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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549  

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

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

For the transition period from __________ to __________

Commission file number 000-55430

Resource Real Estate Opportunity REIT II, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

80-0854717

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1845 Walnut Street, 18th Floor, Philadelphia, PA, 19103

(Address of principal executive offices) (Zip code)

 

(215) 231-7050

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N/A

N/A

N/A

 

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 No     

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 No

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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

As of May 6, 2020, there were 60,326,767 outstanding shares of common stock of Resource Real Estate Opportunity REIT II, Inc.

 


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

 

 

 

 

 

 

 

PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets – March 31, 2020 (unaudited) and December 31, 2019

4

 

 

 

 

Consolidated Statements of Operations and Comprehensive Loss - Three Months Ended March 31, 2020 and 2019 (unaudited)

5

 

 

 

 

Consolidated Statements of Changes in Stockholders' Equity - Three Months Ended March 31, 2020 and 2019 (unaudited)

6

 

 

 

 

Consolidated Statements of Cash Flows - Three Months Ended March 31, 2020 and 2019 (unaudited)

7

 

 

 

 

Notes to Consolidated Financial Statements – March 31, 2020 (unaudited)

8

 

 

 

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

40

 

 

 

ITEM 4.

Controls and Procedures

40

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1A.

Risk Factors

43

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

ITEM 6.

Exhibits

44

 

 

 

SIGNATURES

 

45

 

 

 

 

 


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.  You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and which could materially affect the Company’s results of operations, financial condition, cash flows, performance or future achievements or events. Currently, one of the most significant factors is the potential adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company, particularly its ability to collect rent, the personal financial condition of its tenants and their ability to pay rent, and the real estate market and the global economy and financial markets. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The extent to which COVID-19 impacts the Company and its tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, you should interpret many of the risks identified in our Annual Report on Form 10-K for the year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts COVID-19. 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.

3


PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

March 31,

2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Rental properties, net

 

$

726,412

 

 

$

735,530

 

 

 

 

726,412

 

 

 

735,530

 

 

 

 

 

 

 

 

 

 

Cash

 

 

34,094

 

 

 

39,647

 

Restricted cash

 

 

7,385

 

 

 

6,534

 

Subtotal - cash and restricted cash

 

 

41,479

 

 

 

46,181

 

Tenant receivables, net

 

 

111

 

 

 

107

 

Due from related parties

 

 

-

 

 

 

297

 

Prepaid expenses and other assets

 

 

3,663

 

 

 

2,147

 

Total assets

 

$

771,665

 

 

$

784,262

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Mortgage notes payable, net

 

$

546,244

 

 

$

547,875

 

Accounts payable and accrued expenses

 

 

12,412

 

 

 

11,502

 

Due to related parties

 

 

539

 

 

 

432

 

Tenant prepayments

 

 

581

 

 

 

634

 

Security deposits

 

 

1,534

 

 

 

1,513

 

Distributions payable

 

 

-

 

 

 

5,993

 

Total liabilities

 

 

561,310

 

 

 

567,949

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

1

 

 

 

1

 

Common stock (par value $.01; 1,000,000,000 shares authorized; and 60,326,297 and 60,094,623 shares outstanding, respectively)

 

 

602

 

 

 

600

 

Additional paid-in capital

 

 

530,368

 

 

 

528,464

 

Accumulated other comprehensive loss

 

 

(116

)

 

 

(189

)

Accumulated deficit

 

 

(320,500

)

 

 

(312,563

)

Total stockholders’ equity

 

 

210,355

 

 

 

216,313

 

Total liabilities and stockholders’ equity

 

$

771,665

 

 

$

784,262

 

 

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

4


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Rental income

 

$

21,407

 

 

$

21,959

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

Rental operating - expenses

 

 

3,846

 

 

 

3,131

 

Rental operating - payroll

 

 

1,736

 

 

 

2,009

 

Rental operating - real estate taxes

 

 

2,902

 

 

 

3,162

 

Subtotal - Rental operating expenses

 

 

8,484

 

 

 

8,302

 

Management fees

 

 

3,127

 

 

 

3,395

 

General and administrative

 

 

2,090

 

 

 

2,289

 

Loss on disposal of assets

 

 

63

 

 

 

44

 

Depreciation and amortization expense

 

 

10,054

 

 

