $12.3 million and $35.9 million, respectively.

During the three months ended September 30, 2018, the Company entered into an agreement to sell one rental property, Retreat at Shawnee, with a net book value of $15.3 million. The Company confirmed the intent and ability to sell this property in its present condition and this property qualified for held for sale accounting treatment upon meeting all applicable criteria prior to September 30, 2018, at which time depreciation ceased. As such, the assets associated with this property were separately classified and included as assets held for sale on the Company's consolidated balance sheet as of September 30, 2018. However, the sale of this property did not qualify for discontinued operations, and, therefore, the operations for all periods presented continue to be classified within continuing operations on the Company's consolidated statements of operations. The Company completed the sale on October 19, 2018.

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

NOTE 6 - LOAN HELD FOR INVESTMENT, NET

In 2011, the Company purchased, at a discount, one performing promissory note (the "Trail Ridge Note”), which is secured by a first priority mortgage on a multifamily rental apartment community. The contract purchase price for the Trail Ridge Note was $700,000, excluding closing costs. As of both September 30, 2018 and December 31, 2017, the Trail Ridge Note was both current and performing.

The following table presents details of the balance and terms of the Trail Ridge Note as of September 30, 2018 and December 31, 2017 (in thousands):



	September 30, 2018			December 31, 2017
Unpaid principal balance	$	918		$	934
Unamortized discount and acquisition costs	(128		)	(152		)
Net book value	$	790		$	782

Maturity date	10/28/2021
Interest rate	7.5		%
Average monthly payment	$	8

The Company has evaluated the loan for impairment and determined that, as of September 30, 2018, it was not impaired. There were no allowances for credit losses as of both September 30, 2018 and December 31, 2017. There were no charge-offs for both the nine months ended September 30, 2018 and the nine months ended September 30, 2017.

NOTE 7 - ACQUISITIONS

As of September 30, 2018, the Company owned interests in 31 properties. On April 17, 2018, the Company, through its wholly-owned subsidiary, purchased Addison at Sandy Springs Apartments, a 236-unit multifamily apartment complex in Sandy Springs, Georgia, for $34.0 million from an unrelated third party. On April 25, 2018, the Company, through its wholly-owned subsidiary, purchased Bristol at Grapevine, a 376-unit multifamily apartment complex in Grapevine, Texas, for $44.7 million from an unrelated third party.

The following table presents the allocated contract purchase price, acquisition fee, and acquisition costs during the nine months ended September 30, 2018 (in thousands):



Bristol at Grapevine	Contractual Purchase Price		Acquisition Fee		Acquisition Costs		Total Real Estate Cost
Land	$	3,279	$	70	$	15	$	3,364
Building and Improvements	39,777		854		187		40,818
Furniture, fixtures and equipment	570		12		3		585
Intangible Assets	1,074		23		5		1,102
	$	44,700	$	959	$	210	$	45,869



Addison at Sandy Springs	Contractual Purchase Price		Acquisition Fee		Acquisition Costs		Total Real Estate Cost
Land	$	4,595	$	100	$	24	$	4,719
Building and Improvements	28,241		613		145		28,999
Furniture, fixtures and equipment	424		9		2		435
Intangible Assets	740		16		4		760
	$	34,000	$	738	$	175	$	34,913

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

NOTE 8 - DISPOSITION OF PROPERTIES AND DECONSOLIDATION OF INTERESTS

The Company disposed of one property during the three and nine months ended September 30, 2018.

The following table presents details of the Company's disposition and deconsolidation activity during the three and nine months ended September 30, 2018 and 2017 (in thousands):



					Net Gains on Dispositions of Properties and Joint Venture Interests
Multifamily Community	Location	Sale Date	Contract Sales Price		Three months ended September 30, 2018		Nine months ended September 30, 2018
2018 Dispositions:
Pheasant Run	Lee's Summit, MO	September 14, 2018	$	16,400	$	6,195	$	6,195
					$	6,195	$	6,195

2017 Dispositions:					Three months ended September 30, 2017		Nine months ended September 30, 2017
Chisholm Place	Plano, Texas	May 10, 2017	$	21,250	$	—	$	6,922
Mosaic	Oklahoma City, Oklahoma	May 12, 2017	6,100		—		1,513
Deerfield	Hermantown, Minnesota	August 16, 2017	23,600		11,035		11,035
Stone Ridge	Columbia, South Carolina	September 27, 2017	10,534		3,265		3,265
					$	14,300	$	22,735

The following table presents the Company's revenues and net income (loss) attributable to properties sold, which includes gain on sale, for the three and nine months ended September 30, 2018 and 2017 (in thousands):



	Revenues Attributable to Properties Sold					Net Income (Loss) Attributable to Properties Sold
Multifamily Community	Three months ended September 30, 2018			Nine months ended September 30, 2018		Three months ended September 30, 2018			Nine months ended September 30, 2018
2018 Dispositions:
Pheasant Run	$	342		$	1,169	$	6,230		$	6,217
	$	342		$	1,169	$	6,230		$	6,217

2017 Dispositions:	Three months ended September 30, 2017			Nine months ended September 30, 2017		Three months ended September 30, 2017			Nine months ended September 30, 2017
Chisholm Place	$	—		$	825	$	(4	)	$	6,659
Mosaic	(2		)	473		(26		)	1,441
Deerfield	326			1,653		10,827			11,042
Stone Ridge	435			1,286		3,196			3,099
	$	759		$	4,237	$	13,993		$	22,241

On September 4, 2018, the Company entered into an agreement to sell its interest in Retreat at Shawnee, located in Shawnee, Kansas, for $25.0 million. Retreat at Shawnee is included in assets held for sale-rental properties in the consolidated balance sheet as of September 30, 2018. The Company completed the sale on October 19, 2018 and expects to recognize a gain on sale during the three months ended December 31, 2018.

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

NOTE 9 - IDENTIFIED INTANGIBLE ASSETS, NET AND GOODWILL

Identified intangible assets, net, relate to in-place apartment unit rental and antennae leases. The net carrying value of the acquired in-place leases totaled $553,000 and $1.8 million as of September 30, 2018 and December 31, 2017, respectively, net of accumulated amortization of $29.4 million and $26.6 million, respectively. The weighted-average remaining life of the acquired apartment unit rental leases was two months and five months as of September 30, 2018 and December 31, 2017, respectively. Expected amortization for the antennae leases at the Vista Apartment Homes for the years ending September 30, 2019, 2020, 2021, and 2022 are $12,544, $10,768, $5,358, $674, respectively, and none thereafter. Amortization of the apartment unit rental and antennae leases for the three and nine months ended September 30, 2018 was $840,100 and $3.1 million, respectively. Amortization of the apartment unit rental and antennae leases for the three and nine months ended September 30, 2017 was $842,000 and $2.6 million, respectively.

