N-Q 1 fp0031541_nq.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number: 811-22749

 

RESOURCE REAL ESTATE DIVERSIFIED INCOME FUND

(Exact name of registrant as specified in charter)

 

712 Fifth Avenue, 12th Floor

New York, NY 10019

(Address of principal executive offices) (Zip code)

 

(855) 747-9559

(Registrant’s telephone number, including area code)

 

The Corporation Trust Company

Corporation Trust Center, 1209 Orange Street

Wilmington, DE 19801

(Name and address of agent for service)

 

Date of fiscal year end: September 30

 

Date of reporting period: October 1, 2017 - December 31, 2017

 

 

 

Item 1. Schedule of Investments.

 

Resource Real Estate Diversified Income Fund

PORTFOLIO OF INVESTMENTS

December 31, 2017 (Unaudited)

 

   Interest Rate/Dividend Rate   Maturity   Principal   Value 
BONDS & NOTES (1.09%)                
ASSET BACKED SECURITIES (0.00%)(a)                
ACA CLO 2007-1, Ltd., Class SUB(b)(c)(d)(e)(f)   0.000%   06/15/2022   $1,750,000   $9,869 
                     
COMMERCIAL MORTGAGE BACKED SECURITIES (1.09%)                    
Banc of America Commercial Mortgage Trust 2007-3, Class B(f)(g)   5.708%   06/10/2049    520,537    526,045 
Hypo Real Estate Bank International AG, Class A2(d)(f)(g)   3M GBP L + 0.22%   03/20/2022    2,200,000    816,841 
Morgan Stanley Capital I Trust 2007-HQ11, Class B(f)(g)   5.538%   02/12/2044    1,700,000    1,366,761 
                   2,709,647 
TOTAL BONDS & NOTES                    
(Cost $3,939,888)                  2,719,516 

 

                  Shares   Value 
PREFERRED STOCKS (21.21%)                       
REAL ESTATE INVESTMENT TRUSTS (21.21%)                       
American Homes 4 Rent, Series E(f)     6.350%           23,698    634,869 
Annaly Capital Management, Inc., Series D(f)     7.500%           118,328    3,000,798 
ARMOUR Residential REIT, Inc., Series B(f)     7.875%           161,972    4,052,539 
Chimera Investment Corp., Series B(f)     8.000%           36,800    949,440 
City Office REIT, Inc., Series A(f)     6.625%           54,729    1,378,076 
Colony NorthStar, Inc., Series E(f)     8.750%           121,289    3,222,649 
Colony NorthStar, Inc., Series I(f)     7.150%           162,500    4,091,750 
Colony NorthStar, Inc., Series D(f)     8.500%           36,497    932,863 
Colony NorthStar, Inc., Series H(f)     7.125%           70,953    1,774,535 
CYS Investments, Inc., Series B(f)     7.500%           6,123    151,728 
Dynex Capital, Inc., Series B(f)     7.625%           200,000    4,954,000 
Five Oaks Investment Corp., Series A(f)     8.750%           135,006    3,396,751 
Gladstone Commercial Corp., Series D(f)     7.000%           45,904    1,188,914 
Global Medical REIT, Inc., Series A(f)     7.500%           120,000    3,038,400 
Innovative Industrial Properties, Inc., Series A(f)     9.000%           95,000    2,654,300 
New York Mortgage Trust, Inc., Series C(f)     7.875%           77,075    1,896,045 
Pennsylvania Real Estate Investment Trust, Series C(f)     7.200%           129,600    3,356,640 
Pennsylvania Real Estate Investment Trust, Series B(f)     7.375%           17,464    439,744 
Sotherly Hotels, Inc., Series B(f)     8.000%           120,000    3,076,800 
Two Harbors Investment Corp., Series A(f)     8.125%           120,000    3,271,200 
Washington Prime Group, Inc., Series I(f)     6.875%           6,173    152,905 
Wheeler Real Estate Investment Trust, Inc., Series D(f)     8.750%           264,019    5,306,782 
                          