 

9,801

 

Total expenses

 

 

23,818

 

 

 

23,831

 

Loss before net gain on disposition

 

 

(2,411

)

 

 

(1,872

)

Net gain on disposition of property

 

 

-

 

 

 

20,619

 

Income (loss) before other income (expense)

 

 

(2,411

)

 

 

18,747

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

11

 

 

 

64

 

Interest expense

 

 

(5,526

)

 

 

(7,114

)

Net income (loss)

 

 

(7,926

)

 

 

11,697

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Designated derivatives, fair value adjustment

 

 

73

 

 

 

32

 

Comprehensive income (loss)

 

$

(7,853

)

 

$

11,729

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

60,215

 

 

 

61,613

 

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per common share

 

$

(0.13

)

 

$

0.19

 

 

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

5


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(in thousands)

(unaudited)

 

 

Common Stock

 

 

Convertible Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance, at January 1, 2020

 

 

60,095

 

 

$

600

 

 

 

50

 

 

$

1

 

 

$

528,464

 

 

$

(189

)

 

$

(312,563

)

 

$

216,313

 

Common stock issued through distribution reinvestment plan

 

 

371

 

 

 

4

 

 

 

 

 

 

 

 

 

3,127

 

 

 

 

 

 

 

 

 

3,131

 

True-up of prior year cash distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

(11

)

Common stock redemptions

 

 

(140

)

 

 

(2

)

 

 

 

 

 

 

 

 

(1,223

)

 

 

 

 

 

 

 

 

(1,225

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

73

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,926

)

 

 

(7,926

)

Balance, at March 31, 2020

 

 

60,326

 

 

$

602

 

 

 

50

 

 

$

1

 

 

$

530,368

 

 

$

(116

)

 

$

(320,500

)

 

$

210,355

 

 

 

 

 

 

 

Common Stock

 

 

Convertible Stock

 

 

Additional

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

Balance, at January 1, 2019

 

 

61,379

 

 

$

612

 

 

 

50

 

 

$

1

 

 

$

539,493

 

 

$

(379

)

 

$

(276,261

)

 

$

263,466

 

Common stock issued through distribution reinvestment plan

 

 

570

 

 

 

6

 

 

 

 

 

 

 

 

 

4,858

 

 

 

 

 

 

 

 

 

4,864

 

Distributions declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,132

)

 

 

(6,132

)

Common stock redemptions

 

 

(664

)

 

 

(7

)

 

 

 

 

 

 

 

 

(5,946

)

 

 

 

 

 

 

 

 

(5,953

)

Designated derivatives, fair value adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

32

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,697

 

 

 

11,697

 

Balance, at March 31, 2019

 

 

61,285

 

 

$

611

 

 

 

50

 

 

$

1

 

 

$

538,405

 

 

$

(347

)

 

$

(270,696

)

 

$

267,974

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

6


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(7,926

)

 

$

11,697

 

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Loss on disposal of assets

 

 

63

 

 

 

44

 

Net gain on disposition of property

 

 

-

 

 

 

(20,619

)

Depreciation and amortization

 

 

10,054

 

 

 

9,801

 

Amortization of deferred financing costs

 

 

263

 

 

 

288

 

Amortization of mortgage premiums

 

 

(28

)

 

 

(28

)

Realized loss on ineffectiveness of interest rate caps

 

 

(34

)

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Tenant receivables, net

 

 

(4

)

 

 

27

 

Due from related parties

 

 

296

 

 

 

51

 

Prepaid expenses and other assets

 

 

(1,391

)

 

 

78

 

Due to related parties

 

 

107

 

 

 

(74

)

Accounts payable and accrued expenses

 

 

909

 

 

 

304

 

Tenant prepayments

 

 

(53

)

 

 

58

 

Security deposits

 

 

22

 

 

 

67

 

Net cash provided by operating activities

 

 

2,278

 

 

 

1,694

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Proceeds from disposal of property, net of closing costs

 

 

 

 

 

32,882

 

Capital expenditures

 

 

(1,000

)

 

 

(1,645

)

Net cash provided by (used in) investing activities

 

 

(1,000

)

 

 

31,237

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Redemptions of common stock

 

 

(1,225

)

 

 

(5,953

)

Repayments on mortgage notes payable

 

 

(1,866

)

 

