Pacific Oak Strategic Opportunity REIT Q2 2024 Update

TL;DR

**Pacific Oak REIT Q2 2024 10-Q filed. Financials and ops details inside.**

AI Summary

Pacific Oak Strategic Opportunity REIT, Inc. filed its 10-Q for the period ending June 30, 2024. The filing details the company's financial position and operational activities during the second quarter of 2024. Specific financial figures and operational highlights for this period are presented within the report.

Why It Matters

This filing provides investors with a crucial update on the financial health and performance of Pacific Oak Strategic Opportunity REIT, Inc. during the second quarter of 2024.

Risk Assessment

Risk Level: medium — As a REIT, the company's performance is tied to real estate market fluctuations and interest rate sensitivity.

Key Players & Entities

• Pacific Oak Strategic Opportunity REIT, Inc. (company) — Filer of the 10-Q report.
• KBS Strategic Opportunity REIT, Inc. (company) — Former name of the company.
• 20240630 (date) — End of the reporting period for the 10-Q.
• 20240809 (date) — Date the 10-Q was filed.

FAQ

Filing Documents

• pacoaksor-20240630.htm (10-Q) — 1292KB
• tulespringsvillage2-firs.htm (EX-10.4) — 6KB
• tulespringsvillage2-seco.htm (EX-10.5) — 8KB
• pacificoaksorq22024ex311.htm (EX-31.1) — 10KB
• pacificoaksorq22024ex312.htm (EX-31.2) — 10KB
• pacificoaksorq22024ex321.htm (EX-32.1) — 6KB
• pacificoaksorq22024ex322.htm (EX-32.2) — 6KB
• tulespringsvillage2-firs001.jpg (GRAPHIC) — 459KB
• tulespringsvillage2-firs002.jpg (GRAPHIC) — 43KB
• tulespringsvillage2-seco001.jpg (GRAPHIC) — 665KB
• tulespringsvillage2-seco002.jpg (GRAPHIC) — 42KB
• 0001452936-24-000110.txt ( ) — 8477KB
• pacoaksor-20240630.xsd (EX-101.SCH) — 47KB
• pacoaksor-20240630_cal.xml (EX-101.CAL) — 70KB
• pacoaksor-20240630_def.xml (EX-101.DEF) — 278KB
• pacoaksor-20240630_lab.xml (EX-101.LAB) — 589KB
• pacoaksor-20240630_pre.xml (EX-101.PRE) — 411KB
• pacoaksor-20240630_htm.xml (XML) — 971KB

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION 2

Financial Statements

Item 1. Financial Statements 2 Consolidated Balance Sheets as of June 30, 2024 (unaudited) and December 31, 2023 2 Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2024 and 2023 3 Consolidated Statements of Equity (unaudited) for the Three and Six Months Ended June 30, 2024 and 2023 4 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2024 and 2023 6 Condensed Notes to Consolidated Financial Statements as of June 30, 2024 (unaudited) 8

