10-Q 1 kbssorq2201810q.htm FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________
 
FORM 10-Q
______________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨
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 000-54382
______________________________________________________
 
KBS STRATEGIC OPPORTUNITY REIT, INC.
(Exact Name of Registrant as Specified in Its Charter)
______________________________________________________
Maryland
 
26-3842535
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
800 Newport Center Drive, Suite 700
Newport Beach, California
 
92660
(Address of Principal Executive Offices)
 
(Zip Code)
(949) 417-6500
(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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
 
¨
 
Accelerated Filer
 
¨
Non-Accelerated Filer
 
x  (Do not check if a smaller reporting company)
 
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 Exchange Act).    Yes  ¨  No  x
As of August 7, 2018, there were 54,640,201 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.



KBS STRATEGIC OPPORTUNITY REIT, INC.
FORM 10-Q
June 30, 2018
INDEX 
PART I.
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.

1

PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements


KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
June 30, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate held for investment, net
 
$
811,338

 
$
502,222

Real estate held for sale, net
 
30,684

 
30,645

Real estate equity securities
 
98,627

 
90,063

Real estate debt securities, net
 
17,879

 
17,751

Total real estate and real estate-related investments, net
 
958,528

 
640,681

Cash and cash equivalents
 
49,867

 
366,512

Restricted cash
 
11,008

 
10,670

Investments in unconsolidated joint ventures
 
50,986

 
55,577

Rents and other receivables, net
 
12,464

 
8,755

Above-market leases, net
 
3,587

 
10

Assets related to real estate held for sale, net
 
1,945

 
1,965

Prepaid expenses and other assets
 
16,069

 
17,404

Total assets
 
$
1,104,454

 
$
1,101,574

Liabilities and equity
 
 
 
 
Notes and bonds payable, net
 
 
 
 
Notes and bonds payable related to real estate held for investment, net
 
$
739,650

 
$
575,528

Notes payable related to real estate held for sale, net
 
27,566

 
27,515

Notes and bonds payable, net
 
767,216

 
603,043

Accounts payable and accrued liabilities
 
18,700

 
16,686

Due to affiliate
 
39

 
26

Distribution payable
 

 
187,914

Below-market leases, net
 
6,011

 
2,843

Other liabilities
 
14,614

 
16,966

Redeemable common stock payable
 
421

 
8,595

Total liabilities
 
807,001

 
836,073

Commitments and contingencies (Note 14)
 

 

Redeemable common stock
 
2,720

 
4,518

Equity
 
 
 
 
KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
 
 
 
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding
 

 

Common stock, $.01 par value; 1,000,000,000 shares authorized, 54,682,660 and 52,053,817 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
547

 
521

Additional paid-in capital
 
434,935

 
388,800

Cumulative distributions and net income
 
(143,397
)
 
(155,454
)
Accumulated other comprehensive income
 

 
25,146

Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity
 
292,085

 
259,013

Noncontrolling interests
 
2,648

 
1,970

Total equity
 
294,733

 
260,983

Total liabilities and equity
 
$
1,104,454

 
$
1,101,574

See accompanying condensed notes to consolidated financial statements.

2

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
18,915

 
$
31,704

 
$
34,096

 
$
62,350

Tenant reimbursements
 
3,703

 
6,456

 
6,384

 
12,094

Other operating income
 
952

 
987

 
1,173

 
2,540

Interest income from real estate debt securities
 
511

 
601

 
1,012

 
760

Dividend income from real estate equity securities
 
1,209

 
489

 
2,260

 
489

Total revenues
 
25,290

 
40,237

 
44,925

 
78,233

Expenses:
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
7,571

 
11,299

 
13,058

 
22,207

Real estate taxes and insurance
 
3,435

 
5,415

 
5,773

 
10,152

Asset management fees to affiliate
 
2,217

 
2,856

 
4,043

 
5,603

General and administrative expenses
 
2,250

 
1,378

 
4,302

 
3,123

Foreign currency transaction (gain) loss, net
 
(10,111
)
 
2,426

 
(9,114
)
 
7,097

Depreciation and amortization
 
9,042

 
15,307

 
16,307

 
29,908

Interest expense
 
7,819

 
10,324

 
14,410

 
19,709

Total expenses
 
22,223

 
49,005

 
48,779

 
97,799

Other income (loss):
 
 
 
 
 
 
 
 
Income from unconsolidated joint venture
 
131

 

 
185

 
1,869

Equity in loss of unconsolidated joint ventures
 
(2,373
)
 
(1,622
)
 
(4,751
)
 
(1,776
)
Other interest income
 
419

 
171

 
1,349

 
196

Unrealized gain (loss) on real estate equity securities
 
8,724

 

 
(7,287
)
 

Gain on sale of real estate
 
25

 
34,028

 
649

 
34,028

Total other income (loss), net
 
6,926

 
32,577

 
(9,855
)
 
34,317

Net income (loss)
 
9,993

 
23,809

 
(13,709
)
 
14,751

Net loss attributable to noncontrolling interests
 
43

 
37

 
64

 
3

Net income (loss) attributable to common stockholders
 
$
10,036

 
$
23,846

 
$
(13,645
)
 
$
14,754

Net income (loss) per common share, basic and diluted
 
$
0.16

 
$
0.42

 
$
(0.22
)
 
$
0.26

Weighted-average number of common shares outstanding, basic and diluted
 
61,910,602

 
56,714,180

 
62,216,998

 
56,748,125

See accompanying condensed notes to consolidated financial statements.

3

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
9,993

 
$
23,809

 
$
(13,709
)
 
$
14,751

Other comprehensive income:
 
 
 
 
 
 
 
 
Unrealized gain on real estate securities
 

 
849

 

 
849

Total other comprehensive income
 

 
849

 

 
849

Total comprehensive income (loss)
 
9,993

 
24,658

 
(13,709
)
 
15,600

Total comprehensive loss attributable to noncontrolling interests
 
43

 
37

 
64

 
3

Total comprehensive income (loss) attributable to common stockholders
 
$
10,036

 
$
24,695

 
$
(13,645
)
 
$
15,603

See accompanying condensed notes to consolidated financial statements.

