10-Q 1 kbssoriiq2201810q.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 000-55424
______________________________________________________
 
KBS STRATEGIC OPPORTUNITY REIT II, INC.
(Exact Name of Registrant as Specified in Its Charter)
______________________________________________________
Maryland
 
46-2822978
(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
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
x
 
 
 
 
Emerging growth company
 
x
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.   x
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 17,853,044 and 11,980,251 outstanding shares of Class A and Class T common stock, respectively, of KBS Strategic Opportunity REIT II, Inc.



KBS Strategic Opportunity REIT II, 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 II, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
 
 
June 30, 2018
 
December 31, 2017
 
 
(unaudited)
 
 
Assets
 
 
 
 
Real estate, net
 
$
529,187

 
$
530,440

Real estate equity securities
 
7,300

 

Real estate loan receivable, net
 

 
3,500

Total real estate and real estate-related investments, net
 
536,487

 
533,940

Cash and cash equivalents
 
27,134

 
29,031

Restricted cash
 
7,056

 
6,022

Investment in unconsolidated entity
 
2,732

 
2,698

Rents and other receivables
 
6,241

 
3,265

Above-market leases, net
 
74

 
83

Prepaid expenses and other assets
 
8,231

 
7,476

Total assets
 
$
587,955

 
$
582,515

Liabilities and equity
 
 
 
 
Notes payable, net
 
$
328,674

 
$
328,351

Accounts payable and accrued liabilities
 
7,357

 
6,845

Due to affiliates
 
1,535

 
1,862

Distributions payable
 
374

 
366

Below-market leases, net
 
8,951

 
10,783

Other liabilities
 
13,861

 
12,399

Total liabilities
 
360,752

 
360,606

Commitments and contingencies (Note 12)
 


 


Redeemable common stock
 
1,846

 
2,611

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

 

Class A common stock, $.01 par value per share; 500,000,000 shares authorized, 17,619,873 and 16,888,940 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
176

 
169

Class T common stock, $.01 par value per share; 500,000,000 shares authorized, 11,770,887 and 11,031,895 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
118

 
110

Additional paid-in capital
 
259,191

 
245,077

Cumulative distributions and net losses
 
(47,614
)
 
(39,657
)
Accumulated other comprehensive income
 
134

 
202

Total KBS Strategic Opportunity REIT II, Inc. stockholders’ equity
 
212,005

 
205,901

Noncontrolling interests
 
13,352

 
13,397

Total equity
 
225,357

 
219,298

Total liabilities and equity
 
$
587,955

 
$
582,515

See accompanying condensed notes to consolidated financial statements.

2

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

KBS STRATEGIC OPPORTUNITY REIT II, 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:
 
 
 
 
 
 
 
 
Office revenues
 
$
7,361

 
$
1,782

 
$
14,960

 
$
3,606

Hotel revenues
 
10,263

 
6,470

 
15,773

 
11,313

Apartment revenues
 
1,803

 
1,699

 
3,519

 
3,438

Dividend income from real estate equity securities
 
36

 

 
36

 

Interest income from real estate loan receivable
 

 
101

 
10

 
200

Total revenues
 
19,463

 
10,052

 
34,298

 
18,557

Expenses:
 
 
 
 
 
 
 
 
Office expenses
 
3,039

 
597

 
5,710

 
1,177

Hotel expenses
 
6,265

 
4,788

 
11,055

 
9,032

Apartment expenses
 
965

 
862

 
1,882

 
1,698

Asset management fees to affiliate
 
986

 
577

 
1,920

 
1,081

General and administrative expenses
 
604

 
772

 
1,244

 
1,346

Depreciation and amortization
 
5,069

 
2,614

 
10,172

 
5,467

Interest expense
 
3,407

 
1,834

 
6,304

 
3,544

Total expenses
 
20,335

 
12,044

 
38,287

 
23,345

Other income:
 
 
 
 
 
 
 
 
Other interest income
 
91

 
193

 
152

 
289

Equity in income of unconsolidated entity
 
116

 
13

 
131

 
26

Unrealized gain on real estate equity securities
 
400

 

 
314

 

Total other income
 
607

 
206

 
597

 
315

Net loss before income taxes
 
(265
)
 
(1,786
)
 
(3,392
)
 
(4,473
)
Income tax benefit
 

 
428

 
9

 
437

Net loss
 
(265
)
 
(1,358
)
 
(3,383
)
 
(4,036
)
Net (income) loss attributable to noncontrolling interests
 
(39
)
 
78

 
213

 
308

Net loss attributable to common stockholders
 
$
(304
)
 
$
(1,280
)
 
$
(3,170
)
 
$
(3,728
)
 
 
 
 
 
 
 
 
 
Class A Common Stock:
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(23
)
 
$
(650
)
 
$
(1,593
)
 
$
(2,138
)
Net loss per common share, basic and diluted
 
$

 
$
(0.04
)
 
$
(0.09
)
 
$
(0.14
)
Weighted-average number of common shares outstanding, basic and diluted
 
17,565,835

 
15,632,018

 
17,399,380

 
15,285,252

 
 
 
 
 
 
 
 
 
Class T Common Stock:
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(281
)
 
$
(630
)
 
$
(1,577
)
 
$
(1,590
)
Net loss per common share, basic and diluted
 
$
(0.02
)
 
$
(0.06
)
 
$
(0.14
)
 
$
(0.19
)
Weighted-average number of common shares outstanding, basic and diluted
 
11,664,545

 
9,776,935

 
11,514,548

 
8,580,397

See accompanying condensed notes to consolidated financial statements.