 

(1,225

)

Purchase of interest rate caps

 

 

(16

)

 

 

-

 

Distributions paid on common stock

 

 

(2,873

)

 

 

(4,035

)

Net cash used in financing activities

 

 

(5,980

)

 

 

(11,213

)

Net increase (decrease) in cash and restricted cash

 

 

(4,702

)

 

 

21,718

 

Cash and restricted cash at beginning of period

 

 

46,181

 

 

 

47,988

 

Cash and restricted cash at end of period

 

$

41,479

 

 

$

69,706

 

 

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sums to the total of such amounts shown on the consolidated statements of cash flows:

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash

 

$

34,094

 

 

$

63,004

 

Restricted cash

 

 

7,385

 

 

 

6,702

 

Total cash and restricted cash shown in the consolidated balance sheets

 

$

41,479

 

 

$

69,706

 

 

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

7


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2020

(unaudited)

NOTE 1 - NATURE OF BUSINESS AND OPERATIONS (LOSS)

Resource Real Estate Opportunity REIT II, Inc. (the “Company”) was organized in Maryland on September 28, 2012. The Company offered up to 100,000,000 shares of common stock in its primary initial public offering for $10 per share, with discounts available to certain categories of investors. The primary portion of the offering closed on February 6, 2016. The Company continued to offer up to 10,000,000 shares pursuant to the Company’s distribution reinvestment plan at a purchase price equal to 95% of the estimated net asset value per share. On January 23, 2020, the Company filed a Registration Statement to offer an additional 1,500,000 shares pursuant to the Company’s distribution reinvestment plan. The Company has adopted a fiscal year ending December 31.

Resource Real Estate Opportunity Advisor II, LLC (the “Advisor”) is a wholly owned subsidiary of Resource Real Estate, LLC (the “Sponsor”) and an indirect wholly owned subsidiary of Resource America, Inc. (“RAI”). The Advisor acts as the Company's external advisor and manages the Company's day-to-day operations and its portfolio of real estate investments and provides asset-management, marketing, investor relations and other administrative services on the Company's behalf, all subject to the supervision of the Company's Board of Directors.

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

As of March 31, 2020, a total of 60,326,297 shares, including the additional shares purchased by the Advisor and shares issued through the distribution reinvestment plan, have been issued resulting in gross offering proceeds of $644.8 million. As of March 31, 2020, the Company had issued 10,197,719 shares for $88.5 million pursuant to its distribution reinvestment plan.

The Company’s objective is to take advantage of the Sponsor's dedicated multifamily investing and lending platforms to invest in multifamily assets across the entire spectrum of investments in order to provide stockholders with growing cash flow and increasing asset values. The Company has acquired and may continue to acquire commercial real estate assets, principally underperforming multifamily rental properties which the Company will renovate and stabilize in order to increase rents, and may acquire, to a lesser extent, real estate related debt.

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 “Code”). 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 thereto, as of March 31, 2020, are unaudited and prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all of the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three months ended March 31, 2020 may not necessarily be indicative of the results of operations for the full year ending December 31, 2020.

 

COVID-19 Pandemic

 

Currently, one of the most significant risks and uncertainties facing the Company and the real estate industry generally is the potential adverse effect of the ongoing public health crisis of the novel coronavirus disease (COVID-19) pandemic. The extent to which the COVID-19 pandemic impacts the Company’s operations and those of its tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of

8


the pandemic and containment measures, among others. See Note 15, “Subsequent Events” for a further discussion on the COVID-19 pandemic.

 

 

 

9


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

(unaudited)

 

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 consolidated financial statements have been prepared in conformity with GAAP.

Principles of Consolidation

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

 

Subsidiary

 

Apartment Complex

 

Number of Units

 

Property Location

RRE Opportunity Holdings II, LLC

 

N/A

 

N/A

 

N/A

RRE Opportunity OP II, LP

 

N/A

 

N/A

 

N/A

RRE Bear Creek Holdings, LLC, or Bear

   Creek

 

Adair off Addison

 

152

 

Dallas, TX

RRE Oak Hill Holdings, LLC, or Oak Hill

 

Overton Trails

 

N/A (1)

 

N/A (1)

RRE Buckhead Holdings, LLC, or

   Buckhead

 

Uptown Buckhead

 

216

 