4

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the Year Ended December 31, 2017 and the Six Months Ended June 30, 2018
(unaudited)
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in Capital
 
Cumulative Distributions and Net Income
 
Accumulated Other Comprehensive Income
 
Total Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
Shares
 
Amounts
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2016
56,775,767

 
$
568

 
$
455,373

 
$
(162,289
)
 
$

 
$
293,652

 
$
1,898

 
$
295,550

Net income (loss)

 

 

 
210,644

 

 
210,644

 
(64
)
 
210,580

Other comprehensive income

 

 

 

 
25,146

 
25,146

 

 
25,146

Issuance of common stock
585,192

 
6

 
8,660

 

 

 
8,666

 

 
8,666

Transfers to redeemable common stock

 

 
(498
)
 

 

 
(498
)
 

 
(498
)
Redemptions of common stock
(5,307,142
)
 
(53
)
 
(74,727
)
 

 

 
(74,780
)
 

 
(74,780
)
Distributions declared

 

 

 
(203,809
)
 

 
(203,809
)
 

 
(203,809
)
Other offering costs

 

 
(8
)
 

 

 
(8
)
 

 
(8
)
Noncontrolling interests contributions

 

 

 

 

 

 
158

 
158

Distributions to noncontrolling interests

 

 

 

 

 

 
(22
)
 
(22
)
Balance, December 31, 2017
52,053,817

 
$
521

 
$
388,800

 
$
(155,454
)
 
$
25,146

 
$
259,013

 
$
1,970

 
$
260,983

Cumulative effect adjustments to retained earnings

 

 

 
27,618

 
(25,146
)
 
2,472

 

 
2,472

Net loss

 

 

 
(13,645
)
 

 
(13,645
)
 
(64
)
 
(13,709
)
Issuance of common stock
83,855

 
1

 
963

 

 

 
964

 

 
964

Stock distribution issued
13,069,487

 
130

 
150,169

 

 

 
150,299

 

 
150,299

Transfers from redeemable common stock

 

 
9,969

 

 

 
9,969

 

 
9,969

Redemptions of common stock
(10,524,499
)
 
(105
)
 
(114,966
)
 

 

 
(115,071
)
 

 
(115,071
)
Distributions declared

 

 

 
(1,916
)
 

 
(1,916
)
 

 
(1,916
)
Noncontrolling interests contributions

 

 

 

 

 

 
742

 
742

Balance, June 30, 2018
54,682,660

 
$
547

 
$
434,935

 
$
(143,397
)
 
$

 
$
292,085

 
$
2,648

 
$
294,733

See accompanying condensed notes to consolidated financial statements.

5

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net (loss) income
 
$
(13,709
)
 
$
14,751

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Loss due to property damages
 
600

 
430

Equity in loss of unconsolidated joint ventures
 
4,751

 
1,776

Depreciation and amortization
 
16,307

 
29,908

Unrealized loss on real estate equity securities
 
7,287

 

Gain on real estate
 
(649
)
 
(34,028
)
Unrealized loss on interest rate caps
 
31

 
88

Deferred rent
 
(1,670
)
 
(1,370
)
Bad debt recovery
 
(218
)
 
(58
)
Amortization of above- and below-market leases, net
 
(500
)
 
(2,037
)
Amortization of deferred financing costs
 
1,699

 
2,592

Interest accretion on real estate debt securities
 
(128
)
 
(348
)
Net amortization of discount and (premium) on bond and notes payable
 
29

 
23

Foreign currency transaction (gain) loss, net
 
(9,114
)
 
7,097

Changes in assets and liabilities:
 
 
 
 
Rents and other receivables
 
(1,854
)
 
(1,524
)
Prepaid expenses and other assets
 
(3,606
)
 
(3,618
)
Accounts payable and accrued liabilities
 
911

 
(1,090
)
Due to affiliates
 
13

 
(29
)
Other liabilities
 
388

 
294

Net cash provided by operating activities
 
568

 
12,857

Cash Flows from Investing Activities:
 
 
 
 
Acquisitions of real estate
 
(312,348
)
 
(82,235
)
Improvements to real estate
 
(14,108
)
 
(18,784
)
Proceeds from sales of real estate, net
 
2,567

 
94,914

Reimbursement of construction costs
 
1,636

 

Insurance proceeds received for property damages
 

 
744

Purchase of interest rate cap
 
(163
)
 
(107
)
Contributions to unconsolidated joint venture
 
(1,320
)
 

Distributions of capital from unconsolidated joint venture
 
1,160

 
59,157

Investment in real estate equity securities
 
(15,851
)
 
(38,995
)
Investment in real estate debt securities, net
 

 
(12,514
)
Proceeds for future development obligations
 

 
1,368

Funding of development obligations
 
(892
)
 
(753
)
Net cash (used in) provided by investing activities
 
(339,319
)
 
2,795

Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes and bonds payable
 
184,351

 
124,556

Principal payments on notes and bonds payable
 
(5,711
)
 
(69,019
)
Payments of deferred financing costs
 
(2,702
)
 
(1,793
)
Payments to redeem common stock
 
(115,071
)
 
(7,511
)
Payments of prepaid other offering costs
 
(295
)
 
(196
)
Distributions paid
 
(38,567
)
 
(4,728
)
Noncontrolling interests contributions
 
742

 
11

Distributions to noncontrolling interests
 

 
(10
)
Net cash provided by financing activities
 
22,747

 
41,310

Effect of exchange rate changes on cash, cash equivalents and restricted cash
 
(303
)
 
596

Net (decrease) increase in cash, cash equivalents and restricted cash
 
(316,307
)
 
57,558

Cash, cash equivalents and restricted cash, beginning of period
 
377,182

 
64,450

Cash, cash equivalents and restricted cash, end of period
 
$
60,875

 
$
122,008

See accompanying condensed notes to consolidated financial statements.

6

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)



1.
ORGANIZATION
KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, KBS Strategic Opportunity BVI issued one certificate containing 10,000 common shares with no par value to KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.
Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2017 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate, real estate-related debt securities and other real estate-related investments.
On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.
The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of June 30, 2018, the Company had sold 6,704,217 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $75.0 million. Also, as of June 30, 2018, the Company had redeemed 21,972,263 shares for $266.9 million. As of June 30, 2018, the Company had issued 13,069,487 shares of common stock in connection with the December 2017 special dividend. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.
On March 2, 2016, KBS Strategic Opportunity BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels.  In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%.  KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.
In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to KBS Strategic Opportunity BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments.  The Operating Partnership owns all of the issued and outstanding equity of KBS Strategic Opportunity BVI.  As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through KBS Strategic Opportunity BVI.