3

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

KBS STRATEGIC OPPORTUNITY REIT II, 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 loss
 
$
(265
)
 
$
(1,358
)
 
$
(3,383
)
 
$
(4,036
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
 
(135
)
 
162

 
(68
)
 
191

Total other comprehensive (loss) income
 
(135
)
 
162

 
(68
)
 
191

Total comprehensive loss
 
(400
)
 
(1,196
)
 
(3,451
)
 
(3,845
)
Total comprehensive (income) loss attributable to noncontrolling interests
 
(39
)
 
78

 
213

 
308

Total comprehensive loss attributable to common stockholders
 
$
(439
)
 
$
(1,118
)
 
$
(3,238
)
 
$
(3,537
)
See accompanying condensed notes to consolidated financial statements.

4

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

KBS STRATEGIC OPPORTUNITY REIT II, 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 Losses
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests
 
Total Equity
 
Class A
 
Class T
 
 
Shares
 
Amounts
 
Shares
 
Amounts
 
Balance, December 31, 2016
14,074,793

 
$
140

 
6,046,591

 
$
61

 
$
176,021

 
$
(27,817
)
 
$
(111
)
 
$
148,294

 
$
11,674

 
$
159,968

Net loss

 

 

 

 

 
(3,272
)
 

 
(3,272
)
 
(26
)
 
(3,298
)
Other comprehensive income

 

 

 

 

 

 
313

 
313

 

 
313

Issuance of common stock
2,641,090

 
27

 
4,822,456

 
48

 
71,841

 

 

 
71,916

 

 
71,916

Stock dividends issued
308,857

 
3

 
184,606

 
2

 
4,643

 
(4,648
)
 

 

 

 

Redemptions of common stock
(135,800
)
 
(1
)
 
(21,758
)
 
(1
)
 
(1,357
)
 

 

 
(1,359
)
 

 
(1,359
)
Transfers to redeemable common stock

 

 

 

 
(490
)
 

 

 
(490
)
 

 
(490
)
Distributions declared

 

 

 

 

 
(3,920
)
 

 
(3,920
)
 

 
(3,920
)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate

 

 

 

 
(4,913
)
 

 

 
(4,913
)
 

 
(4,913
)
Other offering costs

 

 

 

 
(668
)
 

 

 
(668
)
 

 
(668
)
Noncontrolling interests contributions

 

 

 

 

 

 

 

 
1,774

 
1,774

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(25
)
 
(25
)
Balance, December 31, 2017
16,888,940

 
$
169

 
11,031,895

 
$
110

 
$
245,077

 
$
(39,657
)
 
$
202

 
$
205,901

 
$
13,397

 
$
219,298

Net loss

 

 

 

 

 
(3,170
)
 

 
(3,170
)
 
(213
)
 
(3,383
)
Other comprehensive loss

 

 

 

 

 

 
(68
)
 
(68
)
 

 
(68
)
Issuance of common stock
762,335

 
7

 
665,366

 
7

 
13,705

 

 

 
13,719

 

 
13,719

Stock dividends issued
171,682

 
2

 
113,539

 
1

 
2,578

 
(2,581
)
 

 

 

 

Redemptions of common stock
(203,084
)
 
(2
)
 
(39,913
)
 

 
(2,120
)
 

 

 
(2,122
)
 

 
(2,122
)
Transfers from redeemable common stock

 

 

 

 
765

 

 

 
765

 

 
765

Distributions declared

 

 

 

 

 
(2,206
)
 

 
(2,206
)
 

 
(2,206
)
Commissions on stock sales, dealer manager fees and stockholder servicing fees to affiliate

 

 

 

 
(685
)
 

 

 
(685
)
 

 
(685
)
Other offering costs

 

 

 

 
(129
)
 

 

 
(129
)
 

 
(129
)
Noncontrolling interests contributions

 

 

 

 

 

 

 

 
518

 
518

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 
(350
)
 
(350
)
Balance, June 30, 2018
17,619,873

 
$
176

 
11,770,887

 
$
118

 
$
259,191

 
$
(47,614
)
 
$
134

 
$
212,005

 
$
13,352

 
$
225,357

See accompanying condensed notes to consolidated financial statements.