The following table presents the Company's expected amortization for the rental and antennae leases for the next five 12-month periods ending September 30, and thereafter (in thousands):



2019	$	536
2020	11
2021	5
2022	1
Thereafter	—
	$	553

As of September 30, 2018 and December 31, 2017, the Company had $594,000 and $670,000, respectively, of goodwill included on the consolidated balance sheets. The following table presents the Company's activity in goodwill for the nine months ended September 30, 2018 (in thousands):



Balance, January 1, 2018	$	670
Sale of Pheasant Run	(76		)
Balance, September 30, 2018	$	594

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

NOTE 10 - MORTGAGE NOTES PAYABLE, NET

The following table presents a summary of the Company's mortgage notes payable, net (in thousands):



	September 30, 2018										December 31, 2017
Collateral	Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value		Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value
Vista Apartment Homes	$	14,674	$	—		$	(113	)	$	14,561	$	14,896	$	—		$	(140	)	$	14,756
Cannery Lofts	13,100		—			(144		)	12,956		13,100		—			(165		)	12,935
Trailpoint at the Woodlands	18,126		—			(163		)	17,963		18,368		—			(188		)	18,180
Verona Apartment Homes	32,970		—			(433		)	32,537		32,970		—			(475		)	32,495
Skyview Apartment Homes	28,400		—			(376		)	28,024		28,400		—			(413		)	27,987
Maxwell Townhomes	13,139		—			(88		)	13,051		13,342		—			(109		)	13,233
Pinehurst	7,249		—			(111		)	7,138		7,339		—			(128		)	7,211
Pheasant Run	—		—			—			—		6,250		—			—			6,250
Retreat of Shawnee	12,486		—			—			12,486		12,682		7			(2		)	12,687
Evergreen at Coursey Place	26,272		61			(59		)	26,274		26,639		77			(75		)	26,641
Pines of York	14,498		(189		)	(36		)	14,273		14,717		(235		)	(44		)	14,438
The Estates at Johns Creek	47,836		—			(199		)	47,637		48,603		—			(286		)	48,317
Perimeter Circle	16,634		—			(42		)	16,592		16,923		—			(84		)	16,839
Perimeter 5550	13,128		—			(35		)	13,093		13,356		—			(70		)	13,286
Aston at Cinco Ranch	22,611		—			(167		)	22,444		22,942		—			(210		)	22,732
Sunset Ridge 1	18,907		138			(109		)	18,936		19,254		189			(150		)	19,293
Sunset Ridge 2	2,846		19			(14		)	2,851		2,890		26			(19		)	2,897
Calloway at Las Colinas	33,863		—			(193		)	33,670		34,396		—			(241		)	34,155
South Lamar Village	11,977		—			(41		)	11,936		12,177		—			(80		)	12,097
Heritage Pointe	25,498		—			(252		)	25,246		25,912		—			(284		)	25,628
The Bryant at Yorba Linda	67,500		—			(356		)	67,144		67,500		—			(461		)	67,039
Point Bonita Apartment Homes	26,225		1,435			(246		)	27,414		26,525		1,660			(285		)	27,900
The Westside Apartments	36,820		—			(354		)	36,466		36,820		—			(390		)	36,430
Tech Center Square	11,984		—			(140		)	11,844		12,141		—			(164		)	11,977
Williamsburg	53,995		—			(613		)	53,382		53,995		—			(706		)	53,289
Retreat at Rocky Ridge	11,375		—			(193		)	11,182		11,375		—			(223		)	11,152
Providence in the Park	47,000		—			(456		)	46,544		47,000		—			(524		)	46,476
Green Trails Apartment Homes	61,500		—			(586		)	60,914		61,500		—			(667		)	60,833
Meridian Pointe	39,500		—			(518		)	38,982		39,500		—			(588		)	38,912
Terraces at Lake Mary	32,250		—			(333		)	31,917		32,250		—			(377		)	31,873
Courtney Meadows Apartments	27,100		—			(325		)	26,775		27,100		—			(367		)	26,733
Addison at Sandy Springs	22,750		—			(304		)	22,446		—		—			—			—
Bristol at Grapevine	32,922		—			(380		)	32,542		—		—			—			—
	$	845,135	$	1,464		$	(7,379	)	$	839,220	$	800,862	$	1,724		$	(7,915	)	$	794,671

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

The following table presents additional information about the Company's mortgage notes payable, net (in thousands, except percentages) as of September 30, 2018:



Collateral	Maturity Date	Annual Interest Rate		Average Monthly Debt Service		Average Monthly Escrow
Vista Apartment Homes	1/1/2022	4.55%	₍₁₎₍₅₎	$	79	$	17
Cannery Lofts	11/1/2023	4.80%	₍₁₎₍₃₎	52		26
Trailpoint at the Woodlands	11/1/2023	4.67%	₍₁₎₍₄₎	95		47
Verona Apartment Homes	10/1/2026	4.62%	₍₁₎₍₃₎	125		40
Skyview Apartment Homes	10/1/2026	4.62%	₍₁₎₍₃₎	107		24
Maxwell Townhomes	1/1/2022	4.32%	₍₂₎₍₅₎	71		78
Pinehurst	11/1/2023	4.68%	₍₁₎₍₃₎	38		15
Retreat of Shawnee	2/1/2019	4.76%	₍₁₎₍₆₎	78		28
Evergreen at Coursey Place	8/1/2021	5.07%	₍₂₎₍₅₎	154		37
Pines of York	12/1/2021	4.46%	₍₂₎₍₅₎	80		25
The Estates at Johns Creek	7/1/2020	3.38%	₍₂₎₍₅₎	221		79
Perimeter Circle	7/1/2019	3.42%	₍₂₎₍₅₎	81		44
Perimeter 5550	7/1/2019	3.42%	₍₂₎₍₅₎	64		32
Aston at Cinco Ranch	10/1/2021	4.34%	₍₂₎₍₅₎	120		70
Sunset Ridge 1	11/1/2020	4.58%	₍₂₎₍₅₎	113		89
Sunset Ridge 2	11/1/2020	4.54%	₍₂₎₍₅₎	16		—
Calloway at Las Colinas	12/1/2021	3.87%	₍₂₎₍₅₎	171		115
South Lamar Village	8/1/2019	3.64%	₍₂₎₍₅₎	59		57
Heritage Pointe	4/1/2025	4.14%	₍₁₎₍₄₎	130		43
The Bryant at Yorba Linda	6/1/2020	4.01%	₍₁₎₍₃₎	297		—
Point Bonita Apartment Homes	10/1/2023	5.33%	₍₂₎₍₅₎	152		61
The Westside Apartments	9/1/2026	4.38%	₍₁₎₍₃₎	196		69
Tech Center Square	6/1/2023	4.84%	₍₁₎₍₅₎	65		24
Williamsburg	1/1/2024	4.64%	₍₁₎₍₃₎	252		167
Retreat at Rocky Ridge	1/1/2024	4.72%	₍₁₎₍₃₎	54		23
Providence in the Park	2/1/2024	4.56%	₍₁₎₍₃₎	212		138
Green Trails Apartment Homes	6/1/2024	4.25%	₍₁₎₍₃₎	234		79
Meridian Pointe	8/1/2024	4.16%	₍₁₎₍₃₎	138		56
Terraces at Lake Mary	9/1/2024	4.17%	₍₁₎₍₃₎	110		46
Courtney Meadows Apartments	1/1/2025	4.10%	₍₁₎₍₃₎	91		51
Addison at Sandy Springs	5/1/2025	4.02%	_(1)(3)(7)	74		38
Bristol at Grapevine	5/1/2025	3.97%	_(1)(3)(7)	106		78


(1)	Variable rate based on one-month LIBOR of 2.2606% (as of September 30, 2018) plus a fixed margin.


(2)	Fixed rate.


(3)	Monthly interest-only payment currently required.


(4)	Monthly fixed principal plus interest payment required.


(5)	Fixed monthly principal and interest payment required.


(6)	Mortgage note payable related to asset held for sale at September 30, 2018.


(7)	New debt placed during the nine months ended September 30, 2018.

Loans assumed as part of the Point Bonita Apartment Homes, South Lamar Village, Paladin (Pinehurst, Retreat of Shawnee, Evergreen at Coursey Place, Pines of York), Sunset Ridge and Maxwell Townhomes acquisitions were recorded at their fair values. The premium or discount is amortized over the remaining term of the loans and included in interest expense. For the three months ended September 30, 2018 and 2017, interest expense was reduced by $85,000 and $120,000, respectively, for the amortization of the premium or discount. For the nine months ended September 30, 2018 and 2017, interest expense was reduced by $260,000 and $359,000, respectively, for the amortization of the premium or discount.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

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

The following table presents the Company's annual principal payments on outstanding borrowings for each of the next five 12-month periods ending September 30, and thereafter (in thousands):



2019	$	63,305
2020	123,564
2021	57,351
2022	102,312
2023	21,163
Thereafter	477,440
	$	845,135

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. These exceptions are referred to as “carveouts.” The Company has guaranteed the carveouts under mortgage notes by executing a guarantee with respect to the properties. 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 may borrow an additional $7.5 million on the mortgage secured by The Bryant at Yorba Linda when certain debt service coverage and loan to value criteria are met. The Bryant at Yorba Linda mortgage loan includes a net worth and liquidity covenant. During the nine months ended September 30, 2018, the Company paid $50,000 to the lender in connection with an amendment to the loan agreement to modify the debt service coverage ratio covenant. The Company was in compliance with all covenants related to this loan as of September 30, 2018.