7

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

As of June 30, 2018, the Company consolidated seven office properties (of which one office property was held for sale), one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties and three investments in undeveloped land with approximately 1,100 developable acres. The Company also owned three investments in unconsolidated joint ventures, an investment in real estate debt securities and three investments in real estate equity securities.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2017, except for the Company’s adoption of the revenue recognition and financial instruments standards issued by the Financial Accounting Standards Board (“FASB”) effective on January 1, 2018. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC.
Principles of Consolidation and Basis of Presentation
The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the FASB Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.
The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, KBS Strategic Opportunity BVI and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Redeemable Common Stock
The Company has adopted a share redemption program that may enable stockholders to sell their shares to the Company in limited circumstances.
Pursuant to the share redemption program there are several limitations on the Company’s ability to redeem shares:
Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), the Company may not redeem shares until the stockholder has held the shares for one year.
During each calendar year, redemptions are limited to the amount of net proceeds from the sale of shares under the dividend reinvestment plan during the prior calendar year.

8

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

The Company may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that the Company redeems less than $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) in a given fiscal quarter, any remaining excess capacity to redeem shares in such fiscal quarter will be added to the Company’s capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during succeeding fiscal quarters.  The last $1.0 million of net proceeds from the dividend reinvestment plan during the prior year is reserved exclusively for shares redeemed in connection with a stockholder’s death, “qualifying disability,” or “determination of incompetence”. The share redemption plan also provides that, to the extent that in the last month of any calendar year the amount of redemption requests in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” is less than the $1.0 million reserved for such redemptions under the share redemption plan, any excess funds may be used to redeem shares not requested in connection with a stockholder’s death, “qualifying disability or “determination of incompetence” during such month. The Company may increase or decrease this limit upon ten business days’ notice to stockholders.  The Company’s board of directors may approve an increase in this limit to the extent that the Company has received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2017, as of June 30, 2018, the Company had $2.2 million available for all share redemption requests for the remainder of 2018. On August 9, 2018, the Company’s board of directors approved an additional $6.0 million of funds available for the redemption of shares in 2018.
During any calendar year, the Company may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.
The Company has no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.
Effective December 30, 2016, pursuant to the tenth amended and restated share redemption program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence”, the price at which the Company began to redeem shares is 95% of the Company’s most recent estimated value per share as of the applicable redemption date.  Upon the death, “qualifying disability” or “determination of incompetence” of a stockholder, the redemption price continued to be equal to the Company’s most recent estimated value per share.
The Company’s board of directors may amend, suspend or terminate the share redemption program with ten business days’ notice to its stockholders. The Company may provide this notice by including such information in a Current Report on Form 8-K or in the Company’s annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to its stockholders.
In anticipation of a self-tender offer in order to make liquidity available to stockholders in excess of that permitted under the share redemption program, on March 14, 2018, the Company’s board of directors approved a temporary suspension of the share redemption program starting with the March 2018 redemption period, including any unsatisfied requests from prior redemption periods. In connection with its approval of the Self-Tender (defined below), the Company’s board of directors approved the reopening of the share redemption program for the June 2018 redemption period, meaning no redemptions were made in March, April or May 2018 (including those requested following a stockholder’s death, qualifying disability or determination of incompetence).
On April 23, 2018, the Company commenced a self-tender offer (the “Self-Tender”) for up to 8,234,217 shares of common stock at a price of $10.93 per share, or approximately $90.0 million of shares. The Company increased the number of shares accepted for payment in the Self-Tender by up to 1,294,910 shares at a price of $10.93 per share, or approximately $14.1 million of shares. On June 1, 2018, the Company accepted for purchase 9,527,724 shares at a purchase price of $10.93 per share, or approximately $104.1 million of shares, excluding fees and expenses related to the Self-Tender.

9

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

The Company records amounts that are redeemable under the share redemption program as redeemable common stock in its consolidated balance sheets because the shares will be redeemable at the option of the holder and therefore their redemption will be outside the control of the Company. However, because the amounts that can be redeemed will be determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company presents the net proceeds from the current year and prior year DRP, net of current year redemptions, as redeemable common stock in its consolidated balance sheets.
The Company classifies as liabilities financial instruments that represent a mandatory obligation of the Company to redeem shares. The Company’s redeemable common shares are redeemable at the option of the holder. When the Company determines it has a mandatory obligation to repurchase shares under the share redemption program, it will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.
The Company limits the dollar value of shares that may be redeemed under the program as described above. During the six months ended June 30, 2018, the Company had redeemed $10.9 million of common stock, of which $4.4 million relates to delayed December 2017 redemptions. The Company recorded $0.4 million and $8.6 million of other liabilities on the Company’s balance sheet as of June 30, 2018 and December 31, 2017, respectively, related to unfulfilled redemption requests received in good order under the share redemption program. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2017, the Company has $2.2 million available for redemptions in the remainder of 2018 as of June 30, 2018, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations described above.
Revenue Recognition
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of the Company’s adoption.  Under the modified retrospective approach, an entity may also elect to apply this standard to either (i) all contracts as of January 1, 2018 or (ii) only to contracts that were not completed as of January 1, 2018.  A completed contract is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP that was in effect before the date of initial application. The Company elected to apply this standard only to contracts that were not completed as of January 1, 2018. 
Based on the Company’s evaluation of contracts within the scope of ASU No. 2014-09, revenue that is impacted by ASU No. 2014-09 includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at the Company’s properties. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied. For the three and six months ended June 30, 2018, tenant reimbursements for substantial services accounted for under ASU No. 2014-09 were $0.5 million and $0.9 million, respectively, which were included in tenant reimbursements on the accompanying statements of operations. 
Sale of Real Estate
Prior to January 1, 2018, gains on real estate sold were recognized using the full accrual method at closing when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. Gain on sales of real estate may have been deferred in whole or in part until the requirements for gain recognition had been met.
Effective January 1, 2018, the Company adopted the guidance of ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (“ASC 610-20”), which  applies to sales or transfers to noncustomers of nonfinancial assets or in substance nonfinancial assets that do not meet the definition of a business.  Generally, the Company’s sales of real estate would be considered a sale of a nonfinancial asset as defined by ASC 610-20.