Atlanta, GA

RRE Farrington Holdings, LLC, or

   Farrington

 

Crosstown at Chapel Hill

 

411

 

Chapel Hill, NC

RRE Mayfair Chateau Holdings, LLC, or

   Mayfair Chateau

 

The Brookwood

 

274

 

Homewood, AL

RRE Fairways of Bent Tree Holdings, LLC,

   or Fairways of Bent Tree

 

Adair off Addison Apartment

Homes

 

200

 

Dallas, TX

RRE Montclair Terrace Holdings, LLC, or

   Montclair Holdings

 

Montclair Terrace

 

188

 

Portland, OR

RRE Grand Reserve Holdings, LLC, or

   Grand Reserve

 

Grand Reserve

 

319

 

Naperville, IL

RRE Canterwood Holdings, LLC, or

   Canterwood

 

Verdant Apartment Homes

 

216

 

Boulder, CO

RRE Spalding Crossing Holdings, LLC, or

   Spalding Crossing

 

1000 Spalding Apartment Homes

 

252

 

Atlanta, GA

RRE Fox Ridge Holdings, LLC, or Fox

   Ridge

 

Arcadia Apartment Homes

 

300

 

Centennial, CO

RRE Riverlodge Holdings, LLC, or

   Riverlodge

 

Ravina Apartment Homes

 

498

 

Austin, TX

RRE Breckenridge Holdings, LLC, or

   Breckenridge

 

81 Fifty at West Hills Apartment

Homes

 

357

 

Portland, OR

RRE Santa Rosa Holdings, LLC, or Santa

   Rosa

 

The Palmer at Las Colinas

 

476

 

Irving, TX

RRE Windbrooke Holdings, LLC, or

   Windbrooke Crossing

 

Windbrooke Crossing

 

236

 

Buffalo Grove, IL

RRE Woods Holdings, LLC, or The Woods

   of Burnsville

 

The Woods of Burnsville

 

400

 

Burnsville, MN

RRE Indigo Creek Holdings, LLC

 

Indigo Creek

 

408

 

Glendale, AZ

RRE Martin's Point Holdings, LLC

 

Martin's Point

 

256

 

Lombard, IL

 

N/A - Not Applicable

(1)   Overton Trails was sold on February 28, 2019

All intercompany accounts and transactions have been eliminated in consolidation.

10


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

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

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 March 31, 2020 and December 31, 2019, the Company had no rental properties included in assets held for sale.  

Rental Properties

The Company records acquired rental properties at fair value on their 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's estimated useful lives of its assets by class are as follows:

 

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. Construction management fees are capitalized along with the related asset. Costs of repairs and maintenance are expensed as incurred.

Concentration of Risk

As of March 31, 2020, the Company's real estate investments located in Texas, Illinois, Colorado, Oregon and Georgia represented approximately 19.6%, 18.9%, 15.6%, 14.1% and 9.1% of the net book value of its rental property assets, respectively. Any adverse economic or real estate developments in these markets, such as the impact of the COVID-19 pandemic, business layoffs or downsizing, industry slowdowns, relocations of businesses, adverse weather events, changing demographics and other factors, or any decrease in demand for multifamily rentals resulting from the local business climate, could adversely affect the Company's operating results and its ability to make distributions to stockholders.

Impairment of Long Lived Assets

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

If an impairment exists, due to the Company's inability to recover the carrying value of a property, an impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used. For properties held for sale, the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset. These assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net income. As of March 31, 2020, the Company evaluated whether the global economic disruption caused by the COVID-19 pandemic was an impairment indicator. The Company examined a number of factors and concluded that there was no indication that the carrying value of the Company's investments in real estate might not be recoverable as of March 31, 2020. The Company did not recognize any impairment charges during the three months ended March 31, 2020 and 2019.

11


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

(unaudited)

 

Allocation of Purchase Price of Acquired Assets

On January 1, 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business ("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 that 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 screen is not met, and 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 relative fair value.

Upon the acquisition of real properties, the Company allocates the purchase price 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-cancellable 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-cancellable terms of the respective leases.

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

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

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

Revenue Recognition

The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases where collection is considered probable, on a straight-line basis over the term of the related lease.

The future minimum rental payments to be received from noncancelable operating leases are $41.9 million and $1.6 million for the 12-month periods ending March 31, 2021 and 2022, respectively, and none thereafter.