Deferred financing costs incurred to obtain financing are amortized over the term of the related debt. During the three months ended September 30, 2018 and September 30, 2017, $456,000 and $633,000, respectively, of amortization of deferred financing costs was included in interest expense. During the nine months ended September 30, 2018 and September 30, 2017, $1.3 million and $1.5 million, respectively, of amortization of deferred financing costs was included in interest expense. Accumulated amortization as of September 30, 2018 and December 31, 2017 was $5.3 million and $4.0 million, respectively.

The following table presents the Company's estimated amortization of the existing deferred financing costs for the next five 12-month periods ending September 30, and thereafter (in thousands):



2019	$	1,758
2020	1,517
2021	1,209
2022	1,007
2023	948
Thereafter	940
	$	7,379

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

NOTE 11 - CREDIT FACILITY

The secured revolving credit facility with Bank of America, N.A. (“Bank of America”), as amended, matured on May 23, 2017 and was closed; all collateral subject to the revolving credit line was released.

Deferred financing costs incurred to obtain financing were amortized over the term of the related debt. During the three months ended September 30, 2018 and 2017, there was no amortization of deferred financing costs included in interest expense. During the nine months ended September 30, 2018 and 2017, $0 and $68,000, respectively, of amortization of deferred financing costs was included in interest expense. Deferred financing costs were fully amortized on the date of maturity.

NOTE 12 - ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table presents the changes in each component of the Company's accumulated other comprehensive loss for the nine months ended September 30, 2018 (in thousands):



Balance, January 1, 2018	$	(562	)
Reclassification adjustment for realized loss on designated derivatives	144
Designated derivatives, fair value adjustments	(23		)
Balance, September 30, 2018	$	(441	)

NOTE 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

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

Relationship with RAI and C-III

Property loss pool. The Company's properties participate in a property loss self-insurance pool with other properties directly and indirectly managed by RAI and C-III, which is backed by a catastrophic insurance policy. Substantially all of the receivables from related parties represent insurance deposits held in escrow by RAI and C-III to the self-insurance pool which, if unused, will be returned to the Company. The pool covers losses up to $2.5 million, after a $25,000 deductible per incident. Claims beyond the insurance pool limits will be covered by the catastrophic insurance policy, which covers claims up to $250 million, after either a $25,000 or a $100,000 deductible per incident depending on the location and/or type of loss. 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 nine months ended September 30, 2018, the Company paid $940,327 into the insurance pool.

General liability loss pool. The Company's properties participated in a general liability pool with other properties directly or indirectly managed by RAI and C-III until April 22, 2017. The pool covered claims up to $50,000 per incident through April 22, 2017. Effective April 23, 2017, the loss pool was eliminated, and the Company now participates (with other properties directly or indirectly managed by RAI and C-III) in a general liability policy. The insured limit for the general liability policy is $76 million in total claims, after a $25,000 deductible per incident.

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

Directors and officers liability insurance. The Company participates in a liability insurance program for directors and officers coverage with other C-III managed entities and subsidiaries for coverage up to $100.0 million. The Company paid premiums of $283,533 during the year ended December 31, 2018 in connection with this insurance program for an annual policy through September 2019.

Other expenses. The Company utilizes the services of The Planning and Zoning Resource Company, an affiliate of C-III, for zoning reports for acquisitions.

Relationship with the Advisor

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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

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. The Company renewed the Advisory Agreement for another year on September 15, 2018. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:

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

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

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

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

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

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

Relationship with Resource Real Estate Opportunity Manager

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

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

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

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

Information technology fees and operating expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared information technology fees and operating expenses on behalf of the Company for which they are reimbursed.

Relationship with Other Related Parties

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

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

The following table presents the Company's amounts payable to and amounts receivable from such related parties (in thousands):



	September 30, 2018		December 31, 2017
Due from related parties:
RAI and affiliates	$	146	$	371

Due to related parties:
Advisor:
Asset management fees	$	—	$	15
Operating expense reimbursements	62		32

Manager:
Property management fees	531		476
Other operating expense reimbursements	127		196
	$	720	$	719

The following table presents the Company's fees earned by and expenses paid to such related parties (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Fees earned / expenses paid to related parties:
Advisor:
Acquisition fees ⁽¹⁾	$	—	$	953	$	1,697	$	2,565
Asset management fees ⁽²⁾	3,307		2,893		9,663		8,370
Disposition fees ⁽³⁾	73		144		73		361
Debt financing fees ⁽⁴⁾	—		358		278		901
Overhead allocation ⁽⁵⁾	1,153		1,091		3,390		3,399
Internal audit ⁽⁵⁾	27		21		75		47

Manager:
Property management fees ⁽²⁾	$	1,612	$	1,429	$	4,647	$	4,158
Construction management fees ⁽⁶⁾	197		188		633		712
Construction payroll reimbursements ⁽⁶⁾	65		57		146		166
Acquisition-related reimbursements ⁽⁵⁾	—		20		53		38
Operating expense reimbursements ⁽⁷⁾	114		218		342		723
Debt servicing fees ⁽²⁾	1		1		2		2

Other:
The Planning & Zoning Resource Company ⁽¹⁾	—		2		2		3
Graphic Images ⁽⁵⁾	—		—		—		9


(1)	For the three and nine months ended September 30, 2017, Acquisition fees are included in Acquisition costs on the consolidated statements of operations and comprehensive income (loss). For the three and nine months ended September 30, 2018, Acquisition fees are capitalized and included in Rental Properties, net on the consolidated balance sheet.


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


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


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


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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)


(6)	Capitalized and included in Rental properties, net, on the consolidated balance sheets.


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

NOTE 14 - EQUITY

Preferred Stock

The Company’s charter authorizes the Company to issue 10.0 million shares of its $0.01 par value preferred stock. As of September 30, 2018 and December 31, 2017, no shares of preferred stock were issued and outstanding.

Common Stock

As of September 30, 2018, the Company had an aggregate of 70,563,588 shares of its $0.01 par value common stock outstanding as follows (dollars in thousands):



	Shares Issued		Gross Proceeds
Shares issued through private offering	1,263,727		$	12,582
Shares issued through primary public offering ⁽¹⁾	62,485,461		622,077
Shares issued through stock distributions	2,132,266		—
Shares issued through distribution reinvestment plan	13,429,165		138,058
Shares issued in conjunction with the Advisor's initial investment, net of 4,500 share conversion	15,500		155
Total	79,326,119		$	772,872
Shares redeemed and retired	(8,762,531	)
Total shares outstanding as of September 30, 2018	70,563,588

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

Convertible Stock

As of September 30, 2018 and December 31, 2017, the Company had 49,995 shares of $0.01 par value convertible stock outstanding of which the Advisor and affiliated persons own 49,063 shares and outside investors own 932 shares. In 2017, the Company repurchased and retired five shares. The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 10% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on the 31st trading day after listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold.

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


(A)	the lesser of

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


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


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

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


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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)


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


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

As of September 30, 2018, no Triggering Event has occurred.