10

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

ASC 610-20 refers to the revenue recognition principles under ASU No. 2014-09.  Under ASC 610-20, if the Company determines it does not have a controlling financial interest in the entity that holds the asset and the arrangement meets the criteria to be accounted for as a contract, the Company would derecognize the asset and recognize a gain or loss on the sale of the real estate when control of the underlying asset transfers to the buyer.  As a result of the adoption of ASC 610-20 on January 1, 2018, the Company recorded a cumulative effect adjustment to increase retained earnings by $2.5 million to recognize the deferred gain from the sale of 102 developable acres at Park Highlands that closed on May 1, 2017, as control of the sold acres had transferred to the buyers at closing. 
As of January 1, 2018 and June 30, 2018, the Company had recorded contract liabilities of $1.7 million and $2.0 million, respectively, related to deferred proceeds received from the buyers of the Park Highlands land sales and another developer for the value of land that was contributed to a master association that is consolidated by the Company, which was included in other liabilities on the accompanying consolidated balance sheets.
Real Estate Equity Securities
The Company’s real estate equity securities are carried at their estimated fair value based on quoted market prices for the security, net of any discounts for restrictions on the sale of the security. Any discount for lack of marketability is estimated using an option pricing model. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis.
Prior to the Company’s adoption of ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”) on January 1, 2018, the Company classified its investments in real estate equity securities as available-for-sale and unrealized gains and losses were reported in accumulated other comprehensive income (loss). Upon the sale of a security, the previously recognized unrealized gain (loss) would be reversed out of accumulated other comprehensive income (loss) and the actual realized gain (loss) recognized in earnings.  Effective January 1, 2018, unrealized gains and losses on real estate equity securities are recognized in earnings.  Upon adoption of ASU No. 2016-01 on January 1, 2018, the Company recorded a $25.1 million cumulative effect adjustment to retained earnings related to the unrealized gain on real estate equity securities previously reported in accumulated other comprehensive income prior to January 1, 2018. 
Investment in Unconsolidated Joint Ventures
Equity Investment Without Readily Determinable Value
Prior to the adoption of ASU No. 2016-01 on January 1, 2018, the Company accounted for investments in unconsolidated joint venture entities in which the Company did not have the ability to exercise significant influence and had virtually no influence over partnership operating and financial policies using the cost method of accounting.  Under the cost method, income distributions from the partnership were recognized in other income.  Distributions that exceed the Company’s share of earnings were applied to reduce the carrying value of the Company’s investment and any capital contributions increased the carrying value of the Company’s investment.  On a quarterly basis, the Company evaluated its cost method investment in an unconsolidated joint venture for other-than-temporary impairments.  The fair value of a cost method investment was not estimated if there were no identified events or changes in circumstances that indicated a significant adverse effect on the fair value of the investment. 
In accordance with ASU No. 2016-01, the Company may elect to measure an equity investment without a readily determinable value that does not qualify for the practical expedient to estimate fair value using the net asset value per share, at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  The Company elected to measure its investment in the NIP Joint Venture (defined in Note 12) in accordance with the above guidance, applying it prospectively, and as of January 1, 2018 and June 30, 2018, recorded its investment in the NIP Joint Venture at a cost basis of $3.7 million and $2.5 million, respectively. 

11

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

Reclassifications
Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period. As of June 30, 2018, the Company had classified one office property as held for sale. As a result, certain assets and liabilities were reclassified as held for sale on the consolidated balance sheets for all periods presented.
Segments
The Company has invested in opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in opportunistic real estate and other real estate‑related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.
Per Share Data
Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three and six months ended June 30, 2018 and 2017.
Distributions declared per share were $0.01597500 and $0.03195000 during the three and six months ended June 30, 2018, respectively, and $0.09349315 and $0.18595890 during the three and six months ended June 30, 2017, respectively.
Square Footage, Occupancy and Other Measures
Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.
Recently Issued Accounting Standards Updates
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 as of its issuance is permitted. ASU No. 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting the new lease accounting standard on its consolidated financial statements. Upon adoption of ASU No. 2016-02, the Company expects to adopt the package of practical expedients for all leases that commenced before the effective date of January 1, 2019. Accordingly, the Company will 1) not reassess whether any expired or existing contracts are or contain leases, 2) not reassess the lease classification for any expired or existing lease, and 3) not reassess initial direct costs for any existing leases. The Company does not expect to elect the practical expedient related to using hindsight to reevaluate the lease term. In addition, the Company expects to adopt the practical expedient for land easements to not assess whether existing or expired land easements that were not previously accounted for as leases under the current lease accounting standards of Topic 840 are or contain a lease under Topic 842.

12

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements (“ASU No. 2018-11”), which provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue recognition standard (Topic 606) and if certain conditions are met. Upon adoption of the lease accounting standard under Topic 842, the Company expects to adopt this practical expedient, specifically related to its tenant reimbursements which would otherwise be accounted for under the new revenue recognition standard. The Company believes the two conditions have been met for tenant reimbursements as 1) the timing and pattern of transfer of the nonlease components and associated lease components are the same and 2) the lease component would be classified as an operating lease. In addition, ASU No. 2018-11 provides an additional optional transition method to allow entities to apply the new lease accounting standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings. An entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new lease accounting standard will continue to be reported under the current lease accounting standards of Topic 840. The Company expects to adopt this transition method upon adoption of the lease accounting standard of Topic 842 on January 1, 2019.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU No. 2016-13”).  ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income.  The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.  ASU No. 2016-13 also amends the impairment model for available-for-sale securities.  An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures.  For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes.  For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due.  ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.