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 21

Quantitative and Qualitative Disclosures about Market Risk

Item 3. Quantitative and Qualitative Disclosures about Market Risk 32

Controls and Procedures

Item 4. Controls and Procedures 33

OTHER INFORMATION

PART II. OTHER INFORMATION 35

Legal Proceedings

Item 1. Legal Proceedings 35

Risk Factors

Item 1A. Risk Factors 35

Unregistered Sales of Equity Securities and Use of Proceeds

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36

Defaults upon Senior Securities

Item 3. Defaults upon Senior Securities 37

Mine Safety Disclosures

Item 4. Mine Safety Disclosures 37

Other Information

Item 5. Other Information 37

Exhibits

Item 6. Exhibits 38

SIGNATURES

SIGNATURES 40 1 Table of Contents

FINANCIAL INFORMATION

PART I. FINANCIAL INFORMATION

Financial Statements

Item 1. Financial Statements PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) June 30, 2024 December 31, 2023 (unaudited) Assets Real estate held for investment, net $ 1,028,007 $ 1,091,881 Real estate held for sale, net — 2,873 Real estate equity securities 8,598 41,609 Total real estate and real estate-related investments, net 1,036,605 1,136,363 Cash and cash equivalents 40,467 99,160 Restricted cash 39,014 56,049 Investments in unconsolidated entities 66,136 45,901 Rents and other receivables, net 23,234 22,500 Prepaid expenses and other assets 23,778 28,170 Total assets $ 1,229,234 $ 1,388,143 Liabilities and equity Notes and bonds payable related to real estate held for investment, net $ 999,442 $ 1,026,714 Notes payable related to real estate held for sale, net — 1,969 Notes and bonds payable, net $ 999,442 $ 1,028,683 Accounts payable and accrued liabilities 27,963 30,409 Due to affiliates 10,976 7,902 Other liabilities 52,015 57,785 Total liabilities 1,090,396 1,124,779 Commitments, contingencies and guarantees (Note 9) Equity Stockholders' equity Preferred stock, $ .01 par value; 10,000,000 shares authorized, no shares issued and outstanding — — Common stock, $ .01 par value; 1,000,000,000 shares authorized, 103,016,968 and 103,310,648 shares issued and outstanding as of June 30, 2024 and December 31, 2023, respectively 1,030 1,033 Additional paid-in capital 899,052 901,049 Cumulative distributions and net loss ( 760,627 ) ( 639,933 ) Total stockholders' equity 139,455 262,149 Noncontrolling (deficit) interests ( 617 ) 1,215 Total equity 138,838 263,364 Total liabilities and equity $ 1,229,234 $ 1,388,143 See accompanying condensed notes to consolidated financial statements. 2 Table of Contents

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 Revenues: Rental income $ 30,612 $ 32,152 $ 61,822 $ 64,229 Hotel revenues 2,235 2,565 5,039 5,478 Other operating income 959 1,066 1,869 2,204 Dividend income from real estate equity securities 3 113 81 2,110 Total revenues 33,809 35,896 68,811 74,021 Expenses: Operating, maintenance, and management 11,183 11,107 22,086 22,275 Real estate taxes and insurance 6,556 5,843 13,031 12,260 Hotel expenses 1,784 1,984 3,652 3,945 Asset management fees to affiliates 3,872 3,710 7,974 7,684 General and administrative expenses 4,541 3,222 7,793 6,220 Foreign currency transaction (gain) loss, net ( 7,368 ) 6,272 ( 11,280 ) 3,553 Depreciation and amortization 10,380 12,110 21,129 24,158 Interest expense, net 18,008 15,788 34,782 31,819 Impairment charges on real estate and related intangibles 21,026 18,926 60,291 36,589 Total expenses 69,982 78,962 159,458 148,503 Other (loss) income: Loss from unconsolidated entities, net ( 8,653 ) ( 14,630 ) ( 16,730 ) ( 16,962 ) Other interest income 283 1,012 738 1,216 Loss on real estate equity securities, net ( 1,282 ) ( 4,089 ) ( 16,632 ) ( 16,122 ) Gain on sale of real estate 167 3,292 619 32,761 Total other (loss) income, net ( 9,485 ) ( 14,415 ) ( 32,005 ) 893 Net loss before income taxes ( 45,658 ) ( 57,481 ) ( 122,652 ) ( 73,589 ) Income tax provision — — — ( 3,662 ) Net loss ( 45,658 ) ( 57,481 ) ( 122,652 ) ( 77,251 ) Net loss attributable to noncontrolling interests 1,437 6 1,958 195 Net loss attributable to common stockholders $ ( 44,221 ) $ ( 57,475 ) $ ( 120,694 ) $ ( 77,056 ) Net loss per common share, basic and diluted $ ( 0.43 ) $ ( 0.55 ) $ ( 1.17 ) $ ( 0.74 ) Weighted-average number of common shares outstanding, basic and diluted 103,134