Redemption of Securities

During the nine months ended September 30, 2018, the Company redeemed shares of its outstanding common stock as follows (in thousands, except per share data):



Period	Total Number of Shares Redeemed ⁽¹⁾	Average Price Paid per Share
January 2018	—	—
February 2018	—	—
March 2018	1,006	$10.94
April 2018	—	—
May 2018	—	—
June 2018	843	$10.26
July 2018	—	—
August 2018	—	—
September 2018	755	$10.29
	2,604

(1) All redemptions of equity securities by the Company during the nine months ended September 30, 2018 were made pursuant to the Company's share redemption program.

All redemptions requests tendered were honored during the three and nine months ended September 30, 2018.

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

On March 28, 2018, the Company's Board of Directors approved and adopted a Second Amended and Restated Share Redemption Program (the “Amended SRP”). Pursuant to the Amended SRP, the Company redeems shares at a purchase price equal to 95% of the current net asset value per share redeemed, except for redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility. The Amended SRP became effective for redemptions occurring after April 29, 2018.

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.

(Back to Index)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

Distributions

For the nine months ended September 30, 2018, the Company paid aggregate distributions of $31.9 million, including $12.3 million of distributions paid in cash and $19.6 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):



Record Date	Per Common Share	Distribution Date	Distributions reinvested in Shares of Common Stock		Net Cash Distribution		Total Aggregate Distribution
January 30, 2018	$0.05	January 31, 2018	$	2,217	$	1,352	$	3,569
February 27, 2018	0.05	February 28, 2018	2,214		1,362		3,576
March 29, 2018	0.05	April 2, 2018	2,182		1,353		3,535
April 27, 2018	0.05	April 30, 2018	2,181		1,364		3,545
May 30, 2018	0.05	May 31, 2018	2,176		1,379		3,555
June 28, 2018	0.05	June 29, 2018	2,151		1,373		3,524
July 30, 2018	0.05	July 31, 2018	2,155		1,380		3,535
August 30, 2018	0.05	August 31, 2018	2,151		1,394		3,545
September 27, 2018	0.05	September 28, 2018	2,133		1,384		3,517
	$0.45		$	19,560	$	12,341	$	31,901

NOTE 15 - FAIR VALUE MEASURES AND DISCLOSURES

In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts payable, approximate their carrying value due to their short nature. The hierarchy followed defines three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.

Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.

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

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)

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

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 (in thousands):



	Level 1		Level 2		Level 3		Total
September 30, 2018
Assets:
Interest rate caps	$	—	$	67	$	—	$	67
	$	—	$	67	$	—	$	67

December 31, 2017
Assets:
Interest rate caps	$	—	$	49	$	—	$	49
	$	—	$	49	$	—	$	49

The following table presents the carrying and fair values of the Company’s loan held for investment, net, and mortgage notes payable-outstanding borrowings (in thousands):



	September 30, 2018						December 31, 2017
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Loan held for investment, net	$	790		$	982		$	782		$	1,057
Mortgage notes payable- outstanding borrowings	$	(845,135	)	$	(836,431	)	$	(800,862	)	$	(802,523	)

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

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

NOTE 16 - DERIVATIVES AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into a total of 17 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

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RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

SEPTEMBER 30, 2018

(unaudited)

transaction affects earnings. During the three and nine months ended September 30, 2018, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2018, the Company had losses of $62,000 and $144,000, respectively. During the three and nine months ended September 30, 2017, the Company had losses of $42,000 and $117,000, respectively.

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 $278,000 will be reclassified as an increase to interest expense.

The following table presents the Company's outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk as of September 30, 2018 (dollars in thousands):



Interest Rate Derivative	Number of Instruments	Notional Amount		Maturity Dates
Interest Rate Caps	17	$	507,000	November 1, 2018 to May 1, 2021

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

The following table presents the fair value of the Company’s derivative financial instruments on the consolidated balance sheets as of September 30, 2018 and December 31, 2017 (in thousands):

Asset Derivatives

Liability Derivatives

September 30, 2018

December 31, 2017

September 30, 2018

December 31, 2017

Balance Sheet

Fair Value

Balance Sheet

Fair Value

Balance Sheet

Fair Value

Balance Sheet

Fair Value

Prepaid expenses and other assets

—

NOTE 17 - OPERATING EXPENSE LIMITATION

Under its charter, the Company must limit its total operating expenses to the greater of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the conflicts committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four quarters ended September 30, 2018 were in compliance with the charter-imposed limitation.

NOTE 18 - SUBSEQUENT EVENTS

On October 30, 2018, the Company's Board of Directors declared a $0.05 per share cash distribution to its common stockholders of record at the close of business on each of the following record dates: October 30, 2018, November 29, 2018, and December 28, 2018. Such distributions were paid or will be paid on October 31, 2018, November 30, 2018, and December 31, 2018, respectively.

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

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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT, Inc. and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2017. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT, Inc., a Maryland corporation, and, as required by context, Resource Real Estate Opportunity OP, LP, a Delaware limited partnership, and to their subsidiaries.

Overview

We were formed on June 3, 2009. Resource Real Estate Opportunity Advisor, LLC (the “Advisor”), an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”) has been engaged to manage our day-to-day operations.

RAI is a wholly-owned subsidiary of C-III Capital Partners LLC ("C-III"), a leading commercial real estate investment management and services company engaged in a broad range of activities. C-III controls our Advisor and Resource Real Estate Opportunity Manager, LLC (the "Manager"), our property manager. C-III also controls all of the shares of common stock held by the Advisor.

We have acquired a diversified portfolio of discounted U.S. commercial real estate and real estate-related debt. Our portfolio consists of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we have or can add value with a capital infusion (referred to as “value add properties”). However, we are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate and, accordingly, we may invest in other real estate assets or debt secured by real estate assets. At September 30, 2018, we held approximately 23% of our total assets in category (i) and 77% of our total assets in category (ii).

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

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

Results of Operations

As of September 30, 2018, we owned interests in a total of 31 multifamily properties. We also owned one performing loan. Since our inception, we have acquired interests in 54 multifamily properties. As of September 30, 2018, we had sold our interests in 23 of those properties.

Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.

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Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017:

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



	Three Months Ended
	September 30,
	2018			2017
Revenues:
Rental income	$	33,791		$	29,847
Utility income	2,060			1,847
Other ancillary fees	664			565
Interest and dividend income	65			74
Total revenues	36,580			32,333

Expenses:
Rental operating - expenses	8,419			7,162
Rental operating - payroll	3,662			3,306
Rental operating - real estate taxes	4,286			3,794
Subtotal - Rental operating expenses	16,367			14,262
Acquisition costs	—			1,290
Management fees	4,920			4,323
General and administrative	2,625			2,874
Loss on disposal of assets	286			537
Depreciation and amortization expense	14,851			13,193
Total expenses	39,049			36,479
Loss before other income (expense)	(2,469		)	(4,146		)

Other income (expense):
Net gains on dispositions of properties and joint venture interests	6,195			14,300
Interest expense	(9,526		)	(7,963		)
Insurance proceeds in excess of cost basis	169			—
Total other (expense) income	(3,162		)	6,337
Net loss attributable to common stockholders	$	(5,631	)	$	2,191

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The following table presents the results of operations separated into three categories: the results of operations of the 27 properties and one performing loan that we owned for the entirety of both periods presented, properties purchased or sold during either of the periods presented, and company level revenues and expenses for the three months ended September 30, 2018 and 2017 (in thousands):



	For the three months ended												For the three months ended
	September 30, 2018												September 30, 2017
	Properties owned both periods			Properties purchased/sold during either period			Company level			Total			Properties owned both periods			Properties purchased/sold during either period			Company level			Total
Revenues:
Rental income	$	29,834		$	3,957		$	—		$	33,791		$	28,439		$	1,408		$	—		$	29,847
Utility income	1,809			251			—			2,060			1,762			85			—			1,847
Other ancillary fees	587			77			—			664			536			29			—			565
Interest and dividend income	46			—			19			65			35			(1		)	40			74
Total revenues	32,276			4,285			19			36,580			30,772			1,521			40			32,333