5

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

KBS STRATEGIC OPPORTUNITY REIT II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
 
For the Six Months Ended June 30,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net loss
 
$
(3,383
)
 
$
(4,036
)
Adjustment to reconcile net loss to net cash provided by operating activities
 
 
 
 
Equity in income of unconsolidated entity
 
(131
)
 
(26
)
Distribution of earnings from unconsolidated entity
 
29

 
26

Depreciation and amortization
 
10,172

 
5,467

Unrealized gain on real estate equity securities
 
(314
)
 

Insurance proceeds received for repair and cleanup costs
 

 
2,368

Noncash interest income on real estate-related investment
 

 
(38
)
Deferred rents
 
(1,042
)
 
(11
)
Bad debt expense
 
179

 
213

Amortization of above- and below-market leases, net
 
(1,823
)
 
(329
)
Amortization of deferred financing costs
 
530

 
384

Unrealized (gain) loss on derivative instruments
 
(61
)
 
73

Changes in operating assets and liabilities:
 
 
 
 
Rents and other receivables
 
(2,259
)
 
380

Prepaid expenses and other assets
 
(1,370
)
 
(995
)
Accounts payable and accrued liabilities
 
412

 
(3,104
)
Due to affiliates
 
6

 
6

Other liabilities
 
1,621

 
417

Net cash provided by operating activities
 
2,566

 
795

Cash Flows from Investing Activities:
 
 
 
 
Improvements to real estate
 
(4,768
)
 
(4,489
)
Investment in real estate securities
 
(6,986
)
 

Payments for construction in progress
 
(3,244
)
 
(2,325
)
Payoff of real estate loan receivable
 
3,500

 

Purchase of interest rate cap agreement
 
(8
)
 

Proceeds from insurance claims
 
237

 
908

Net cash used in investing activities
 
(11,269
)
 
(5,906
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from notes payable
 
1,753

 
1,951

Principal payments on notes payable
 
(2,166
)
 

Payments of deferred financing costs
 
(100
)
 
(58
)
Principal payments on capital lease obligations
 
(175
)
 

Proceeds from issuance of common stock
 
12,509

 
52,336

Payments to redeem common stock
 
(2,122
)
 
(302
)
Payments of commissions on stock sales, dealer manager fees and stockholder servicing fees
 
(1,185
)
 
(3,161
)
Distributions paid
 
(842
)
 
(677
)
Noncontrolling interest contributions
 
518

 
80

Distributions to noncontrolling interest
 
(350
)
 
(25
)
Net cash provided by financing activities
 
7,840

 
50,144

Net (decrease) increase in cash, cash equivalents and restricted cash
 
(863
)
 
45,033

Cash, cash equivalents and restricted cash, beginning of period
 
35,053

 
47,126

Cash, cash equivalents and restricted cash, end of period
 
$
34,190

 
$
92,159

Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Interest paid, net of capitalized interest of $2,607 and $1,710 for the six months ended June 30, 2018 and 2017, respectively
 
$
5,160

 
$
2,595

Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
 
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan
 
$
1,356

 
$
1,084

Increase in accrued improvements to real estate
 
$
218

 
$
158

Increase in other offering costs due to affiliates
 
$
129

 
$
496

Stock dividends issued
 
$
2,581

 
$
2,225

Increase in distributions payable
 
$
8

 
$
51

Foreign currency translation (loss) gain on investment in unconsolidated entity
 
$
(68
)
 
$
191

Increase in construction in progress payable
 
$
23

 
$
649

See accompanying condensed notes to consolidated financial statements.

6

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



1.
ORGANIZATION
KBS Strategic Opportunity REIT II, Inc. (the “Company”) was formed on February 6, 2013 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2014 and intends to continue to operate in such a manner. The Company’s business is conducted through KBS Strategic Opportunity Limited Partnership II (the “Operating Partnership”), a Delaware limited partnership formed on February 7, 2013. The Company is the sole general partner of, and owns a 0.1% partnership interest in, the Operating Partnership. KBS Strategic Opportunity Holdings II LLC (“REIT Holdings”), a Delaware limited liability company formed on February 7, 2013, owns the remaining 99.9% partnership interest in the Operating Partnership and is the sole limited partner. The Company is the sole member and manager of REIT Holdings. The Company has three wholly owned taxable REIT subsidiaries (“TRS”), two of which lease the Company’s hotel properties and in turn contract with independent hotel management companies that manage the day-to-day operations of the Company’s hotels; the third consolidates the Company’s wholly owned TRSs.  The Company’s TRSs are subject to federal and state income tax at regular corporate tax rates.
Subject to certain restrictions and limitations, the business of the Company has been externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, since July 2013 pursuant to an advisory agreement (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate loans, opportunistic real estate, and other real estate-related investments. The Advisor has entered into a sub-advisory agreement with STAM, a real estate operating company to provide real estate acquisition and portfolio management services to the Advisor in connection with any investments the Company may make in value-added real estate, distressed debt, and real estate-related investments in Europe. On July 3, 2013, the Company issued 21,739 shares of its common stock to the Advisor at a purchase price of $9.20 per share.
The Company expects to invest in and manage a diverse portfolio of opportunistic real estate, real estate-related loans, real estate-related debt securities and other real estate-related investments located in the United States and Europe. Such investments may include the acquisition of distressed debt, the origination and acquisition of mortgage, mezzanine, bridge and other real estate-related loans, investment in opportunistic real estate and investments in real estate-related debt securities such as residential and commercial mortgage-backed securities and collateralized debt obligations. The Company may also invest in entities that make similar investments. As of June 30, 2018, the Company had invested in two hotel properties, four office properties, one apartment building, an investment in an unconsolidated entity and an investment in real estate equity securities. Additionally as of June 30, 2018, the Company had entered into a joint venture to develop one retail property, which is currently under construction.
From July 3, 2013 to August 11, 2014, the Company conducted a private placement offering (the “Private Offering”) exempt from registration under Regulation D of the Securities Act of 1933, as amended (the “Act”). The Company sold 3,619,851 shares of common stock for gross offering proceeds of $32.2 million in the Private Offering.
On November 14, 2013, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 180,000,000 shares of common stock for sale to the public (the “Public Offering”), of which 100,000,000 shares were registered in a primary offering and 80,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on August 12, 2014. On February 11, 2016, the Company filed an amended registration statement on Form S-11 with the SEC to offer a second class of common stock designated as Class T shares and to designate its initially offered and outstanding common stock as Class A shares. Pursuant to the amended registration statement, the Company is offering to sell any combination of Class A and Class T shares in the Public Offering but in no event may the Company sell more than 180,000,000 of shares of its common stock pursuant to the Public Offering. The Company commenced offering Class T shares of common stock for sale to the public on February 17, 2016. KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Advisor, serves as the dealer manager of the Public Offering pursuant to a dealer manager agreement originally dated August 12, 2014 and amended and restated February 17, 2016 (the “Dealer Manager Agreement”). Previously the Dealer Manager served as dealer manager for the Private Offering. The Dealer Manager is responsible for marketing the Company’s shares.