TOTAL PREFERRED STOCKS                         
(Cost $50,823,833)                       52,921,728 
                          
REAL ESTATE INVESTMENT TRUSTS - COMMON STOCKS (99.29%)                         
PUBLIC NON-TRADED REAL ESTATE INVESTMENT TRUSTS (4.53%)                         
Black Creek Group Diversified Property Fund(d)(e)(f)                  30,292    224,467 

 

 

 

   Shares   Value 
PUBLIC NON-TRADED REAL ESTATE INVESTMENT TRUSTS (continued)        
Black Creek Group Diversified Property Fund, Class I(d)(e)(f)   132,945   $985,124 
Cole Credit Property Trust IV, Inc.(d)(e)(f)   4,839    46,839 
Cole Real Estate Income Strategy (Daily NAV), Inc., Class I(d)(e)(f)   111,767    2,073,283 
Healthcare Trust, Inc.(d)(e)   2,981    60,872 
Highlands REIT, Inc.(d)(e)(f)   446,837    156,393 
InvenTrust Properties Corp.(d)(e)(f)   446,837    1,487,968 
Jones Lang Lasalle(d)(e)(f)   265,355    3,104,648 
NorthStar Healthcare Income, Inc.(d)(e)(f)   321,623    2,679,123 
NorthStar Real Estate Income II, Inc.(d)(e)(f)   37,429    320,396 
Phillips Edison Grocery Center REIT I, Inc.(d)(e)(f)   14,984    164,675 
         11,303,788 
PRIVATE REAL ESTATE INVESTMENT TRUSTS (56.75%)          
Barings Core Property Fund, LP(d)(f)        4,904,216 
Broadstone Net Lease(d)(f)        13,437,637 
Brookfield Real Estate Finance V(d)(f)        1,510,800 
Clarion Debt Fund(d)(f)        3,097,827 
Clarion Lion Industrial Trust(d)(f)        12,038,513 
Clarion Lion Properties Fund, LP(d)(f)        16,186,802 
Clarion Ventures(d)(f)        10,822,929 
Cottonwood Residential, Inc.(d)(f)        1,297,663 
Guggenheim US Property Private REIT(d)(f)        16,406,119 
Heitman Core Real Estate Debt Income(d)(f)        25,205,062 
Metlife Commercial Mortgage Income Fund LP(d)(f)        6,815,423 
Och-Ziff Real Estate Advisors LP(d)(f)        1,800,642 
PGIM Real Estate US Debt Fund(d)(f)        12,293,970 
Reverse Mortgage Investment Trust, Inc.(b)(d)(e)(f)        320,000 
Sentinel Real Estate Fund Private REIT(d)(f)        3,038,065 
Truman REIT(d)(f)        1,777,154 
UBS Trumbull LP(d)(f)        5,290,226 
UBS Trumbull Property Fund(d)(f)        5,359,705 
         141,602,753 
TRADED REAL ESTATE INVESTMENT TRUSTS (38.01%)          
Arlington Asset Investment Corp., Class A(f)   242,072    2,851,608 
Blackstone Mortgage Trust, Inc., Class A(f)   141,746    4,561,386 
City Office REIT, Inc.(f)   347,834    4,525,320 
Colony NorthStar, Inc., Class A(f)   236,416    2,697,507 
Condor Hospitality Trust, Inc.(f)   302,500    3,009,875 
EPR Properties(f)   30,584    2,002,029 
Five Oaks Investment Corp.(f)   85,186    340,744 
Global Medical REIT, Inc.(f)   888,752    7,287,766 
Great Ajax Corp.(f)   168,728    2,331,821 
Independence Realty Trust, Inc.(f)   571,423    5,765,658 
Innovative Industrial Properties, Inc.(f)   113,052    3,652,710 
MedEquities Realty Trust, Inc.(f)   215,000    2,412,300 
Medical Properties Trust, Inc.(f)   133,111    1,834,270 