Expenses:
Rental operating - expenses	7,288			1,131			—			8,419			6,757			401			4			7,162
Rental operating - payroll	3,167			495			—			3,662			3,108			198			—			3,306
Rental operating- real estate taxes	3,768			518			—			4,286			3,677			117			—			3,794
Subtotal - Rental operating expenses	14,223			2,144			—			16,367			13,542			716			4			14,262
Acquisition costs	—			—						—			—			1,290			—			1,290
Management fees	1,425			188			3,307			4,920			1,356			73			2,894			4,323
General and administrative	970			115			1,540			2,625			1,027			121			1,726			2,874
Loss on disposal of assets	196			90			—			286			102			435			—			537
Depreciation and amortization expense	12,481			2,370			—			14,851			12,803			390			—			13,193
Total expenses	29,295			4,907			4,847			39,049			28,830			3,025			4,624			36,479
Income (loss) before other (expense) income	2,981			(622		)	(4,828		)	(2,469		)	1,942			(1,504		)	(4,584		)	(4,146		)

Other (expense) income:
Net gains on dispositions of properties and joint venture interests	—			6,195			—			6,195			—			14,300			—			14,300
Interest expense	(8,250		)	(1,276		)	—			(9,526		)	(7,195		)	(768		)	—			(7,963		)
Insurance proceeds in excess of cost basis	169			—			—			169			—			—			—			—
Total other (expense) income	(8,081		)	4,919			—			(3,162		)	(7,195		)	13,532			—			6,337

Net (loss) income attributable to common stockholders	$	(5,100	)	$	4,297		$	(4,828	)	$	(5,631	)	$	(5,253	)	$	12,028		$	(4,584	)	$	2,191

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Revenues: The $1.4 million increase in rental revenues for the 27 properties we owned during both the three months ended September 30, 2018 and September 30, 2017 reflects the implementation of our investment strategy to increase monthly rental income after renovating and stabilizing operations and was primarily comprised of:



Multifamily Community	Rental Increase (in thousands)		Increase/ (Decrease) in Occupancy		Increase (Decrease) in Effective Monthly Revenue Per Unit (in dollars)
The Bryant at Yorba Linda	$	202	2.4	%	$	134
Providence in the Park	188		2.7	%	95
Skyview Apartment Homes	112		6.6	%	91
Heritage Pointe	110		1.5	%	72
Pointe Bonita Apartment Homes	107		1.4	%	106
Calloway at Las Colinas	104		2.0	%	44
South Lamar Village	82		2.4	%	108
Verona Apartment Homes	81		2.7	%	68
Meridian Pointe	79		0.5	%	76
The Estates at Johns Creek	74		2.9	%	17
All other, net	256
	$	1,395

Expenses: Our total rental operating expenses for the 27 properties we owned during both three month periods presented increased by $681,000 during the three months ended September 30, 2018, primarily driven by an increase in insurance premiums. Real estate tax expense increased by $91,000 due largely to higher real property assessments.

Total acquisition costs decreased by $1.3 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. There were no property acquisitions during the three months ended September 30, 2018. Additionally, effective January 1, 2018, property acquisitions are accounted for as asset acquisitions.

Total depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases, which are amortized over a period of approximately six to eight months after acquisition. The increases (decreases) in the components of depreciation and amortization during the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, were as follows (in thousands):



	Properties owned both periods			Properties purchased/sold during either period		Total
Depreciation	$	408		$	1,251	$	1,659
Amortization of intangibles	(730		)	729		(1		)
	$	(322	)	$	1,980	$	1,658

The overall increase in depreciation was due to the three property acquisitions as well as $20.5 million in capital improvements since September 30, 2017 made in accordance with our planned renovations. The overall increase in amortization of intangibles was due to the amortization of in-place leases during the three months ended September 30, 2018 on the three properties purchased since September 30, 2017.

Net gains on dispositions of properties and joint venture interests included in other (expense) income decreased by $8.1 million for the three months ended September 30, 2018, which had one disposition, as compared to the three months ended September 30, 2017, which had two dispositions, as detailed below (in thousands):

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Multifamily Community	Location	Sale Date	Contract Sales Price		Net Gains on Dispositions of Properties and Joint Venture Interests
2018 Dispositions:
Pheasant Run	Lee's Summit, MO	September 14, 2018	$	16,400	$	6,195

2017 Dispositions:
Deerfield	Hermantown, Minnesota	August 16, 2017	$	23,600	$	11,035
Stone Ridge	Columbia, South Carolina	September 27, 2017	10,534		3,265
					$	14,300

Interest expense increased by $1.6 million for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, which is due largely to a $82.8 million increase in new mortgages obtained subsequent to September 30, 2017 and due to a lesser extent to rising interest rates.

Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017:

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



	Nine Months Ended
	September 30,
	2018			2017
Revenues:
Rental income	$	96,995		$	86,557
Utility income	6,079			5,275
Other ancillary fees	1,683			1,571
Interest and dividend income	240			165
Total revenues	104,997			93,568

Expenses:
Rental operating - expenses	23,477			20,009
Rental operating- payroll	10,523			10,385
Rental operating- real estate taxes	12,501			11,096
Subtotal - Rental operating expenses	46,501			41,490
Acquisition costs	9			3,065
Management fees	14,312			12,530
General and administrative	8,161			8,546
Loss on disposal of assets	590			729
Depreciation and amortization expense	44,234			38,527
Total expenses	113,807			104,887
Loss before other income (expense)	(8,810		)	(11,319		)

Other income (expense):
Net gains on dispositions of properties and joint venture interests	6,195			22,735
Interest expense	(26,709		)	(21,351		)
Insurance proceeds in excess of cost basis	515			98
Total other expense	(19,999		)	1,482
Net loss attributable to common stockholders	$	(28,809	)	$	(9,837	)

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The following table presents the results of operations separated into two categories: the results of operations of the 26 properties and one performing loan that we owned for the entirety of both periods presented, properties purchased or sold during either of the periods presented, and company level revenues and expenses for the nine months ended September 30, 2018 and 2017 (in thousands):



	For the nine months ended												For the nine months ended
	September 30, 2018												September 30, 2017
	Properties owned both periods			Properties purchased/sold during either period			Company level			Total			Properties owned both periods			Properties purchased/sold during either period			Company level			Total
Revenues:
Rental income	$	82,160		$	14,835		$	—		$	96,995		$	78,837		$	7,720		$	—		$	86,557
Utility income	5,261			818			—			6,079			4,906			369			—			5,275
Ancillary tenant fees	1,482			201			—			1,683			1,425			146			—			1,571
Interest and dividend income	134			1			105			240			109			1			55			165
Total revenues	89,037			15,855			105			104,997			85,277			8,236			55			93,568

Expenses:
Rental operating - expenses	20,076			3,398			3			23,477			18,145			1,857			7			20,009
Rental operating - payroll	8,954			1,569			—			10,523			9,330			1,055			—			10,385
Rental operating- real estate taxes	10,455			2,046			—			12,501			10,357			739			—			11,096
Subtotal- Rental operating expenses	39,485			7,013			3			46,501			37,832			3,651			7			41,490
Acquisition costs	—			9			—			9			—			3,065			—			3,065
Management fees	3,940			708			9,664			14,312			3,779			380			8,371			12,530
General and administrative	2,680			395			5,086			8,161			2,880			432			5,234			8,546
Loss on disposal of assets	468			122			—			590			287			442			—			729
Depreciation and amortization expense	35,341			8,893			—			44,234			35,373			3,154			—			38,527
Total expenses	81,914			17,140			14,753			113,807			80,151			11,124			13,612			104,887
Income (loss) before other (expense) income	7,123			(1,285		)	(14,648		)	(8,810		)	5,126			(2,888		)	(13,557		)	(11,319		)