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (in thousands, except share amounts) Common Stock Additional Paid-in Capital Cumulative Distributions and Net Loss Total Stockholders' Equity Noncontrolling Interests (Deficit) Total Equity Shares Amounts Balance, March 31, 2024 103,214,807 $ 1,032 $ 901,050 $ ( 716,406 ) $ 185,676 $ 1,044 $ 186,720 Net loss — — — ( 44,221 ) ( 44,221 ) ( 1,437 ) ( 45,658 ) Transfers to redeemable common stock payable, net — — ( 399 ) — ( 399 ) — ( 399 ) Noncontrolling interest contribution — — — — — 47 47 Noncontrolling interest distribution — — — — — ( 271 ) ( 271 ) Redemptions of common stock ( 197,839 ) ( 2 ) ( 1,599 ) — ( 1,601 ) — ( 1,601 ) Balance, June 30, 2024 103,016,968 $ 1,030 $ 899,052 $ ( 760,627 ) $ 139,455 $ ( 617 ) $ 138,838 Common Stock Additional Paid-in Capital Cumulative Distributions and Net Loss Total Stockholders' Equity Noncontrolling Interests Total Equity Shares Amounts Balance, March 31, 2023 103,788,298 $ 1,038 $ 907,045 $ ( 515,363 ) $ 392,720 $ 3,903 $ 396,623 Net loss — — — ( 57,475 ) ( 57,475 ) ( 6 ) ( 57,481 ) Transfers to redeemable common stock, net — — ( 297 ) — ( 297 ) — ( 297 ) Redemptions of common stock ( 162,202 ) ( 2 ) ( 1,702 ) — ( 1,704 ) — ( 1,704 ) Noncontrolling interests distributions — — — — — ( 613 ) ( 613 ) Balance, June 30, 2023 103,626,096 $ 1,036 $ 905,046 $ ( 572,838 ) $ 333,244 $ 3,284 $ 336,528 See accompanying condensed notes to consolidated financial statements. 4 Table of Contents

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONSOLIDATED STATEMENTS OF EQUITY (CONTINUED) (unaudited) (in thousands, except share amounts) Common Stock Additional Paid-in Capital Cumulative Distributions and Net Loss Total Stockholders' Equity Noncontrolling Interests (Deficit) Total Equity Shares Amounts Balance, December 31, 2023 103,310,648 $ 1,033 $ 901,049 $ ( 639,933 ) $ 262,149 $ 1,215 $ 263,364 Net loss — — — ( 120,694 ) ( 120,694 ) ( 1,958 ) ( 122,652 ) Transfers from redeemable common stock payable, net — — 357 — 357 — 357 Noncontrolling interest contributions — — — — — 397 397 Noncontrolling interest distribution — — — — — ( 271 ) ( 271 ) Redemptions of common stock ( 293,680 ) ( 3 ) ( 2,354 ) — ( 2,357 ) — ( 2,357 ) Balance, June 30, 2024 103,016,968 $ 1,030 $ 899,052 $ ( 760,627 ) $ 139,455 $ ( 617 ) $ 138,838 Common Stock Additional Paid-in Capital Cumulative Distributions and Net Loss Total Stockholders' Equity Noncontrolling Interests Total Equity Shares Amounts Balance, December 31, 2022 103,932,083 $ 1,039 $ 907,044 $ ( 495,782 ) $ 412,301 $ 4,092 $ 416,393 Net loss — — — ( 77,056 ) ( 77,056 ) ( 195 ) ( 77,251 ) Transfers from redeemable common stock, net — — 1,213 — 1,213 — 1,213 Redemptions of common stock ( 305,987 ) ( 3 ) ( 3,211 ) — ( 3,214 ) — ( 3,214 ) Noncontrolling interests distributions — — — — — ( 613 ) ( 613 ) Balance, June 30, 2023 103,626,096 $ 1,036 $ 905,046 $ ( 572,838 ) $ 333,244 $ 3,284 $ 336,528 See accompanying condensed notes to consolidated financial statements. 5 Table of Contents