 

 

 

   Shares   Value 
TRADED REAL ESTATE INVESTMENT TRUSTS (continued)        
MFA Financial, Inc.(f)   268,900   $2,129,688 
National Storage Affiliates Trust(f)   125,150    3,411,589 
New Residential Investment Corp.(f)   333,700    5,966,556 
Omega Healthcare Investors, Inc.(f)   138,420    3,812,087 
Orchid Island Capital, Inc.(f)   564,162    5,235,423 
Park Hotels & Resorts, Inc.(f)   78,554    2,258,428 
Plymouth Industrial REIT, Inc.(f)   201,250    3,719,100 
Sachem Capital Corp.(f)   1,038,025    4,089,819 
Spirit Realty Capital, Inc.(f)   211,600    1,815,528 
STAG Industrial, Inc.(f)   103,260    2,822,096 
Uniti Group, Inc.(f)   290,400    5,166,216 
Washington Prime Group, Inc.(f)   439,515    3,129,347 
Whitestone REIT(f)   436,257    6,286,463 
WP Carey, Inc.(f)   25,197    1,736,073 
         94,851,407 
TOTAL REAL ESTATE INVESTMENT TRUSTS - COMMON STOCKS          
(Cost $236,846,762)        247,757,948 

 

   Notional Amount   Number of Contracts   Value 
PURCHASED OPTIONS (0.55%)            
iShares U.S. Real Estate ETF, Put, Exercise Price $80, (expiring 03/16/18)  $94,781,700    11,700    1,380,600 
                
TOTAL PURCHASED OPTIONS               
(Cost $1,398,636)             1,380,600 
                
                
TOTAL INVESTMENTS (122.14%)               
(Cost $293,009,119)            $304,779,792 
                
LINE OF CREDIT (-24.58%)             (61,335,535)
                
Other Assets In Excess Of Liabilities (2.44%)             6,080,935(h)
                
NET ASSETS (100.00%)            $249,525,192 

 

Investment Abbreviations:

LIBOR - London Interbank Offered Rate

 

Libor Rates:

3M GBP L - 3 Month POUND LIBOR as of December 31, 2017 was 0.52%

 

(a)Less than 0.005% of Net Assets.
(b)Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. As of December 31, 2017, the aggregate market value of those securities was $329,869, representing 0.13% of net assets.
(c)Issued with a zero coupon. Income is recognized through the accretion of discount.
(d)Illiquid security. See below.
(e)Fair Value estimated using Fair Valuation Procedures adopted by the Board of Trustees. Total value of such securities is $11,623,788, representing 4.66% of net assets.
(f)All or a portion of each of these securities may be segregated as collateral for written options and the Fund's line of credit. The aggregate market value of those securities was $308,428,156.

 

 

 

(g)Variable rate investment. Interest rates reset periodically. Interest rate shown reflects the rate in effect at December 31, 2017. For securities based on a published reference rate and spread, the reference rate and spread are indicated in the description above. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.
(h)Includes cash which is being held as collateral for futures, written options, and line of credit.

 

Securities determined to be illiquid under the procedures approved by the Fund's Board of Trustees.

 

Information related to the illiquid securities is as follows:

 