Other (expense) income:
Net gains on dispositions of properties and joint venture interests	—			6,195			—			6,195			—			22,735			—			22,735
Interest expense	(21,842		)	(4,867		)	—			(26,709		)	(18,610		)	(2,422		)	(319		)	(21,351		)
Insurance proceeds in excess of cost basis	387			128			—			515			72			26			—			98
Total other (expense) income	(21,455		)	1,456			—			(19,999		)	(18,538		)	20,339			(319		)	1,482

Net (loss) income attributable to common stockholders	$	(14,332	)	$	171		$	(14,648	)	$	(28,809	)	$	(13,412	)	$	17,451		$	(13,876	)	$	(9,837	)

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Revenues: The $3.3 million increase in rental income for the 26 properties we owned during both the nine months ended September 30, 2018 and the nine months ended September 30, 2017 reflects the implementation of our investment strategy to increase monthly rental income and occupancy rates after renovating and stabilizing operations and was primarily comprised of:



Multifamily Community	Rental Increase (in thousands)		Increase/(Decrease) in Occupancy		Increase in Effective Monthly Revenue Per Unit (in dollars)
Providence in the Park	$	405	0.9	%	82
The Bryant at Yorba Linda	371		(0.6	)%	125
Heritage Pointe	342		0.8	%	83
Village of Bonita Glen	311		1.2	%	106
Meridian Pointe	297		0.5	%	98
Calloway at Las Colinas	269		(0.3	)%	63
The Estates at Johns Creek	242		2.9	%	23
Verona Apartment Homes	230		1.3	%	82
Williamsburg	159		1.9	%	1
South Lamar Village	157		2.4	%	60
All other, net	540
	$	3,323

Expenses: Our total rental operating expenses for the 26 properties we owned during both nine month periods presented increased by $1.7 million during the nine months ended September 30, 2018, which was primarily driven by an increase of $512,000 in utility expenses resulting from extremes in weather temperatures. There was also an increase of $487,000 in operating expenses, excluding payroll and real estate taxes, largely driven by maintenance and turnover costs.

Total acquisition costs decreased by $3.1 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. Effective January 1, 2018, property acquisitions are accounted for as asset acquisitions. This resulted in acquisition fees being capitalized and no longer expensed. Acquisition fees paid and capitalized during the nine months ended September 30, 2018 for the purchase of the Addison at Sandy Springs and Bristol at Grapevine were approximately $1.7 million.

Total management fees increased by $1.8 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 due to a $1.3 million increase in the asset management fees paid to the Advisor related to recent acquisitions.

Total depreciation and amortization expense is comprised of the depreciation on our rental properties and amortization of intangible assets related to in-place leases which are amortized over a period of approximately six to eight months after acquisition. The increases (decreases) in the components of depreciation and amortization during the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, were as follows (in thousands):



	Properties owned both periods			Properties purchased/sold during either period		Total
Depreciation	$	1,524		$	3,660	$	5,184
Amortization of intangibles	(1,711		)	2,234		523
	$	(187	)	$	5,894	$	5,707

The overall increase in depreciation is due to the three property acquisitions as well as capital improvements made in accordance with our planned renovations since September 30, 2017. The overall increase in amortization of intangibles was due to the amortization of in-place leases during the nine months ended September 30, 2018 on the five properties purchased since May 2017.

Net gains on dispositions of properties and joint venture interests included in other (expense) income decreased by $16.5 million for the nine months ended September 30, 2018, which had one disposition, as compared to the nine months ended September 30, 2017, which had two dispositions, as detailed below (in thousands):

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Multifamily Community	Location	Sale Date	Contract Sales Price		Net Gains on Dispositions of Properties and Joint Venture Interests
2018 Dispositions:
Pheasant Run	Lee's Summit, MO	September 14, 2018	$	16,400	$	6,195

2017 Dispositions:
Chisholm Place	Plano, Texas	May 10, 2017	$	21,250	$	6,922
Mosaic	Oklahoma City, Oklahoma	May 12, 2017	6,100		1,513
Deerfield	Hermantown, Minnesota	August 16, 2017	23,600		11,035
Stone Ridge	Columbia, South Carolina	September 27, 2017	10,534		3,265
					$	22,735

Interest expense increased by $5.4 million for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, of which $3.8 million relates to a $176.5 million increase in debt due to refinancing or new loans obtained since May 2017 and due to a lesser extent to rising interest rates. These increases were offset by a decrease in interest expense of $1.3 million due to the sale of Chisholm Place, Deerfield, and Stone Ridge during the twelve months ended December 31, 2017.

Liquidity and Capital Resources

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

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

Capital Expenditures

We deployed a total of $16.7 million during the nine months ended September 30, 2018 for capital expenditures. The properties in which we deployed the most capital during the nine months ended September 30, 2018 are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):



	Capital deployed during the nine months ended		Remaining capital budgeted
Multifamily Community	September 30, 2018		Remaining capital budgeted
The Bryant at Yorba Linda	$	2,482	$	5,910
Providence in the Park	1,739		2,438
Terrace at Lake Mary	1,609		2,477
Green Trails Apartment Homes	1,355		769
Heritage Pointe	1,262		1,784
Point Bonita Apartment Homes	1,210		792
Williamsburg	1,176		294
Calloway at Las Colinas	937		978
Courtney Meadows	740		3,455
The Estates At Johns Creek	607		273
All other properties	3,534		9,198
	$	16,651

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Initial Public Offering

The primary portion of our initial public offering closed on December 13, 2013. On December 26, 2013, the unsold primary offering shares were deregistered and, on December 30, 2013, the registration of the shares issuable pursuant to the distribution reinvestment plan was continued pursuant to a Registration Statement on Form S-3. A new Registration Statement on Form S-3 was filed in May 2016 to continue the distribution reinvestment plan offering. We continue to offer up to $120.0 million of shares of common stock pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares at $10.26 ($10.94 per share prior to May 2018) per share.

Gross Offering Proceeds

As of September 30, 2018, shares of our $0.01 par value common stock have been issued as follows (dollars in thousands):



	Shares Issued		Gross Proceeds
Shares issued through private offering	1,263,727		$	12,582
Shares issued through primary public offering ⁽¹⁾	62,485,461		622,077
Shares issued through stock distributions	2,132,266		—
Shares issued through distribution reinvestment plan	13,429,165		138,058
Shares issued in conjunction with the Advisor's initial investment, net of 4,500 share conversion	15,500		155
Total	79,326,119		$	772,872
Shares redeemed and retired	(8,762,531	)
Total shares outstanding at September 30, 2018	70,563,588

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

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Mortgage Debt

The following table presents a summary of our mortgage notes payable, net (in thousands):