7

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



On January 7, 2015, the Company broke escrow in the Public Offering and through June 30, 2018, the Company had sold 12,242,387 and 11,443,519 shares of Class A and Class T common stock, respectively, in the Public Offering for aggregate gross offering proceeds of $230.0 million, including 496,426 and 146,459 shares of Class A and Class T common stock, respectively, under its dividend reinvestment plan for aggregate gross offering proceeds of $6.0 million. Also as of June 30, 2018, the Company had redeemed 410,408 and 61,671 shares of Class A and Class T common stock, respectively, for $4.1 million.
On each of April 2, 2014 and July 31, 2014, the Company issued 120,106 shares of Class A common stock to Willowbrook Capital Group LLC, an entity owned and controlled by Keith D. Hall, one of the Company’s directors and the Company’s Chief Executive Officer, and Peter McMillan III, also one of the Company’s directors and the Company’s President, for $1.0 million. On July 14, 2017 and February 13, 2018, the Company issued 214,175 shares and 10,935 shares, respectively, of Class A common stock to a business associate of Keith D. Hall and Peter McMillan III for approximately $2.0 million and $0.1 million, respectively. The Company issued these shares of common stock in a private transaction exempt from the registration requirements of the Act pursuant to Section 4(2) of the Act.
On August 10, 2017, the Company filed a registration statement on Form S-11 with the SEC to register a proposed follow-on offering. Pursuant to the follow-on offering registration statement, the Company proposes to register up to $500.0 million of shares of common stock for sale to the public in a primary offering. The Company also  proposes to register up to $125.0 million of shares of common stock pursuant to the dividend reinvestment plan in the follow-on offering. The Company can give no assurance that it will commence or complete the follow-on offering.
The Company ceased offering shares of common stock in the primary offering on July 31, 2018 and is continuing to process subscriptions. Subscriptions must be dated on or before July 31, 2018, and subscriptions and all related documents and funds must be received by the Company in good order no later than September 28, 2018.
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 and the addition of an accounting policy with respect to real estate equity securities. 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 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.

8

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



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.
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 other operating income and tenant reimbursements for substantial services earned at the Company’s office properties and hotel revenues. The recognition of such revenue will occur when the services are provided and the performance obligations are satisfied.
Hotel Revenue
The Company recognizes revenue for hotels as hotel revenue when earned. Revenues are recorded net of any sales or occupancy tax collected from the Company’s guests. Additionally, some of the Company’s hotel rooms are booked through independent internet travel intermediaries. If the guest pays the independent internet travel intermediary directly, revenue for the room is booked by the Company at the price the Company sold the room to the independent internet travel intermediary, less any discount or commission paid. If the guest pays the Company directly, revenue for the room is booked by the Company on a gross basis. The Company participates in frequent guest programs sponsored by the brand owners of the Company’s hotels and the Company expenses the charges associated with those programs, as incurred. Hotel operating revenues are disaggregated in the real estate footnote into the categories of rooms revenue, food, beverage and convention services revenue, campground revenue and other revenue to demonstrate how economic factors affect the nature, amount, timing, and uncertainty of revenue and cash flows.
Room revenue is generated through contracts with customers whereby the customer agrees to pay a daily rate for right to use a hotel room. The Company’s contract performance obligations are fulfilled at the end of the day that the customer is provided the room and revenue is recognized daily at the contract rate. Payment from the customer is secured at the end of the contract upon check-out by the customer from the Company’s hotel. The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future stay at the Company’s hotels. Advanced deposits for room revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits are recognized as revenue at the time of the guest’s stay. The Company notes no significant judgments regarding the recognition of rooms revenue.
Food, beverage and convention revenue is generated through contracts with customers whereby the customer agrees to pay a contract rate for restaurant dining services or convention services. The Company’s contract performance obligations are fulfilled at the time that the meal is provided to the customer or when the convention facilities and related dining amenities are provided to the customer. The Company recognizes food and beverage revenue upon the fulfillment of the contract with the customer. The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future banquet event at the Company’s hotels. Advanced deposits for food and beverage revenue are included in the balance of other liabilities on the consolidated balance sheet. Advanced deposits for banquet services are recognized as revenue following the completion of the banquet services. The Company notes no significant judgements regarding the recognition of food and beverage revenue.