Date(s) of Purchase  Security  Cost   Value  

% of Net

Assets

 
 01/26/15  ACA CLO 2007-1, Ltd., Class SUB  $200,209   $9,869    0.00%(a)
 10/01/15-07/01/16  Barings Core Property Fund, LP   4,500,000    4,904,216    1.97%
 04/05/13-11/12/14  Black Creek Group Diversified Property Fund   146,085    224,467    0.09%
 3/31/17  Black Creek Group Diversified Property Fund, Class I   1,000,000    985,124    0.40%
 10/31/16-05/31/17  Broadstone Net Lease   13,000,000    13,437,637    5.38%
 06/26/17  Brookfield Real Estate Finance V   1,567,804    1,510,800    0.61%
 02/14/17-07/21/17  Clarion Debt Fund   3,174,050    3,097,827    1.24%
 01/01/14-04/03/17  Clarion Lion Industrial Trust   10,300,000    12,038,513    4.82%
 01/01/14-07/01/16  Clarion Lion Properties Fund, LP   14,050,000    16,186,802    6.49%
 07/01/16-08/04/17  Clarion Ventures   10,036,915    10,822,929    4.34%
 05/22/13  Cole Credit Property Trust IV, Inc.   38,995    46,839    0.02%
 04/17/14-03/31/17  Cole Real Estate Income Strategy (Daily NAV), Inc., Class I   1,703,331    2,073,283    0.83%
 02/24/14-07/21/14  Cottonwood Residential, Inc.   642,116    1,297,663    0.52%
 09/01/16-07/31/17  Guggenheim US Property Private REIT   16,000,000    16,406,119    6.57%
 11/08/13  Healthcare Trust, Inc.   52,157    60,872    0.02%
 07/27/17  Heitman Core Real Estate Debt Income   25,000,000    25,205,062    10.10%
 02/06/15  Highlands REIT, Inc.   142,690    156,393    0.06%
 10/30/15  Hypo Real Estate Bank International AG, Class A2   1,535,459    816,841    0.33%
 02/06/15  InvenTrust Properties Corp.   1,390,454    1,487,968    0.60%
 11/27/13-03/12/15  NorthStar Healthcare Income, Inc.   2,475,092    2,679,123    1.07%
 03/11/14-06/30/15  NorthStar Real Estate Income II, Inc.   289,709    320,396    0.13%
 06/28/17  Och-Ziff Real Estate Advisors LP   2,021,647    1,800,642    0.72%
 07/31/17  PGIM Real Estate US Debt Fund   12,305,732    12,293,970    4.93%
 08/07/13-11/25/13  Phillips Edison Grocery Center REIT I, Inc.   111,563    164,675    0.07%
 02/06/14-06/06/14  Reverse Mortgage Investment Trust, Inc.   193,300    320,000    0.13%
 06/28/17-07/31/17  Sentinel Real Estate Fund Private REIT   3,000,000    3,038,065    1.22%
 06/24/16-12/15/16  Truman REIT   1,377,428    1,777,154    0.71%
 07/01/16-04/03/17  UBS Trumbull LP   5,200,000    5,290,226    2.12%
 01/04/16-01/03/17  UBS Trumbull Property Fund   5,200,000    5,359,705    2.15%
    Total  $136,654,736   $143,813,180    57.64%

 

(a)Less than 0.005%.

 

Additional information on investments in private real estate investment trusts:

 

Value   Security  Redemption Frequency  Redemption Notice (Days)   Unfunded Commitments as of December 31, 2017 
$4,904,216   Barings Core Property Fund, LP  Quarterly   30   $– 
 13,437,637   Broadstone Net Lease  N/A   N/A    – 
 1,510,800   Brookfield Real Estate Finance V  N/A   N/A    23,422,756 
 3,097,827   Clarion Debt Fund  N/A   N/A    8,854,321 
 12,038,513   Clarion Lion Industrial Trust  Quarterly   90    – 
 16,186,802   Clarion Lion Properties Fund, LP  Quarterly   90    – 
 10,822,929   Clarion Ventures  N/A   N/A    3,118,358 
 1,297,663   Cottonwood Residential, Inc.  Daily   60    – 
 16,406,119   Guggenheim US Property Private REIT  Quarterly   60    – 
 25,205,062   Heitman Core Real Estate Debt Income  Quarterly   90    – 
 6,815,423   Metlife Commercial Mortgage Income Fund LP  Quarterly   90    3,183,240 
 1,800,642   Och-Ziff Real Estate Advisors LP  N/A   N/A    18,472,559 

 

 

 