	September 30, 2018										December 31, 2017
Collateral	Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value		Outstanding Borrowings		Premium (Discount)			Deferred finance costs, net			Carrying Value
Vista Apartment Homes	$	14,674	$	—		$	(113	)	$	14,561	$	14,896	$	—		$	(140	)	$	14,756
Cannery Lofts	13,100		—			(144		)	12,956		13,100		—			(165		)	12,935
Trailpoint at the Woodlands	18,126		—			(163		)	17,963		18,368		—			(188		)	18,180
Verona Apartment Homes	32,970		—			(433		)	32,537		32,970		—			(475		)	32,495
Skyview Apartment Homes	28,400		—			(376		)	28,024		28,400		—			(413		)	27,987
Maxwell Townhomes	13,139		—			(88		)	13,051		13,342		—			(109		)	13,233
Pinehurst	7,249		—			(111		)	7,138		7,339		—			(128		)	7,211
Pheasant Run	—		—			—			—		6,250		—			—			6,250
Retreat of Shawnee	12,486		—			—			12,486		12,682		7			(2		)	12,687
Evergreen at Coursey Place	26,272		61			(59		)	26,274		26,639		77			(75		)	26,641
Pines of York	14,498		(189		)	(36		)	14,273		14,717		(235		)	(44		)	14,438
The Estates at Johns Creek	47,836		—			(199		)	47,637		48,603		—			(286		)	48,317
Perimeter Circle	16,634		—			(42		)	16,592		16,923		—			(84		)	16,839
Perimeter 5550	13,128		—			(35		)	13,093		13,356		—			(70		)	13,286
Aston at Cinco Ranch	22,611		—			(167		)	22,444		22,942		—			(210		)	22,732
Sunset Ridge 1	18,907		138			(109		)	18,936		19,254		189			(150		)	19,293
Sunset Ridge 2	2,846		19			(14		)	2,851		2,890		26			(19		)	2,897
Calloway at Las Colinas	33,863		—			(193		)	33,670		34,396		—			(241		)	34,155
South Lamar Village	11,977		—			(41		)	11,936		12,177		—			(80		)	12,097
Heritage Pointe	25,498		—			(252		)	25,246		25,912		—			(284		)	25,628
The Bryant at Yorba Linda	67,500		—			(356		)	67,144		67,500		—			(461		)	67,039
Point Bonita Apartment Homes	26,225		1,435			(246		)	27,414		26,525		1,660			(285		)	27,900
The Westside Apartments	36,820		—			(354		)	36,466		36,820		—			(390		)	36,430
Tech Center Square	11,984		—			(140		)	11,844		12,141		—			(164		)	11,977
Williamsburg	53,995		—			(613		)	53,382		53,995		—			(706		)	53,289
Retreat at Rocky Ridge	11,375		—			(193		)	11,182		11,375		—			(223		)	11,152
Providence in the Park	47,000		—			(456		)	46,544		47,000		—			(524		)	46,476
Green Trails Apartment Homes	61,500		—			(586		)	60,914		61,500		—			(667		)	60,833
Meridian Pointe	39,500		—			(518		)	38,982		39,500		—			(588		)	38,912
Terraces at Lake Mary	32,250		—			(333		)	31,917		32,250		—			(377		)	31,873
Courtney Meadows Apartments	27,100		—			(325		)	26,775		27,100		—			(367		)	26,733
Addison at Sandy Springs	22,750		—			(304		)	22,446		—		—			—			—
Bristol at Grapevine	32,922		—			(380		)	32,542		—		—			—			—
	$	845,135	$	1,464		$	(7,379	)	$	839,220	$	800,862	$	1,724		$	(7,915	)	$	794,671

For maturity dates, related interest rates, monthly debt service, and monthly escrow payments, see Note 10 of the notes to our consolidated financial statements.

As of September 30, 2018, the weighted average interest rate of all our outstanding indebtedness was 4.29%.

Based on current lending market conditions, we expect that the debt financing we incur, on a total portfolio basis, will not exceed 55% to 65% of the cost of our real estate investments (before deducting depreciation or other non-cash reserves) plus the value of our other assets (64% as of September 30, 2018). We may also increase the amount of debt financing we use with respect to an investment over the amount originally incurred if the value of the investment increases subsequent to our acquisition and if credit market conditions permit us to do so. Our charter limits us from incurring debt such that our total liabilities may not

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exceed 75% of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets, although we may exceed this limit under certain circumstances. We expect that our primary liquidity source for acquisitions and long-term funding will include proceeds from dispositions and, to the extent we co-invest with other entities, capital from any future joint venture partners. We may also pursue a number of potential other funding sources, including mortgage loans, portfolio level credit lines and government financing.

Operating Costs

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor and its affiliates. We make payments to our Advisor and its affiliates in connection with the acquisition of real estate investments and for the management of our assets and costs incurred by our Advisor and its affiliates in providing services to us. We describe these payments in more detail in Note 13 of the notes to our consolidated financial statements.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended September 30, 2018 did not exceed the charter-imposed limitation.

Dispositions

On September 4, 2018,we entered into an agreement to sell our interest in Retreat at Shawnee, located in Shawnee, Kansas, for $25.0 million, which closed on October 19, 2018. Retreat at Shawnee is included in assets held for sale-rental properties in the consolidated balance sheet as of September 30, 2018. We expect to recognize a gain on sale during the three months ended December 31, 2018.

Distributions

For the nine months ended September 30, 2018, we paid aggregate distributions of $31.9 million, including $12.3 million of distributions paid in cash and $19.6 million of distributions reinvested in shares of common stock through our distribution reinvestment plan, as follows (in thousands, except per share data):



Record Date	Per Common Share		Distribution Date	Distributions reinvested in Shares of Common Stock		Net Cash Distribution		Total Aggregate Distribution
January 30, 2018	$	0.05	January 31, 2018	$	2,217	$	1,352	$	3,569
February 27, 2018	0.05		February 28, 2018	2,214		1,362		3,576
March 29, 2018	0.05		April 2, 2018	2,182		1,353		3,535
April 27, 2018	0.05		April 30, 2018	2,181		1,364		3,545
May 30, 2018	0.05		May 31, 2018	2,176		1,379		3,555
June 28, 2018	0.05		June 29, 2018	2,151		1,373		3,524
July 30, 2018	0.05		July 31, 2018	2,155		1,380		3,535
August 30, 2018	0.05		August 31, 2018	2,151		1,394		3,545
September 27, 2018	0.05		September 28, 2018	2,133		1,384		3,517
	$	0.45		$	19,560	$	12,341	$	31,901

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Distributions paid, distributions declared and sources of distributions paid were as follows for the nine months ended September 30, 2018 (dollars in thousands):



	Distributions Paid									Distributions Declared			Sources of Distributions Paid
							Cash Provided By (Used In) Operating Activities						Operating Activities	Debt Financing	Property Dispositions
2018	Cash		Distributions Reinvested (DRIP)		Total		Cash Provided By (Used In) Operating Activities			Total		Per Share	Amount Paid/Percent of Total	Amount Paid/Percent of Total	Amount Paid/Percent of Total
First Quarter	$	2,714	$	4,431	$	7,145	$	(4,986	)	$	10,680	$0.15	$0 / 0%	$0 / 0%	$7,145 / 100% ⁽¹⁾
Second Quarter	5,469		8,690		14,159		7,540			10,624		$0.15	$7,540 / 53%	$0 / 0%	$6,619 / 47% ⁽¹⁾
Third Quarter	4,158		6,439		10,597		6,774			10,597		$0.15	$6,774 / 64%	$0 / 0%	$3,823 / 36%
	$	12,341	$	19,560	$	31,901	$	9,328		$	31,901


(1)	Cash for distributions paid was funded by cash on hand remaining from prior year property dispositions.

Cash distributions paid since inception were as follows (in thousands, except per share data):



Fiscal Year Paid	Per Common Share		Distribution reinvested in shares of Common Stock		Net Cash Distribution		Total Aggregate Distribution
2012	$	0.15	$	1,052	$	841	$	1,893
2013	0.41		9,984		4,757		14,741
2014	0.48		22,898		9,959		32,857
2015	0.60		28,959		13,257		42,216
2016	0.60		28,497		14,508		43,005
2017	0.60		27,114		15,919		43,033
2018	0.45		19,560		12,341		31,901
	$	3.29	$	138,064	$	71,582	$	209,646

Our net loss attributable to common stockholders' for the nine months ended September 30, 2018 was $28.8 million and net cash provided by operating activities was $9.3 million. Our cumulative cash distributions and net loss attributable to common shareholders from inception through September 30, 2018 were $209.6 million and $147.2 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from dispositions of properties and joint venture interests and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities or proceeds from dispositions of properties and joint venture interests, we will have fewer funds available for investment in commercial real estate and real estate-related debt and the overall return to our stockholders may be reduced.