9

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



Campground revenue is recognized on a straight-line basis over the term of the lease when collectability is reasonably assured.
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. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Upon 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, unrealized gains and losses on real estate equity securities are recognized in earnings.
Dividend income from real estate equity securities is recognized on an accrual basis based on eligible shares as of the ex-dividend date.
Segments
The Company has invested in opportunistic real estate investments, real estate equity securities and originated a loan secured by a non-stabilized real estate asset, which was repaid on January 12, 2018. In general, the Company intends to hold its investments in opportunistic real estate, real estate equity securities 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. In addition, the Company has invested in a participating loan facility secured by a portfolio of light industrial properties located in Europe. However, based on the Company’s investment portfolio and future investment focus, the Company does not believe that its investment in the European asset is a reportable 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 for each class of share 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. For the purpose of determining the weighted-average number of shares outstanding, stock dividends issued are adjusted retroactively and treated as if they were issued and outstanding for all periods presented. 

10

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



The Company’s board of directors has declared and issued stock dividends on shares of the Company’s common stock during the three and six months ended June 30, 2018 and 2017 as follows:
Three Months Ended June 30,
 
Amount Declared per Share Outstanding (1)
 
Total Shares Issued
2017
 
0.005001 shares
 
121,213
2018
 
0.005001 shares
 
144,436
_____________________
(1) Amount declared per share outstanding includes monthly dividends and assumes each share was issued and outstanding for the entire periods presented. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend.
Six Months Ended June 30,
 
Amount Declared per Share Outstanding (1)
 
Total Shares Issued
2017
 
0.010002 shares
 
225,738
2018
 
0.010002 shares
 
285,221
_____________________
(1) Amount declared per share outstanding includes monthly dividends and assumes each share was issued and outstanding for the entire periods presented. Stock dividends are issued in the same class of shares as the shares for which such stockholder received the stock dividend.
Until the Company established an estimated net asset value per share of common stock on June 6, 2017, for the purpose of calculating the dollar amount of the Class A and Class T stock dividends issued, the Company used the Class A and Class T primary offering price at the time of issuance.
Cash distributions declared per share of Class A common stock were $0.048 and $0.095 for the three and six months ended June 30, 2018, respectively. Cash distributions declared per share of Class T common stock were $0.025 and $0.049 for the three and six months ended June 30, 2018, respectively. The declared rate of cash distributions for Class T Shares is different than the rate declared for the Class A Shares by an amount equivalent to any applicable daily stockholder servicing fees. Distributions declared per share of common stock assumes each share was issued and outstanding each day that was a record date during the three and six months ended June 30, 2018. Each day during the period from January 1, 2018 through June 30, 2018 was a record date for distributions. Distributions for this period were calculated based on stockholders of record each day during this period at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the  number of shares of common stock of such class outstanding as of the close of business on each respective record date.
Cash distributions declared per share of Class A common stock were $0.048 and $0.095 for the three and six months ended June 30, 2017, respectively. Cash distributions declared per share of Class T common stock were $0.024 and $0.048 for the three and six months ended June 30, 2017, respectively. The declared rate of cash distributions for Class T Shares is different than the rate declared for the Class A Shares by an amount equivalent to any applicable daily stockholder servicing fees. Distributions declared per share of common stock assumes each share was issued and outstanding each day that was a record date during the three and six months ended June 30, 2017. Each day during the period from January 1, 2017 through June 30, 2017 was a record date for distributions. Distributions for this period were calculated based on stockholders of record each day during this period at a rate of (i) $0.00052548 per share per day less (ii) the applicable daily stockholder servicing fees accrued for and allocable to any class of common stock, divided by the  number of shares of common stock of such class outstanding as of the close of business on each respective record date.

11

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



The Company uses the two-class method to calculate earnings per share. Basic earnings per share is calculated based on dividends declared (“distributed earnings”) and the rights of common shares and participating securities in any undistributed earnings, which represents net income remaining after deduction of dividends declared during the period. The undistributed earnings are allocated to all outstanding common shares based on the relative percentage of each class of shares to the total number of outstanding shares. The Company does not have any participating securities outstanding other than Class A Common Stock and Class T Common stock during the periods presented.
The Company’s calculated earnings per share for the three and six months ended June 30, 2018 and 2017 were as follows (in thousands, except share and per share amounts):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
Net loss attributable to common stockholders
 
$
(304
)
 
$
(1,280
)
 
$
(3,170
)
 
$
(3,728
)
Less: Class A Common Stock cash distributions declared
 
836

 
728

 
1,642

 
1,410

Less: Class T Common Stock cash distributions declared
 
288

 
232

 
564

 
402

Undistributed net loss attributable to common stockholders
 
$
(1,428
)
 