Value   Security  Redemption Frequency  Redemption Notice (Days)   Unfunded Commitments as of December 31, 2017 
$12,293,970   PGIM Real Estate US Debt Fund  N/A   N/A   $12,694,268 
 320,000   Reverse Mortgage Investment Trust, Inc.(a)  N/A   IPO(b)    – 
 3,038,065   Sentinel Real Estate Fund Private REIT  Quarterly   N/A    – 
 1,777,154   Truman REIT  N/A   N/A    – 
 5,290,226   UBS Trumbull LP  Quarterly   60    – 
 5,359,705   UBS Trumbull Property Fund  Quarterly   60    – 

 

(a)The fair value of this investment has been estimated using the net asset value per share of the investment and adjusted for any changes in market conditions.
(b)Redemption eligible after the completion of the Initial Price Offering (IPO).

 

Schedule Of Written Options           
                    
At December 31, 2017, the Fund had the following outstanding written options:    
   Number of Contracts   Exercise Price   Maturity Date  Notional Value   Value 
Call Options                   
iShares U.S. Real Estate ETF   (11,700)  $84.00   3/16/2018  $(94,781,700)  $(585,000)
                        
Put Options                       
iShares U.S. Real Estate ETF   (11,700)  $76.00   3/16/2018  $(94,781,700)  $(514,800)
                        
Total Written Options (Premiums $1,379,586)           $(189,563,400)  $(1,099,800)

 

See Notes to Quarterly Portfolio of Investments.

 

 

 

Resource Real Estate Diversified Income Fund

NOTES TO PORTFOLIO OF INVESTMENTS (Unaudited)

December 31, 2017

 

1. ORGANIZATION

Resource Real Estate Diversified Income Fund (the "Fund") was organized as a Delaware statutory trust on August 1, 2012 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a diversified, closed-end management investment company that operates as an interval fund with a continuous offering of Fund shares. The Fund's investment adviser is Resource Real Estate, LLC (the "Adviser"). The Fund's primary investment objective is to produce current income, with a secondary objective to achieve a long-term capital appreciation with moderate volatility and low to moderate correlation to the broader equity markets. The Fund pursues its investment objectives by investing, under normal circumstances, at least 80% of assets (defined in net assets plus the amount of any borrowing for investment purposes) in real estate and real estate related industry securities, primarily in income producing equity and debt securities.

 

The Fund currently offers Class A, Class C, Class W, Class I, Class U, Class T, Class D and Class L shares. Class A shares commenced operations on March 12, 2013, Class C and Class I shares commenced operations on August 1, 2014, Class W shares commenced operations on November 24, 2014 and Class U, Class T and Class D shares commenced operations on February 13, 2015. Class L shares commenced operations on July 10, 2017. Class C, Class W, Class I and Class D shares are offered at net asset value. Class A shares are offered at net asset value plus a maximum sales charge of 5.75% and may also be subject to a 0.50% early withdrawal charge, which will be deducted from repurchase proceeds, for shareholders tendering shares fewer than 365 days after the original purchase date, if (i) the original purchase was for amounts of $1 million or more and (ii) the selling broker received the reallowance of the dealer-manager fee. Class U shares are offered at net asset value plus a maximum sales charge of 6.50% and may also be subject to a 0.50% early withdrawal charge, which will be deducted from repurchase proceeds, for shareholders tendering shares fewer than 365 days after the original purchase date, if (i) the original purchase was for amounts of $1 million or more and (ii) the selling broker received the reallowance of the dealer-manager fee. Class T shares are offered at net asset value plus a maximum sales charge of 1.50% and may also be subject to a 1.00% early withdrawal charge, which will be deducted from repurchase proceeds, for shareholders tendering shares fewer than 365 days after the original purchase date. Class C Shares are subject to a 1.00% early withdrawal charge. Class L shares are offered at net asset value plus a maximum sales charge of 4.75%. Each class represents an interest in the same assets of the Fund and classes are identical except for differences in their sales charge structures and ongoing service and distribution charges. All classes of shares have equal voting privileges except that each class has exclusive voting rights with respect to its service and/or distribution plans. The Fund’s income, expenses (other than class specific distribution fees) and realized and unrealized gains and losses are allocated proportionately each day based upon the relative net assets of each class.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies followed by the Fund. These policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Fund is considered an investment company for financial reporting purposes under GAAP. The information contained herein was prepared in accordance with GAAP, which requires management to make certain estimates and assumptions that affect the reported amounts as of the reporting period. Management believes these estimates and security valuations are appropriate; however, actual results may differ from those estimates, and the security valuations reflected in the financial statements may differ from the value the Fund ultimately realizes upon sale of the securities.