13

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

3.
REAL ESTATE HELD FOR INVESTMENT
As of June 30, 2018, the Company owned six office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, one office/flex/industrial portfolio consisting of 21 buildings and one retail property, encompassing, in the aggregate, approximately 3.8 million rentable square feet. As of June 30, 2018, these properties were 77% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 94% occupied. The Company also owned three investments in undeveloped land with approximately 1,100 developable acres. The following table summarizes the Company’s real estate held for investment as of June 30, 2018 and December 31, 2017, respectively (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Land
 
$
196,052

 
$
155,046

Buildings and improvements
 
624,299

 
361,118

Tenant origination and absorption costs
 
39,677

 
23,212

Total real estate, cost
 
860,028

 
539,376

Accumulated depreciation and amortization
 
(48,690
)
 
(37,154
)
Total real estate, net
 
$
811,338

 
$
502,222

The following table provides summary information regarding the Company’s real estate held for investment as of June 30, 2018 (in thousands):
Property
 
Date Acquired or Foreclosed on
 
City
 
State
 
Property Type
 
Land
 
Building
and Improvements
 
Tenant Origination and Absorption
 
Total Real Estate, at Cost
 
Accumulated Depreciation and Amortization
 
Total Real Estate, Net
 
Ownership %
Richardson Portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Palisades Central I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
$
1,037

 
$
10,709

 
$

 
$
11,746

 
$
(2,479
)
 
$
9,267

 
90.0
%
Palisades Central II
 
11/23/2011
 
Richardson
 
TX
 
Office
 
810

 
18,397

 

 
19,207

 
(4,230
)
 
14,977

 
90.0
%
Greenway I
 
11/23/2011
 
Richardson
 
TX
 
Office
 
561

 
2,113

 

 
2,674

 
(692
)
 
1,982

 
90.0
%
Greenway III
 
11/23/2011
 
Richardson
 
TX
 
Office
 
702

 
4,061

 
559

 
5,322

 
(1,858
)
 
3,464

 
90.0
%
Undeveloped Land
 
11/23/2011
 
Richardson
 
TX
 
Undeveloped Land
 
3,134

 

 

 
3,134

 

 
3,134

 
90.0
%
Total Richardson Portfolio
 
 
 
 
 
 
 
 
 
6,244

 
35,280

 
559

 
42,083

 
(9,259
)
 
32,824

 
 
Park Highlands (1)
 
12/30/2011
 
North Las Vegas
 
NV
 
Undeveloped Land
 
33,430

 

 

 
33,430

 

 
33,430

 
(1) 

Burbank Collection
 
12/12/2012
 
Burbank
 
CA
 
Retail
 
4,175

 
12,536

 
725

 
17,436

 
(2,769
)
 
14,667

 
90.0
%
Park Centre
 
03/28/2013
 
Austin
 
TX
 
Office
 
3,251

 
27,228

 

 
30,479

 
(4,144
)
 
26,335

 
100.0
%
1180 Raymond
 
08/20/2013
 
Newark
 
NJ
 
Apartment
 
8,292

 
38,260

 

 
46,552

 
(5,980
)
 
40,572

 
100.0
%
Park Highlands II
 
12/10/2013
 
North Las Vegas
 
NV
 
Undeveloped Land
 
25,234

 

 

 
25,234

 

 
25,234

 
100.0
%
424 Bedford
 
01/31/2014
 
Brooklyn
 
NY
 
Apartment
 
8,860

 
25,837

 

 
34,697

 
(3,204
)
 
31,493

 
90.0
%
Richardson Land II
 
09/04/2014
 
Richardson
 
TX
 
Undeveloped Land
 
3,418

 

 

 
3,418

 

 
3,418

 
90.0
%
Westpark Portfolio
 
05/10/2016
 
Redmond
 
WA
 
Office/Flex/Industrial
 
36,085

 
92,354

 
6,588

 
135,027

 
(10,557
)
 
124,470

 
100.0
%
Crown Pointe
 
02/14/2017
 
Dunwoody
 
GA
 
Office
 
22,590

 
62,613

 
5,559

 
90,762

 
(5,734
)
 
85,028

 
100.0
%
125 John Carpenter
 
09/15/2017
 
Irving
 
TX
 
Office
 
2,755

 
76,010

 
8,840

 
87,605

 
(3,416
)
 
84,189

 
100.0
%
Marquette Plaza
 
03/01/2018
 
Minneapolis
 
MN
 
Office
 
10,387

 
71,385

 
4,470

 
86,242

 
(1,334
)
 
84,908

 
100.0
%
City Tower
 
03/06/2018
 
Orange
 
CA
 
Office
 
13,930

 
128,787

 
8,150

 
150,867

 
(2,166
)
 
148,701

 
100.0
%
Eight & Nine Corporate Centre
 
06/08/2018
 
Franklin
 
TN
 
Office
 
17,401

 
54,009

 
4,786

 
76,196

 
(127
)
 
76,069

 
100.0
%
 
 
 
 
 
 
 
 
 
 
$
196,052

 
$
624,299

 
$
39,677

 
$
860,028

 
$
(48,690
)
 
$
811,338

 
 
_____________________
(1) On September 7, 2016, a subsidiary of the Company that owns a portion of Park Highlands, sold 820 units of 10% Class A non-voting preferred membership units for $0.8 million to accredited investors. The amount of the Class A non-voting preferred membership units raised, net of offering costs, is included in other liabilities on the accompanying consolidated balance sheets.

14

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

Operating Leases
Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of June 30, 2018, the leases, excluding options to extend and apartment leases (which have terms that are generally one year or less), had remaining terms of up to 13.9 years with a weighted-average remaining term of 4.6 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $5.2 million and $4.3 million as of June 30, 2018 and December 31, 2017, respectively.
During the six months ended June 30, 2018 and 2017, the Company recognized deferred rent from tenants of $1.7 million and $1.4 million, respectively, net of lease incentive amortization. As of June 30, 2018 and December 31, 2017, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $8.6 million and $6.6 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $1.0 million and $0.8 million of unamortized lease incentives as of June 30, 2018 and December 31, 2017, respectively.
As of June 30, 2018, the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):
July 1, 2018 through December 31, 2018
$
30,024

2019
58,632

2020
52,340

2021
45,997

2022
38,248

Thereafter
124,051

 
$
349,292

As of June 30, 2018, the Company’s commercial real estate properties were leased to approximately 350 tenants over a diverse range of industries and geographic areas. No tenant industry concentration accounted for more than 10% of annualized base rent and no tenant accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.
Geographic Concentration Risk
As of June 30, 2018, the Company’s real estate investments in California, Texas and Washington represented 14.8%, 13.3% and 11.3%, respectively, of the Company’s total assets.  As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California, Texas and Washington real estate markets.  Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