$
(2,240
)
 
$
(5,376
)
 
$
(5,540
)
Class A Common Stock:
 
 
 
 
 
 
 
 
Undistributed net loss attributable to common stockholders
 
$
(859
)
 
$
(1,378
)
 
$
(3,235
)
 
$
(3,548
)
Class A Common Stock cash distributions declared
 
836

 
728

 
1,642

 
1,410

Net loss attributable to Class A common stockholders
 
$
(23
)
 
$
(650
)
 
$
(1,593
)
 
$
(2,138
)
Net loss per common share, basic and diluted
 
$

 
$
(0.04
)
 
$
(0.09
)
 
$
(0.14
)
Weighted-average number of common shares outstanding, basic and diluted
 
17,565,835

 
15,632,018

 
17,399,380

 
15,285,252

Class T Common Stock:
 
 
 
 
 
 
 
 
Undistributed net loss attributable to common stockholders
 
$
(569
)
 
$
(862
)
 
$
(2,141
)
 
$
(1,992
)
Class T Common Stock cash distributions declared
 
288

 
232

 
564

 
402

Net loss attributable to Class T common stockholders
 
$
(281
)
 
$
(630
)
 
$
(1,577
)
 
$
(1,590
)
Net loss per common share, basic and diluted
 
$
(0.02
)
 
$
(0.06
)
 
$
(0.14
)
 
$
(0.19
)
Weighted-average number of common shares outstanding, basic and diluted
 
11,664,545

 
9,776,935

 
11,514,548

 
8,580,397

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.

12

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



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.
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.
3.
REAL ESTATE
As of June 30, 2018, the Company’s real estate portfolio was composed of two hotel properties, four office properties and one apartment building. In addition, the Company has entered into a consolidated joint venture to develop one retail property, which is currently under construction. The following table summarizes the Company’s real estate as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Land
 
$
104,138

 
$
104,138

Buildings and improvements
 
366,988

 
362,210

Construction in progress
 
67,232

 
63,732

Tenant origination and absorption costs
 
18,510

 
19,006

Total real estate, cost
 
556,868

 
549,086

Accumulated depreciation and amortization
 
(27,681
)
 
(18,646
)
Total real estate, net
 
$
529,187

 
$
530,440


13

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



The following table provides summary information regarding the Company’s real estate as of June 30, 2018 (in thousands):
Property
 
Date
Acquired
 
City
 
State
 
Property Type
 
Land
 
Building
and Improvements
 (1) 
 
Tenant Origination and Absorption
 
Total Real Estate, at Cost
 
Accumulated Depreciation and Amortization
 
Total Real Estate, Net
 
Ownership %
Springmaid Beach Resort
 
12/30/2014
 
Myrtle Beach
 
SC
 
Hotel
 
$
27,438

 
$
33,154

 
$

 
$
60,592

 
$
(5,750
)
 
$
54,842

 
90.0%
Q&C Hotel
 
12/17/2015
 
New Orleans
 
LA
 
Hotel
 
1,232

 
53,036

 

 
54,268

 
(4,955
)
 
49,313

 
90.0%
2200 Paseo Verde
 
12/23/2015
 
Henderson
 
NV
 
Office
 
1,850

 
11,606

 
553

 
14,009

 
(1,352
)
 
12,657

 
100.0%
Lincoln Court
 
05/20/2016
 
Campbell
 
CA
 
Office
 
14,706

 
34,060

 
3,643

 
52,409

 
(4,615
)
 
47,794

 
100.0%
Lofts at NoHo Commons
 
11/16/2016
 
North Hollywood
 
CA
 
Apartment
 
26,222

 
76,503

 

 
102,725

 
(3,076
)
 
99,649

 
90.0%
210 West 31st Street (2)
 
12/01/2016
 
New York
 
NY
 
Retail
 

 
67,232

 

 
67,232

 

 
67,232

 
80.0%
Oakland City Center
 
08/18/2017
 
Oakland
 
CA
 
Office
 
22,150

 
138,713

 
11,514

 
172,377

 
(6,847
)
 
165,530

 
100.0%
Madison Square (3)
 
10/03/2017
 
Phoenix
 
AZ
 
Office
 
10,540

 
19,916

 
2,800

 
33,256

 
(1,086
)
 
32,170

 
90.0%
 
 
 
 
 
 
 
 
 
 
$
104,138

 
$
434,220

 
$
18,510

 
$
556,868

 
$
(27,681
)
 
$
529,187

 
 
_____________________
(1) Building and improvements includes construction in progress.
(2) The Company acquired the rights to a leasehold interest with respect to this property. The leasehold interest expires January 31, 2114. As of June 30, 2018, the capital lease asset had a carrying value of $6.8 million included in construction in progress.
(3) The Company acquired the rights to a leasehold interest with respect to the land at this property. This property was formerly known as Grace Court and was re-named Madison Square in connection with the Company’s re-branding strategy of this property.
Office Properties
As of June 30, 2018, the Company owned four office properties encompassing in the aggregate 864,941 rentable square feet which were 72% occupied. The following table provides detailed information regarding the Company’s office revenues and expenses 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
Office revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
6,585