 

Security Valuation – Securities listed on an exchange are valued at the last reported sale price at the close of the regular trading session of the exchange on the business day the value is being determined, or in the case of securities listed on NASDAQ at the NASDAQ Official Closing Price (“NOCP”). In the absence of a sale such securities shall be valued at the last bid price. Short-term investments that mature in 60 days or less may be valued at amortized cost, provided such valuations represent fair value.

 

When price quotations for certain securities are not readily available, or if the available quotations are not believed to be reflective of market value by the Adviser, those securities will be valued at “fair value” as determined in good faith by the Fund’s Valuation Committee using procedures adopted by and under the supervision of the Fund’s Board of Trustees (the “Board”). There can be no assurance that the Fund could purchase or sell a portfolio security at the price used to calculate the Fund’s net asset value (“NAV”).

 

 

 

Fair valuation procedures may be used to value a substantial portion of the assets of the Fund. The Fund may use the fair value of a security to calculate its NAV when, for example, (1) a portfolio security is not traded in a public market or the principal market in which the security trades is closed, (2) trading in a portfolio security is suspended and not resumed prior to the normal market close, (3) a portfolio security is not traded in significant volume for a substantial period, or (4) the Adviser determines that the quotation or price for a portfolio security provided by a broker-dealer or independent pricing service is inaccurate.

 

The “fair value” of securities may be difficult to determine and thus judgment plays a greater role in the valuation process. The fair valuation methodology may include or consider the following guidelines, as appropriate: (1) evaluation of all relevant factors, including but not limited to, pricing history, current market level, supply and demand of the respective security; (2) comparison to the values and current pricing of securities that have comparable characteristics; (3) knowledge of historical market information with respect to the security; (4) other factors relevant to the security which would include, but not be limited to, duration, yield, fundamental analytical data, the Treasury yield curve, and credit quality.

 

Valuation of Private REITs – The Fund invests a significant portion of its assets in Private Real Estate Investment Trusts (“Private REITs”). The Private REITs measure their investment assets at fair value, and report a NAV per share on a calendar quarter basis. In accordance with Accounting Standards Codification (“ASC”) 820, the Fund has elected to apply the practical expedient and to value its investments in Private REITs at their respective NAVs at each quarter. For non-calendar quarter days, the Valuation Committee estimates the fair value of each Private REIT by adjusting the most recent NAV for each REIT, as necessary, by the change in a relevant benchmark that the Valuation Committee has deemed to be representative of the entire Private REIT market.

 

Valuation of Public Non-Traded REITs – The Fund invests a significant portion of its assets in Public Non-Traded Real Estate Investment Trusts (“Public Non-Traded REITs”). The Public Non-Traded REITs do not timely report periodic NAVs and therefore cannot be valued using the practical expedient. The Valuation Committee determines the fair value of Public Non-Traded REITs by considering various factors such as the most recent published NAV, the transaction price, secondary market trades, shareholder redemption and dividend reinvestment programs, discounted cash flows and potentially illiquidity discounts.

 

Fair Value Measurements – A three-tier hierarchy has been established to classify fair value measurements for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability that are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability that are developed based on the best information available. In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Fund discloses fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value.