15

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

Recent Acquisitions
Marquette Plaza
On March 1, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office property containing 522,656 rentable square feet located on 2.5 acres of land in Minneapolis, Minnesota (“Marquette Plaza”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of Marquette Plaza was $88.3 million plus $1.1 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $10.4 million to land, $71.4 million to building and improvements, $4.5 million to tenant origination and absorption costs, $3.7 million to above-market lease assets and $0.6 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 6.6 years for tenant origination and absorption costs, 11.7 years for above-market lease assets and 2.4 years for below-market lease liabilities.
City Tower
On March 6, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office building containing 431,007 rentable square feet located on approximately 4.9 acres of land in Orange, California (“City Tower”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of City Tower was $147.1 million plus $1.6 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $13.9 million to land, $127.9 million to building and improvements, $8.1 million to tenant origination and absorption costs and $1.2 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 5.2 years for tenant origination and absorption costs and 6.6 years for below-market lease liabilities.
Eight & Nine Corporate Centre
On June 8, 2018, the Company, through an indirect wholly owned subsidiary, acquired an office building consisting of two buildings containing an aggregate of 311,864 rentable square feet located on approximately 27.6 acres of land in Franklin, Tennessee (“Eight & Nine Corporate Centre”). The seller is not affiliated with the Company or the Advisor. The purchase price (net of closing credits) of Eight & Nine Corporate Centre was $73.0 million plus $1.2 million of capitalized acquisition costs. The Company recorded this acquisition as an asset acquisition and recorded $17.4 million to land, $54.0 million to building and improvements, $4.8 million to tenant origination and absorption costs and $2.0 million to below-market lease liabilities. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 6.4 years for tenant origination and absorption costs and 7.4 years for below-market lease liabilities.
Recent Real Estate Land Sale
On February 28, 2018, the Company sold approximately 26 developable acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $2.5 million, excluding closing costs. The purchasers are not affiliated with the Company or the Advisor. The Company recognized a gain on sale of $0.7 million related to the land sale, which is net of deferred profit of $0.3 million related to proceeds received from the purchaser for the value of land that was contributed to a master association which is consolidated by the Company. 

16

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

4.
TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES
As of June 30, 2018 and December 31, 2017, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Cost
 
$
39,677

 
$
23,212

 
$
3,731

 
$
17

 
$
(7,298
)
 
$
(3,636
)
Accumulated Amortization
 
(8,331
)
 
(5,733
)
 
(144
)
 
(7
)
 
1,287

 
793

Net Amount
 
$
31,346

 
$
17,479

 
$
3,587

 
$
10

 
$
(6,011
)
 
$
(2,843
)
Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands):
 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Three Months Ended June 30,
 
For the Three Months Ended June 30,
 
For the Three Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Amortization
 
$
(2,088
)
 
$
(3,135
)
 
$
(111
)
 
$
(78
)
 
$
385

 
$
1,221

 
 
Tenant Origination and
Absorption Costs
 
Above-Market
Lease Assets
 
Below-Market
Lease Liabilities
 
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Amortization
 
$
(3,625
)
 
$
(6,078
)
 
$
(155
)
 
$
(167
)
 
$
655

 
$
2,204

Additionally, as of June 30, 2018 and December 31, 2017, the Company had recorded tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $4.8 million and $5.3 million, respectively. During the three and six months ended June 30, 2018, the Company recorded amortization expense of $0.2 million and $0.5 million, respectively, related to tax abatement intangible assets. During the three and six months ended June 30, 2017, the Company recorded amortization expense of $0.2 million and $0.5 million, respectively, related to tax abatement intangible assets. 

17

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

5.
REAL ESTATE EQUITY SECURITIES
As of June 30, 2018, the Company owned three investments in real estate equity securities. The following table sets forth the number of shares owned by the Company and the related carrying value of the shares as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
June 30, 2018
 
December 31, 2017
Real Estate Equity Security
 
Number of Shares Owned
 
Total Carrying Value
 
Number of Shares Owned
 
Total Carrying Value
Whitestone REIT
 
3,768,189

 
$
47,027

 
3,603,189

 
$
51,922

Keppel-KBS US REIT
 
43,999,500

 
38,102

 
43,999,500

 
38,141

Franklin Street Properties Corp.
 
1,576,809

 
13,498

 

 

 
 
49,344,498

 
$
98,627

 
47,602,689

 
$
90,063

During the six months ended June 30, 2018, the Company purchased 165,000 shares of common stock of Whitestone REIT (NYSE Ticker: WSR) for an aggregate purchase price of $1.9 million and 1,576,809 shares of common stock of Franklin Street Properties Corp. (NYSE Ticker: FSP) for an aggregate purchase price of $14.0 million.
On November 8, 2017, the Company acquired 43,999,500 shares of common units of Keppel-KBS US REIT (SGX Ticker: CMOU) in connection with the sale of 11 properties to Keppel-KBS US REIT. The Company agreed not to sell, transfer or assign 21,999,750 units of the Keppel-KBS US REIT issued to the Company at closing of the transaction until May 8, 2018 and the remaining 21,999,750 units until November 8, 2018 (the “Unit Lockout Periods”). As of June 30, 2018 and December 31, 2017, a lack of marketability discount of $0.6 million and $1.7 million, respectively, was recorded as a result of the remaining Unit Lockout Period.
The following summarizes the activity related to real estate equity securities for the six months ended June 30, 2018 (in thousands): 
 
 
Amortized Cost Basis
 
Unrealized Gains (Losses) (1)
 
Total
Real estate equity securities - December 31, 2017
 
$
64,917

 
$
25,146

 
$
90,063

Acquisition of real estate equity securities
 
15,676

 

 
15,676

Acquisition fee to affiliate and purchase commission
 
175

 

 
175

Unrealized change in market value of real estate equity securities
 

 
(7,287
)
 
(7,287
)
Real estate equity securities - June 30, 2018
 
$
80,768

 
$
17,859

 
$
98,627

_____________________
(1) As of December 31, 2017, unrealized gain (losses) due to the change in market value of real estate equity securities was recorded to accumulated other comprehensive income. Effective January 1, 2018, upon the adoption of ASU No. 2016-01, unrealized gain (losses) on real estate equity securities are recorded in earnings on the accompanying consolidated statement of operations.
During the three and six months ended June 30, 2018, the Company recognized $1.2 million and $2.3 million, respectively, of dividend income from real estate equity securities. During the three and six months ended June 30, 2017, the Company recognized $0.5 million of dividend income from real estate equity securities.