 
$
1,716

 
$
13,429

 
$
3,466

Tenant reimbursements and other income (1)
 
776

 
66

 
1,531

 
140

Office revenues
 
$
7,361

 
$
1,782

 
$
14,960

 
$
3,606

 
 
 
 
 
 
 
 
 
Office expenses:
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
$
2,134

 
$
405

 
$
3,853

 
$
796

Real estate taxes and insurance
 
905

 
192

 
1,857

 
381

Office expenses
 
$
3,039

 
$
597

 
$
5,710

 
$
1,177

_____________________
(1) For the three and six months ended June 30, 2018, included in tenant reimbursements and other income for office properties is $0.2 million and $0.4 million, respectively, of other operating income and tenant reimbursements for substantial services accounted for under ASU No. 2014-09.

14

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



Operating Leases
The Company’s office properties are leased to tenants under operating leases for which the terms and expirations vary. As of June 30, 2018, the leases had remaining terms, excluding options to extend, of up to 10.2 years with a weighted-average remaining term of 3.9 years. Some of the leases may have provisions to extend the term of the lease, options for early termination for all or a part of the leased premises 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 the tenant 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 lease and the creditworthiness of the tenant, but generally is not a significant amount. 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 related to office tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $1.1 million as of June 30, 2018 and December 31, 2017.
During the three and six months ended June 30, 2018, the Company recognized deferred rent from tenants of $0.4 million and $1.0 million, respectively, net of lease incentive amortization. During the six months ended June 30, 2017, the Company recognized deferred rent from tenants of $11,000, 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 $2.4 million and $1.3 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $0.2 million of unamortized lease incentives as of June 30, 2018 and December 31, 2017.
As of June 30, 2018, the future minimum rental income from the Company’s office properties under its non-cancelable operating leases was as follows (in thousands):
July 1, 2018 through December 31, 2018
$
10,845

2019
20,498

2020
17,789

2021
14,935

2022
11,748

Thereafter
27,741

 
$
103,556

As of June 30, 2018, the Company’s commercial real estate properties were leased to approximately 100 tenants over a diverse range of industries and geographic areas. As of June 30, 2018, the highest tenant industry concentrations (greater than 10% of annualized base rent) in the Company’s portfolio were as follows:
Industry
 
Number of Tenants
 
Annualized Base Rent (1) 
(in thousands)
 
Percentage of
Annualized Base Rent
Legal Services
 
11
 
$
3,564

 
15.3
%
Public Administration (Government)
 
6
 
3,168

 
13.6
%
Professional, Scientific and Legal
 
12
 
2,970

 
12.7
%
Finance
 
13
 
2,505

 
10.7
%
 
 
 
 
$
12,207

 
52.3
%
_____________________
(1) Annualized base rent represents annualized contractual base rental income as of June 30, 2018, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.
No other tenant industries accounted for more than 10% of annualized base rent. No tenant accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

15

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



Hotel Properties
As of June 30, 2018, the Company owned two hotel properties. The following table provides detailed information regarding the Company’s hotel revenues and expenses 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
Hotel revenues:
 
 
 
 
 
 
 
 
Room
 
$
8,002

 
4,736

 
$
12,112

 
8,330

Food, beverage and convention services
 
1,503

 
1,002

 
2,318

 
1,754

Campground
 
292

 
278

 
582

 
550

Other
 
466

 
454

 
761

 
679

Hotel revenues
 
$
10,263

 
$
6,470

 
$
15,773

 
$
11,313

 
 
 
 
 
 
 
 
 
Hotel expenses:
 
 
 
 
 
 
 
 
Room
 
$
1,765

 
1,182

 
$
3,015

 
2,213

Food, beverage and convention services
 
1,197

 
836

 
1,921

 
1,513

General and administrative
 
809

 
581

 
1,445

 
1,147

Sales and marketing
 
797

 
764

 
1,449

 
1,368

Repairs and maintenance
 
509

 
454

 
995

 
896

Utilities
 
276

 
232

 
552

 
452

Property taxes and insurance
 
421

 
400

 
864

 
783

Other
 
491

 
339

 
814

 
660

Hotel expenses
 
$
6,265

 
$
4,788

 
$
11,055

 
$
9,032

Contract liabilities
The Company records contract liabilities in the form of advanced deposits when a customer or group of customers provides a deposit for a future stay or a deposit for a future banquet event at the Company’s hotels. Advanced deposits are recognized as revenue at the time of the guest’s stay or completion of the banquet services. The following table summarizes the Company’s contract liabilities, which are included in other liabilities in the accompanying consolidated balance sheets, as of June 30, 2018 and December 31, 2017 (in thousands):
 
 
June 30, 2018
 
December 31, 2017
Contract liability
 
$
992

 
$
358

Revenue recognized in the period from:
 
 
 
 
Amounts included in contract liability at the beginning of the period
 
$
231

 
(1) 

_____________________
(1) The amount of revenue recognized in the period from amounts included in contract liability at the beginning of the period is not relevant for the year ended December 31, 2017, as the Company adopted ASU No. 2014-09 effective January 1, 2018.