 

Various inputs are used in determining the value of the Fund’s investments as of the reporting period end. These inputs are categorized in the following hierarchy under applicable financial accounting standards:

 

Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities that the Fund has the ability to access.

 

Level 2 – Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.

 

Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participate would use in valuing the asset or liability, and would be based on the best information available.

 

 

 

The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

 

An investment level within the fair value hierarchy is based on the lowest level input, individually or in the aggregate, that is significant to fair value measurement. The valuation techniques used by the Fund to measure fair value during the period ended December 31, 2017 maximized the use of observable inputs and minimized the use of unobservable inputs.

 

The inputs or methodologies used for valuing securities are not necessarily an indication of the risk or liquidity associated with investing in those securities. The following is a summary of the inputs used in valuing the Fund's investments as of December 31, 2017:

 

Investments in Securities at Value  Level 1   Level 2   Level 3   Total 
Bonds & Notes(a)  $–   $2,719,516   $–   $2,719,516 
Preferred Stocks(a)   52,921,728    –    –    52,921,728 
Real Estate Investment Trusts - Common Stocks                    
Public Non-Traded Real Estate Investment Trusts  $6,387,522   $–   $4,916,266   $11,303,788 
Private Real Estate Investment Trusts   –    –    320,000    320,000 
Private Real Estate Investment Trusts (Measured at net asset value)(b)   –    –    –    141,282,753 
Traded Real Estate Investment Trusts   94,851,407    –    –    94,851,407 
Purchased Options   1,380,600    –    –    1,380,600 
TOTAL  $155,541,257   $2,719,516   $5,236,266   $304,779,792 

 

Other Financial Instruments   Level 1    Level 2    Level 3    Total 
Liabilities                    
Written Options  $(1,099,800)  $–   $–   $(1,099,800)
TOTAL  $(1,099,800)  $–   $–   $(1,099,800)

 

(a) For detailed descriptions, see the accompanying Portfolio of Investments.
(b) In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Statement of Assets and Liabilities.

 

There were no transfers between Levels 1 and 2 during the period ended December 31, 2017. It is the Fund's policy to recognize transfers between levels at the end of the reporting period.

 

The following is a reconciliation of assets in which Level 3 inputs were used in determining value:

 

 

 

Security Transactions and Investment Income – Investment security transactions are accounted for on a trade date basis.

 

 

 

Industry Concentration – If the Fund has significant investments in the securities of issuers within a particular industry, any development affecting that industry will have a greater impact on the value of the net assets of the Fund than would be the case if the Fund did not have significant investments in that industry. In addition, this may increase the risk of loss in the Fund and increase the volatility of the Fund's net asset value per share. Occasionally, market conditions, regulatory changes or other developments may negatively impact this industry, and therefore the value of the Fund's portfolio will be adversely affected. As of December 31, 2017, the Fund had 120.50% of the value of its net assets invested within the Real Estate industry.

 

3. DERIVATIVE TRANSACTIONS

Derivative Instruments and Hedging Activities – The following discloses the Fund's use of derivative instruments and hedging activities.

 

The Fund's investment objectives not only permit the Fund to purchase investment securities, it also allows the Fund to enter into various types of derivative contracts such as futures. In doing so, the Fund will employ strategies in differing combinations to permit them to increase, decrease, or change the level or types of exposure to market factors. Central to those strategies are features inherent to derivatives that make them more attractive for this purpose than equity or debt securities; they require little or no initial cash investment, they can focus exposure on only certain selected risk factors, and they may not require the ultimate receipt or delivery of the underlying security (or securities) to the contract. This may allow the Fund to pursue their objectives more quickly and efficiently than if it were to make direct purchases or sales of securities capable of effecting a similar response to market factors.

 

Market Risk Factors – In pursuit of its investment objectives, the Fund may seek to use derivatives to increase or decrease its exposure to the following market risk factors:

 

Foreign Exchange Rate Risk: Foreign exchange rate risk relates to the change in the U.S. dollar value of a security held that is denominated in a foreign currency. The value of a foreign currency denominated security will decrease as the dollar appreciates against the currency, while the value of the foreign currency denominated security will increase as the dollar depreciates against the currency.