18

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

6.
REAL ESTATE DEBT SECURITIES
As of June 30, 2018, the Company owned an investment in real estate debt securities. The Company’s investment in real estate debt securities is classified as held to maturity, as the Company has the intent and ability to hold its investment until maturity, and it is not more likely than not that the Company would be required to sell its investment before recovery of the Company’s amortized cost basis.  The information for those real estate debt securities as of June 30, 2018 and December 31, 2017 is set forth below (in thousands):
Debt Securities Name
 
Dates Acquired
 
Debt Securities Type
 
Outstanding Principal Balance as of
June 30, 2018 (1)
 
Book Value as of
June 30, 2018 (2)
 
Book Value as of
December 31, 2017(2)
 
Contractual Interest Rate (3)
 
Annualized Effective
Interest Rate (3)
 
Maturity Date
Battery Point Series B Preferred Units
 
10/28/2016 /
03/30/2017 /
05/12/2017
 
Series B Preferred Units
 
$
17,500

 
$
17,879

 
$
17,751

 
12.0
%
 
11.1
%
 
10/28/2019
_____________________
(1) Outstanding principal balance as of June 30, 2018 represents principal balance outstanding under the real estate debt securities.
(2) Book value of the real estate debt securities represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.
(3) Contractual interest rate is the stated interest rate on the face of the real estate securities.  Annualized effective interest rate is calculated as the actual interest income recognized in 2018, using the interest method, annualized (if applicable) and divided by the average amortized cost basis of the investment.  The annualized effective interest rate and contractual interest rate presented are as of June 30, 2018.
The following summarizes the activity related to real estate debt securities for the six months ended June 30, 2018 (in thousands): 
Real estate debt securities - December 31, 2017
 
$
17,751

Deferred interest receivable and interest accretion
 
104

Accretion of commitment fee, net of closing costs
 
24

Real estate debt securities - June 30, 2018
 
$
17,879

For the three and six months ended June 30, 2018 and 2017, interest income from real estate debt securities consisted of the following (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Contractual interest income
 
$
490

 
$
321

 
$
884

 
$
412

Interest accretion
 
9

 
78

 
104

 
121

Accretion of commitment fee, net of closing costs and acquisition fee
 
12

 
202

 
24

 
227

Interest income from real estate debt securities
 
$
511

 
$
601

 
$
1,012

 
$
760


19

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

7.
REAL ESTATE SALES
As of June 30, 2018, the Company classified one office property as held for sale. During the three and six months ended June 30, 2018, the Company did not dispose of any real estate properties. During the year ended December 31, 2017, the Company disposed of 12 office properties.
The following summary presents the major components of assets and liabilities related to real estate held for sale as of June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Assets related to real estate held for sale
 
 
 
Real estate, cost
$
35,739

 
$
35,308

Accumulated depreciation and amortization
(5,055
)
 
(4,663
)
Real estate, net
30,684

 
30,645

Other assets
1,945

 
1,965

Total assets related to real estate held for sale
$
32,629

 
$
32,610

Liabilities related to real estate held for sale
 
 
 
Notes payable, net
27,566

 
27,515

Total liabilities related to real estate held for sale
$
27,566

 
$
27,515

The operations of properties sold and real estate held for sale and related gain on sales are included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to these properties for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
 
Rental income
 
$
1,049

 
$
17,621

 
$
2,070

 
$
36,134

Tenant reimbursements and other operating income
 
111

 
5,477

 
251

 
10,482

Total revenues
 
$
1,160

 
$
23,098

 
$
2,321

 
$
46,616

Expenses
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
$
506

 
$
6,208

 
$
433

 
$
12,751

Real estate taxes and insurance
 
154

 
3,376

 
287

 
6,479

Asset management fees to affiliate
 
137

 
1,401

 
272

 
2,826

Depreciation and amortization
 
122

 
7,825

 
483

 
16,232

Interest expense
 
282

 
3,676

 
540

 
7,000

Total expenses
 
$
1,201

 
$
22,486

 
$
2,015

 
$
45,288


20

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

8.
NOTES AND BONDS PAYABLE
As of June 30, 2018 and December 31, 2017, the Company’s notes and bonds payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):
 
 
Book Value as of
June 30, 2018
 
Book Value as of
December 31, 2017
 
Contractual Interest Rate as of June 30, 2018 (1)
 
Effective Interest Rate at June 30, 2018 (1)
 
Payment Type
 
Maturity Date (2)
Richardson Portfolio Mortgage Loan
 
$
32,586

 
$
36,886

 
One-Month LIBOR + 2.10%
 
4.08%
 
Principal & Interest
 
11/01/2018
Portfolio Mortgage Loan (3)
 
9,140

 
9,877

 
One-Month LIBOR + 2.25%
 
4.23%
 
Principal & Interest
 
07/01/2019
Burbank Collection Mortgage Loan
 
10,837

 
10,958

 
One-Month LIBOR + 2.35%
 
4.41%
 
Principal & Interest
 
09/30/2018
1180 Raymond Bond Payable
 
6,370

 
6,460

 
6.50%
 
6.50%
 
Principal & Interest
 
09/01/2036
Central Building Mortgage Loan
 
27,600

 
27,600

 
One-Month LIBOR + 1.75%
 
3.73%
 
Interest Only
 
11/13/2018(4)
424 Bedford Mortgage Loan
 
23,998

 
24,282

 
3.91%
 
3.91%
 
Principal & Interest
 
10/01/2022
1180 Raymond Mortgage Loan
 
30,821

 
31,000

 
One-Month LIBOR + 2.25%
 
4.23%
 
Principal & Interest
 
12/01/2018
KBS SOR (BVI) Holdings, Ltd. Series A Debentures (5)
 
265,285

 
278,801

 
4.25%
 
4.25%
 
(5) 
 
03/01/2023
Westpark Portfolio Mortgage Loan
 
85,200

 
85,200

 
One-Month LIBOR + 2.50%
 
4.48%
 
Interest Only (6)
 