Revenue is primarily derived from the rental of residential housing units for which the Company receives minimum rents pursuant to underlying tenant lease agreements.  The Company also receives utility reimbursements, other ancillary tenant fees for administration of leases, late payments and amenities, which are charged to residents and recognized monthly as

12


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

(unaudited)

 

earned.  The Company elected the practical expedient to not separate lease and non-lease components and has presented property revenues combined based upon the lease being determined the predominant component.  The Company also has revenues sharing arrangements of cable income from contracts with cable providers at the Company's properties. Included in accrued expenses and other liabilities on the consolidated balance sheet at March 31, 2020 and December 31, 2019 is a $555,000 and $573,000 contract liability related to deferred revenue from contracts with cable providers. The Company recognizes income from these contracts on a straight line basis over the contract periods of 10 years to 12 years. In the three months ended March 31, 2020 and 2019, approximately $18,000 and $76,000, respectively, 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, and the condition of the general economy and the industry as a whole. The Company writes off receivables when they become uncollectible.  At March 31, 2020, the allowance for uncollectible accounts was $16,000. At December 31, 2019, the allowance for uncollectible accounts was $44,000.

Income Taxes

The Company elected to be taxed as a REIT, commencing with its taxable year ended December 31, 2014. To maintain its REIT qualification under the Code, 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. Taxable income, generally, 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 a taxable REIT subsidiary (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. While a TRS may generate net income, a TRS can declare dividends to the Company which will be included in the Company’s taxable income and necessitate a distribution to its stockholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. As of March 31, 2020 and December 31, 2019 the Company did not treat any of its subsidiaries as a TRS.

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 the tax return years 2015 and prior.

Earnings Per Share

Basic earnings (loss) per share is calculated on the basis of the weighted-average number of common shares outstanding during the year. Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock. None of the 50,000 shares of convertible stock (see Note 11) are included in the diluted earnings per share calculations because the necessary conditions for conversion have not been satisfied as of March 31, 2020 (were such date to represent the end of the contingency period). For the three months ended March 31, 2019, 732,632 common shares potentially issuable to settle distributions payable were included in the calculation of basic earnings per shares.

13


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

(unaudited)

 

Adoption of New Accounting Standards

In January 2017, the Financial Accounting Standards Board (“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. ASU No. 2017-04 was effective for the Company beginning January 1, 2020. Early application is permitted. The Company adopted the standard on January 1, 2020, and the adoption did not have a significant impact on its consolidated financial statements.

In June 2016, FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses”, which requires measurement and recognition of expected credit losses for financial assets held. The Company adopted the standard on January 1, 2020, and the adoption did not have an impact 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”). The Company adopted the standard on January 1, 2020, and the adoption did not have a significant impact on its consolidated financial statements.

In November 2018, FASB issued ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments-Credit Losses.” ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. The Company early adopted the standard on January 1, 2020, and the adoption did not have a significant impact on its consolidated financial statements.

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” ASU 2020-04 provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in ASU 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. During the three months ended March 31, 2020, the Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.

NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION

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

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Non-cash financing and investing activities:

 

 

 

 

 

 

 

 

Distributions on common stock declared but not yet paid

 

$

-

 

 

$

6,112

 

Stock issued pursuant to distribution reinvestment plan

 

 

3,131

 

 

 

4,864

 

Accruals for construction in process

 

 

490

 

 

 

392

 

Non-cash activity related to sales:

 

 

 

 

 

 

 

 

Mortgage notes payable settled directly with proceeds from sale of rental property

 

 

-

 

 

 

29,947

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

5,326

 

 

$

7,466

 

 

14


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

(unaudited)

 

NOTE 4 - RESTRICTED CASH

Restricted cash represents escrow deposits with lenders to be used to pay real estate taxes, insurance, and capital improvements. A summary of the components of restricted cash follows (in thousands):

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Real estate taxes

 

$

4,862

 

 

$

3,956

 

Insurance

 

 

1,024

 

 

 

877

 

Capital improvements

 

 

1,155

 

 

 

1,380

 

Other

 

 

344

 

 

 

321

 

 

 

$

7,385

 

 

$

6,534

 

 

 

 

 

 

 

 

 

 

Unrestricted cash designated for capital expenditures

 