 

Risk of Investing in Derivatives: The Fund's use of derivatives can result in losses due to unanticipated changes in the market risk factors and the overall market.

 

Derivatives may have little or no initial cash investment relative to their market value exposure and therefore can produce significant gains or losses in excess of their cost. This use of embedded leverage allows the Fund to increase its market value exposure relative to its net assets and can substantially increase the volatility of the Fund's performance.

 

Additional associated risks from investing in derivatives also exist and potentially could have significant effects on the valuation of the derivative and the Fund. Typically, the associated risks are not the risks that the Fund is attempting to increase or decrease exposure to, per their investment objectives, but are the additional risks from investing in derivatives.

 

Examples of these associated risks are liquidity risk, which is the risk that the Fund will not be able to sell the derivative in the open market in a timely manner, and counterparty credit risk, which is the risk that the counterparty will not fulfill its obligation to the Fund.

 

 

 

Futures – The Fund may invest in futures contracts in accordance with its investment objectives. The Fund does so for a variety of reasons, including for cash management, hedging or non-hedging purposes in an attempt to achieve investment returns consistent with the Fund's investment objective. A futures contract provides for the future sale by one party and purchase by another party of a specified quantity of the security or other financial instrument at a specified price and time. A futures contract on an index is an agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to the difference between the value of the index at the close of the last trading day of the contract and the price at which the index contract was originally written. Futures transactions may result in losses in excess of the amount invested in the futures contract. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. An incorrect correlation could result in a loss on both the hedged securities in a Fund and the hedging vehicle so that the portfolio return might have been greater had hedging not been attempted. There can be no assurance that a liquid market will exist at a time when a Fund seeks to close out a futures contract or a futures option position. Lack of a liquid market for any reason may prevent the Fund from liquidating an unfavorable position, and the Fund would remain obligated to meet margin requirements until the position is closed. In addition, the Fund could be exposed to risk if the counterparties to the contracts are unable to meet the terms of their contracts. With exchange-traded futures, there is minimal counterparty credit risk to the Fund since futures are exchange-traded and the exchange's clearinghouse, as counterparty to all exchange-traded futures, guarantees the futures against default.

 

When a purchase or sale of a futures contract is made by the Fund, the Fund is required to deposit with its custodian (or broker, if legally permitted) a specified amount of liquid assets ("initial margin"). The margin required for a futures contract is set by the exchange on which the contract is traded and may be modified during the term of the contract. The initial margin is in the nature of a performance bond or good faith deposit on the futures contract that is returned to the Fund upon termination of the contract, assuming all contractual obligations have been satisfied. Each day the Fund may pay or receive cash, called "variation margin," equal to the daily change in value of the futures contract. Such payments or receipts are recorded for financial statement purposes as unrealized gains or losses by the Fund. Variation margin does not represent a borrowing or loan by the Fund but is instead a settlement between the Fund and the broker of the amount one would owe the other if the futures contract expired. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.

 

 

 

Item 2. Controls and Procedures.

 

(a)The registrant’s principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date.

 

(b)There was no change in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the registrant's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.

 

Item 3. Exhibits.

 

Separate certifications for the registrant's principal executive officer and principal financial officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached as Ex99.CERT.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RESOURCE REAL ESTATE DIVERSIFIED INCOME FUND

 

By: /s/ Alan Feldman  
  Alan Feldman  
  Chief Executive Officer (Principal Executive Officer)  
     
Date: February 28, 2018  

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By: /s/ Alan Feldman  
  Alan Feldman  
  Chief Executive Officer (Principal Executive Officer)  
     
Date: February 28, 2018  

 

By: /s/ Steven R. Saltzman  
  Steven R. Saltzman  
  Treasurer (Principal Financial Officer)  
     
Date: February 28, 2018