07/01/2020
Crown Pointe Mortgage Loan
 
51,171

 
50,500

 
One-Month LIBOR + 2.60%
 
4.58%
 
Interest Only
 
02/13/2020
125 John Carpenter Mortgage Loan
 
50,130

 
50,130

 
(7) 
 
3.74%
 
Interest Only
 
10/01/2022
City Tower Mortgage Loan
 
89,000

 

 
One-Month LIBOR + 1.55%
 
3.53%
 
Interest Only
 
03/05/2021
Marquette Plaza Mortgage Loan
 
50,800

 

 
One-Month LIBOR + 1.55%
 
3.56%
 
Interest Only
 
06/06/2021
Eight & Nine Corporate Centre Mortgage Loan
 
43,880

 

 
One-Month LIBOR + 1.60%
 
3.58%
 
Interest Only
 
06/08/2021
Total Notes and Bonds Payable principal outstanding
 
776,818

 
611,694

 
 
 
 
 
 
 
 
Net Premium/(Discount) on Notes and Bonds Payable (8)
 
167

 
137

 
 
 
 
 
 
 
 
Deferred financing costs, net
 
(9,769
)
 
(8,788
)
 
 
 
 
 
 
 
 
Total Notes and Bonds Payable, net
 
$
767,216

 
$
603,043

 
 
 
 
 
 
 
 
_____________________
(1) Contractual interest rate represents the interest rate in effect under the loan as of June 30, 2018. Effective interest rate is calculated as the actual interest rate in effect as of June 30, 2018 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at June 30, 2018, where applicable.
(2) Represents the initial maturity date or the maturity date as extended as of June 30, 2018; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.
(3) The Portfolio Mortgage Loan is secured by Park Centre.
(4) On July 17, 2018, the Central Building Mortgage Loan was repaid. See note 15, “Subsequent Events – Real Estate Disposition Subsequent to June 30, 2018.”
(5) See “ – Israeli Bond Financing” below.
(6) Represents the payment type required under the loan as of June 30, 2018. Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.
(7) The 125 John Carpenter Mortgage Loan bears interest at a floating rate of the greater of (a) 2.0% or (b) 175 basis points over one-month LIBOR.
(8) Represents the unamortized premium/discount on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bonds payable.

21

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

During the three and six months ended June 30, 2018, the Company incurred $7.8 million and $14.4 million, respectively, of interest expense. Included in interest expense for the three and six months ended June 30, 2018 was $0.9 million and $1.7 million, respectively, of amortization of deferred financing costs. Additionally, during the three and six months ended June 30, 2018, the Company capitalized $0.6 million and $1.3 million, respectively, of interest related to its investments in undeveloped land. During the three and six months ended June 30, 2017, the Company incurred $10.3 million and $19.7 million, respectively, of interest expense. Included in interest expense for the three and six months ended June 30, 2017 was $1.3 million and $2.6 million, respectively, of amortization of deferred financing costs. Additionally, during the three and six months ended June 30, 2017, the Company capitalized $0.6 million and $1.1 million, respectively, of interest related to its investments in undeveloped land.
As of June 30, 2018 and December 31, 2017, the Company’s interest payable was $5.4 million and $5.1 million, respectively.
The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of June 30, 2018 (in thousands):
July 1, 2018 through December 31, 2018
 
$
103,416

2019
 
63,350

2020
 
188,742

2021
 
237,616

2022
 
125,227

Thereafter
 
58,467

 
 
$
776,818

The Company’s notes payable contain financial debt covenants. As of June 30, 2018, the Company was in compliance with all of these debt covenants.
Israeli Bond Financing
On March 2, 2016, KBS Strategic Opportunity BVI, a wholly owned subsidiary of the Company, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels.  In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%.  KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023. As of June 30, 2018, the Company has one foreign currency option for an aggregate notional amount of $285.4 million to hedge its exposure to foreign currency exchange rate movements. See note 9, “Derivative Instruments” for a further discussion on the Company’s foreign currency option.
The deed of trust that governs the terms of the Debentures contains various financial covenants. As of June 30, 2018, the Company was in compliance with all of these financial debt covenants.

22

PART I.
FINANCIAL INFORMATION (CONTINUED)
Item 1.
Financial Statements (continued)
KBS STRATEGIC OPPORTUNITY REIT, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2018
(unaudited)

9.
DERIVATIVE INSTRUMENTS
The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates and foreign currency exchange rate movements. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.
The Company enters into foreign currency options and foreign currency collars to mitigate its exposure to foreign currency exchange rate movements on its bonds payable outstanding denominated in Israeli new Shekels. A foreign currency collar consists of a purchased call option to buy and a sold put option to sell Israeli new Shekels. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices. A foreign currency option consists of a call option to buy Israeli new Shekels.
As of June 30, 2018, the Company had entered into a foreign currency option, a USD put/ILS call option, to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar as it has the right, but not the obligation, to purchase up to 970.2 million Israeli Shekels at the rate of ILS 3.4 per USD. The cost of the foreign currency option was $3.4 million. The following table summarizes the notional amount and other information related to the Company’s foreign currency option as of June 30, 2018. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):
Derivative Instrument
 
Notional Amount
 
Strike Price
 
Trade Date
 
Maturity Date
Derivative instrument not designated as hedging instrument
 
 
 
 
 
 
Foreign currency option
 
$
285,361

 
3.40 ILS-USD
 
08/03/2017
 
08/03/2018
The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.
As of June 30, 2018, the Company had entered into two interest rate caps, which were not designated as a hedging instruments. The following table summarizes the notional amounts and other information related to the Company’s derivative instruments as of June 30, 2018. The notional amount is an indication of the extent of the Company’s involvement in the instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):
Derivative Instrument
 
Effective Date
 
Maturity Date
 
Notional Value
 
Reference Rate
Interest rate cap
 
02/21/2017
 
02/13/2020
 
$
46,875

 
One-month LIBOR at 3.00%
Interest rate cap
 
04/02/2018
 
03/05/2021
 
$
77,513

 
One-month LIBOR at 3.50%
The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of June 30, 2018 and December 31, 2017 (dollars in thousands):
 
 
 
 
June 30, 2018
 
December 31, 2017
Derivative Instruments
 
Balance Sheet Location