$

14,740

 

 

$

21,706

 

 

NOTE 5 - RENTAL PROPERTIES, NET

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

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Land

 

$

119,028

 

 

$

119,028

 

Building and improvements

 

 

722,162

 

 

 

720,420

 

Furniture, fixtures and equipment

 

 

26,454

 

 

 

25,906

 

Construction in progress

 

 

497

 

 

 

1,955

 

 

 

 

868,141

 

 

 

867,309

 

Less: accumulated depreciation

 

 

(141,729

)

 

 

(131,779

)

 

 

$

726,412

 

 

$

735,530

 

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $10.1 million and $10.4 million, respectively.

 

NOTE 6 – DISPOSITION OF PROPERTY

 

The following table presents details of the Company’s disposition activity during the three months ended March 31, 2019. There were no dispositions during the three months ended March 31, 2020 (in thousands):

Multifamily Community

 

Location

 

Sale Date

 

Contract Sales Price

 

 

Net Gain on Disposition

 

 

Revenue Attributable to Property Sold

 

 

Net Loss Attributable to Property Sold (1)

 

Overton Trails

 

Fort Worth, Texas

 

February 28, 2019

 

$

64,000

 

 

$

20,619

 

 

$

1,145

 

 

$

(229

)

 

(1) Excludes net gain on disposition

NOTE 7 - IDENTIFIED INTANGIBLE ASSETS, NET

Identified intangible assets, net, consist of in-place rental leases. The gross value of acquired in-place leases totaled $17.3 million as of March 31, 2020 and December 31, 2019; the intangible assets are reported net of accumulated amortization of $17.3 million. Amortization for the three months ended March 31, 2020 and 2019 was $0. Intangible assets have been fully amortized as of both March 31, 2020 and December 31, 2019.

15


RESOURCE REAL ESTATE OPPORTUNITY REIT II, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

March 31, 2020

(unaudited)

 

NOTE 8 - MORTGAGE NOTES PAYABLE, NET

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

 

 

 

Outstanding

borrowings

 

 

Premium,

net

 

 

Deferred

Finance

Costs, net

 

 

Carrying

Value

 

 

Outstanding

borrowings

 

 

Premium,

net

 

 

Deferred

Finance

Costs, net

 

 

Carrying

Value

 

Collateral

 

March 31, 2020

 

 

December 31, 2019

 

Uptown Buckhead

 

 

19,167

 

 

 

 

 

 

(170

)

 

 

18,997

 

 

 

19,264

 

 

 

 

 

 

(178

)

 

 

19,086

 

Crosstown at Chapel Hill

 

 

42,650

 

 

 

 

 

 

(310

)

 

 

42,340

 

 

 

42,650

 

 

 

 

 

 

(325

)

 

 

42,325

 

The Brookwood - Key Bank

 

 

16,956

 

 

 

160

 

 

 

(76

)

 

 

17,040

 

 

 

17,063

 

 

 

186

 

 

 

(88

)

 

 

17,161

 

The Brookwood - Capital One

 

 

2,554

 

 

 

12

 

 

 

(13

)

 

 

2,553

 

 

 

2,566

 

 

 

14

 

 

 

(15

)

 

 

2,565

 

Adair off Addison and Adair

   off Addison Apartment Homes

 

 

33,210

 

 

 

 

 

 

(364

)

 

 

32,846

 

 

 

33,210

 

 

 

 

 

 

(380

)

 

 

32,830

 

1000 Spalding Crossing

 

 

23,620

 

 

 

 

 

 

(98

)

 

 

23,522

 

 

 

23,737

 

 

 

 

 

 

(113

)

 

 

23,624

 

Montclair Terrace

 

 

19,857

 

 

 

 

 

 

(169

)

 

 

19,688

 

 

 

19,958

 

 

 

 

 

 

(182

)

 

 

19,776

 

Grand Reserve

 

 

47,845

 

 

 

 

 

 

(523

)

 

 

47,322

 

 

 

47,845

 

 

 

 

 

 

(539

)

 

 

47,306

 

Verdant Apartment Homes

 

 

36,744

 

 

 

 

 

 

(164

)

 

 

36,580

 

 

 

36,913

 

 

 

 

 

 

(178

)

 

 

36,735

 

Arcadia Apartment Homes

 

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