16

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



Apartment Property
As of June 30, 2018, the Company owned one apartment property with 292 units which was 94% occupied. The following table provides detailed information regarding the Company’s apartment revenues and expenses 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
Apartment revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
1,645

 
$
1,603

 
$
3,229

 
$
3,218

Tenant reimbursements and other income
 
158

 
96

 
290

 
220

Apartment revenues
 
$
1,803

 
$
1,699

 
$
3,519

 
$
3,438

 
 
 
 
 
 
 
 
 
Apartment expenses:
 
 
 
 
 
 
 
 
Operating, maintenance, and management
 
$
636

 
$
534

 
$
1,205

 
$
1,021

Real estate taxes and insurance
 
329

 
328

 
677

 
677

Apartment expenses
 
$
965

 
$
862

 
$
1,882

 
$
1,698

Geographic Concentration Risk
As of June 30, 2018, the Company’s real estate investments in California and New York represented 53.2% and 11.4%, 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 and New York 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.
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
$
18,510

 
$
19,006

 
$
99

 
$
99

 
$
(12,527
)
 
$
(12,869
)
Accumulated Amortization
(5,355
)
 
(3,473
)
 
(25
)
 
(16
)
 
3,576

 
2,086

Net Amount
$
13,155

 
$
15,533

 
$
74

 
$
83

 
$
(8,951
)
 
$
(10,783
)

17

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



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
$
(1,164
)
 
$
(716
)
 
$
(5
)
 
$
(1
)
 
$
885

 
$
158

 
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
$
(2,378
)
 
$
(1,713
)
 
$
(9
)
 
$
(3
)
 
$
1,832

 
$
332

As of June 30, 2018 and December 31, 2017, the Company had recorded a housing subsidy intangible asset, net of amortization, which is included in prepaid expenses and other assets in the accompanying balance sheets, of $2.4 million, which is amortized on a straight line basis over 31.8 years. During each of the three months ended June 30, 2018 and 2017, the Company recorded amortization expense of $20,000 related to the housing subsidy intangible asset. During each of the six months ended June 30, 2018 and 2017, the Company recorded amortization expense of $40,000 related to the housing subsidy intangible asset.
Additionally, as of June 30, 2018 and December 31, 2017, the Company had recorded property tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $2.5 million and $2.8 million, respectively, which are amortized on a straight line basis over a range of 0.7 to 6.6 years. During the three and six months ended June 30, 2018, the Company recorded amortization expense of $0.1 million and $0.3 million, respectively, related to the property tax abatement intangible assets.
5.
REAL ESTATE LOAN RECEIVABLE
As of December 31, 2017, the Company had originated one real estate loan receivable. On January 12, 2018, the real estate loan receivable was repaid in full. Information for the real estate loan receivable was as follows (in thousands):
Loan Name
Location of Related Property or Collateral
 
Date Originated
 
Property Type
 
Loan Type
 
Outstanding Principal Balance as of
June 30, 2018
 
Book Value as of June 30, 2018 (1)
 
Book Value as of December 31, 2017 (1)
 
Contractual Interest Rate
 
Annualized Effective Interest Rate
 
Maturity Date
655 Summer Street First Mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Boston, Massachusetts
 
09/04/2014
 
Office
 
Mortgage
 
$

 
$

 
$
3,500

 
9.25%
 
(2) 
 
(2) 
_____________________
(1) Book value of the real estate loan receivable represents outstanding principal balance adjusted for unamortized origination fees and direct origination and acquisition costs.
(2) On January 12, 2018, the real estate loan receivable was repaid in full.

18

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



The following summarizes the activity related to the real estate loan receivable for the six months ended June 30, 2018 (in thousands):
Real estate loan receivable - December 31, 2017
 
$
3,500

Principal repayment
 
(3,500
)
Real estate loan receivable - June 30, 2018
 
$

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

 
$
82

 
$
10

 
$
162

Amortization of closing costs and origination fees, net
 

 
19

 

 
38

Interest income from real estate loan receivable
 
$

 
$
101

 
$
10

 
$
200

6.
REAL ESTATE EQUITY SECURITIES
During the six months ended June 30, 2018, the Company purchased 852,797 shares of common stock of Franklin Street Properties Corp. (NYSE Ticker: FSP) for an aggregate purchase price of $7.0 million. The Company’s real estate equity securities are carried at their estimated fair value based on quoted market prices for the security. Transaction costs that are directly attributable to the acquisition of real estate equity securities are capitalized to its cost basis. Unrealized gains and losses on real estate equity securities are recognized in earnings.
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 Gain
 
Total
Real estate equity securities - December 31, 2017
 
$

 
$

 
$

Acquisition of real estate equity securities
 
6,800

 

 
6,800

Acquisition fee to affiliate and purchase commission
 
186

 

 
186

Unrealized change in market value of real estate equity securities
 

 
314

 
314

Real estate equity securities - June 30, 2018
 
$
6,986

 
$
314

 
$
7,300

7.
INVESTMENT IN UNCONSOLIDATED ENTITY
On June 28, 2016, the Company originated a participating loan facility in an amount up to €2.6 million ($2.9 million at closing). The Company funded approximately €2.1 million ($2.3 million