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

Funds from operations attributable to common stockholders, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance. We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests. We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our

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performance. Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but are not limited to: i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”).

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


(1)	acquisition fees and expenses (incurred prior to January 1, 2018, as explained below);


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


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


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


(5)	impairment charges;


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


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


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


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


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


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

We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods.

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

•

Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Under current GAAP, acquisition costs related to business combinations are expensed and are capitalized for asset acquisitions. Prior to January 1, 2018, all of our acquisitions were accounted for as business combinations and their related costs were expensed. On January 1, 2018, we adopted Financial Accounting Standards Board Accounting Standards Update 2017-01, and we anticipate that most property acquisitions will be treated as asset acquisitions and the related costs will be capitalized. Acquisition costs will continue to be funded from both the proceeds of debt financing and the proceeds of property dispositions, not from cash flows from operations. We believe that by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties. Acquisition expenses include those costs paid to our Advisor or third parties.

•

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

•

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

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management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.

•

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

•

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

By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance. We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry. MFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies that are not as affected by other MFFO adjustments.

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

Neither FFO, MFFO nor AFFO should be considered as an alternative to net income attributable to common stockholders, nor as an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions. In particular, as we may continue to acquire properties as part of our ongoing operations, acquisition costs and other adjustments that are increases to MFFO and AFFO are, and may continue to be, a significant use of cash. Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements. Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs.

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The following section presents our calculation of FFO, MFFO and AFFO and provides additional information related to our operations (in thousands, except per share amounts).



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Net loss – GAAP	$	(5,631	)	$	2,191		$	(28,809	)	$	(9,837	)
Net gains on dispositions of properties and joint venture interests	(6,195		)	(14,300		)	(6,195		)	(22,735		)
Depreciation expense	14,011			12,351			41,128			35,944
FFO	2,185			242			6,124			3,372
Adjustments for straight-line rents	82			(23		)	(49		)	(136		)
Amortization of intangible lease assets	840			842			3,106			2,583
Realized loss on change in fair value of interest rate cap	—			5			—			28
Debt premium amortization	(85		)	(120		)	(260		)	(359		)
Acquisition costs	—			1,290			9			3,065
MFFO	3,022			2,236			8,930			8,553
Net gains on dispositions of properties and joint venture interests	6,195			14,300			6,195			22,735
AFFO	$	9,217		$	16,536		$	15,125		$	31,288

Basic and diluted (loss) income per common share - GAAP	$	(0.09	)	$	0.03		$	(0.41	)	$	(0.13	)
FFO per common share	$	0.03		—			$	0.09		$	0.05
MFFO per common share	$	0.04		$	0.03		$	0.13		$	0.12
AFFO per common share	$	0.13		$	0.23		$	0.21		$	0.43

Weighted average shares outstanding ⁽¹⁾	70,790			71,703			71,064			71,967


(1)	None of the 49,995 shares of convertible stock are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of September 30, 2018 or September 30, 2017.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities. We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2017 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”

Off-Balance Sheet Arrangements

As of September 30, 2018 and December 31, 2017, we did not have any off-balance sheet arrangements or obligations.

Subsequent Events

On October 19, 2018, we sold Retreat at Shawnee, located in Shawnee, KS, for $25.0 million. We expect to record a gain on the sale during the three months ended December 31, 2018.

On October 30, 2018, our Board of Directors declared a $0.05 per share cash distribution to common stockholders of record at the close of business on each of the following record dates: October 30, 2018, November 29, 2018, and December 28, 2018. Such distributions were paid or will be paid on October 31, 2018, November 30, 2018, and December 31, 2018, respectively.

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

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we entered into a total of 17 interest rate caps that were designated as cash flow hedges during the years 2013 through 2021. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

As of September 30, 2018 and December 31, 2017, we had $597.2 million and $536.4 million, respectively, in variable rate outstanding borrowings. If interest rates on the variable rate outstanding borrowings had been 100 basis points higher during the nine months ended September 30, 2018 and the year ended December 31, 2017, our annual interest expense would have increased by approximately $4.4 million and $4.6 million, respectively.

In addition, changes in interest rates affect the fair value of our fixed rate outstanding borrowings. As of September 30, 2018 and December 31, 2017, we had $247.9 million and $264.4 million, respectively, in fixed rate outstanding borrowings. As of September 30, 2018 and December 31, 2017, our fixed rate outstanding borrowings had an estimated aggregate fair value of $247.8 million and $272.0 million, respectively. Fair value is computed using rates available to us for debt with similar terms and remaining maturities. If interest rates had been 100 basis points higher as of September 30, 2018 and December 31, 2017, the fair value of these fixed rate outstanding borrowings would have decreased by $5.8 million and $7.7 million, respectively.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision of our principal executive officer and principal financial officer, we have carried out an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as of September 30, 2018.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.


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

Unregistered Sale of Equity Securities

All securities sold by us during the nine months ended September 30, 2018 were sold in an offering registered under the Securities Act of 1933, as amended (the "Securities Act").

Redemption of Securities

During the three months ended September 30, 2018, we redeemed shares of our common stock as follows:



Period	Total Number of Shares Redeemed ⁽¹⁾	Average Price Paid per Share		Year-to-Date Number of Shares Purchased as Part of a Publicly Announced Plan or Program ⁽²⁾	Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
July 2018	—	$	—	—	(3)
August 2018	—	$	—	—	(3)
September 2018	755,014	$	10.29	2,604,447	(3)
	755,014


(1)	All redemptions of equity securities in the three months ended September 30, 2018 were made pursuant to our share redemption program. All redemption requests tendered were honored during the three months ended September 30, 2018.


(2)	The share redemption program commenced on June 16, 2010 and was subsequently amended on September 29, 2011 and March 28, 2018.


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

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

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

On March 28, 2018, our Board of Directors approved and adopted a Second Amended and Restated Share Redemption Program (the “Amended SRP”). Pursuant to the Amended SRP, we redeem shares at a purchase price equal to 95% of the current net asset value per share redeemed, except for redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility. The Amended SRP became effective for redemptions occurring after April 29, 2018.

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

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ITEM 3.	DEFAULTS UPON SENIOR SECURITIES


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


(b)	Not applicable.

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ITEM 6.	EXHIBITS



Exhibit No.			Description
3.1			Amended and Restated Articles of Incorporation (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
3.2			Bylaws (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
4.1			Form of Distribution Reinvestment Plan Enrollment Form (incorporated by reference to the Company’s Registration Statement on Form S-3 (No. 333-211721) filed May 31, 2016)
4.2			Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed November 12, 2009)
4.3			Second Amended and Restated Distribution Reinvestment Plan (incorporated by reference to the Company’s Registration Statement on Form S-3 (No. 333-211721) filed May 31, 2016)
4.4			Third Amended and Restated Distribution Reinvestment Plan dated March 28, 2018 (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K filed March 29, 2018)
10.1			Renewal Agreement, dated September 15, 2018, between Resource Real Estate Opportunity REIT, Inc. and Resource Real Estate Opportunity Advisor, LLC



31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2			Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1			Amended and Restated Share Redemption Program (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 14, 2011)
99.2			Second Amended and Restated Share Redemption Program dated March 28, 2018 (incorporated by reference to Exhibit 99.2 to the Company's Annual Report on Form 10-K filed March 29, 2018)
101.1			Interactive Data Files

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SIGNATURES

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



		RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.

November 9, 2018	By:	/s/ Alan F. Feldman
		ALAN F. FELDMAN
		Chief Executive Officer
		(Principal Executive Officer)

November 9, 2018	By:	/s/ Steven R. Saltzman
		STEVEN R. SALTZMAN
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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Resource Real Estate Opportunity REIT, Inc. - FORM 10-Q - November 9, 2018

Attached files

Resource Real Estate Opportunity REIT, Inc. Reports