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Six Months Ended June 30, 2024 2023 Cash Flows from Operating Activities: Net loss $ ( 122,652 ) $ ( 77,251 ) Adjustments to reconcile net loss to net cash used in operating activities: Impairment charges on real estate and related intangibles 60,291 36,589 Loss from unconsolidated entities, net 16,730 16,962 Depreciation and amortization 21,129 24,158 Loss on real estate equity securities, net 16,632 16,122 Gain on sale of real estate ( 619 ) ( 32,761 ) Deferred rent ( 325 ) ( 1,508 ) Amortization of deferred financing costs and debt discount and premium, net 4,781 4,567 Foreign currency transaction (gain) loss, net ( 11,280 ) 3,553 Changes in assets and liabilities: Rents and other receivables, net ( 370 ) ( 560 ) Prepaid expenses and other assets ( 1,802 ) ( 3,448 ) Accounts payable and accrued liabilities ( 2,243 ) ( 3,068 ) Due to affiliates 3,074 3,884 Other liabilities 894 3,355 Net cash used in operating activities ( 15,760 ) ( 9,406 ) Cash Flows from Investing Activities: Improvements to real estate ( 17,512 ) ( 10,349 ) Proceed from sales of real estate, net 3,126 40,795 Purchase of interest rate caps ( 1,447 ) ( 347 ) Proceeds from interest rate caps 1,687 — Contributions to an unconsolidated entity ( 38,689 ) — Distributions of capital from an unconsolidated entity 1,497 1,144 Payments on foreign currency derivatives, net ( 478 ) ( 17,964 ) Proceeds from the sale of real estate equity securities 16,379 13,557 Proceeds for development obligations 5 1,855 Payments on development obligations ( 3,905 ) ( 1,421 ) Net cash (used in) provided by investing activities ( 39,337 ) 27,270 Cash Flows from Financing Activities: Proceeds from notes and bonds payable 98,850 980 Principal payments on notes and bonds payable ( 115,169 ) ( 56,922 ) Payments of deferred financing cos

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (unaudited) (in thousands) Six Months Ended June 30, 2024 2023 Supplemental Disclosure of Cash Flow Information: Interest paid, net of capitalized interest of $ 2,186 and $ 1,743 for the six months ended June 30, 2024 and 2023, respectively $ 30,490 $ 27,379 Supplemental Disclosure of Significant Noncash Transaction: Accrued improvements to real estate 2,814 1,915 Accrued development obligations 7,313 8,982 See accompanying condensed notes to consolidated financial statements. 7 Table of Contents

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 (unaudited) 1. ORGANIZATION Pacific Oak Strategic Opportunity REIT, Inc. (the "Company") was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust ("REIT"). The Company conducts its business primarily through Pacific Oak SOR (BVI) Holdings, Ltd. ("Pacific Oak SOR BVI"), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, Pacific Oak SOR BVI issued one certificate containing 10,000 common shares with no par value to Pacific Oak Strategic Opportunity Limited Partnership (the "Operating Partnership"), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1 % partnership interest in, the Operating Partnership. Pacific Oak Strategic Opportunity Holdings LLC ("REIT Holdings"), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9 % interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings. 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, 2023. 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, 2023, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC"). Principles of Consolidation and Basis of Presentation The accompanying unaudited co

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2024 (unaudited) Liquidity The Company generally finances its real estate investments and operations using notes and bonds payable that are typically structured as non-recourse secured mortgages with maturities of approximately three to five years . Each reporting period management evaluates the Company's ability to continue as a going concern by evaluating conditions and events, including assessing the liquidity needs to satisfy upcoming debt obligations and the ability to satisfy debt covenant requirements. Through the normal course of operations, and as further discussed in Note 4, the Company has $ 372.2 million of debt obligations coming due within one year following the report issuance date. In order to satisfy obligations as they mature, management will evaluate its options and may seek to utilize extension options (if available) in the respective loan agreements, may make partial loan repayments to meet debt covenant requirements, may seek to refinance certain debt instruments, may sell real estate equity securities to convert to cash to make principal payments, may market one or more properties for sale or may negotiate a turnover of one or more secured properties back to the related mortgage lender and remit payment for any associated loan guarantee. Historically, the Company has successfully refinanced debt instruments or utilized extension options in order to satisfy debt obligations as they come due and has not negotiated a turnover of a secured property back to a lender, though the Company may utilize such option if necessary. Based upon these plans, and the plans described above, management believes it will have sufficient liquidity to satisfy its obligations as they come due and to continue as a going concern. There can be no assurance as to the certainty or timing of any of management'

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2024 (unaudited) Reclassifications Certain amounts in the prior year period have been reclassified to conform to the current period presentation. Goodwill and redeemable common stock payable, which were previously reported separately on the accompanying consolidated balance sheets, are now included in prepaid expenses and other assets and other liabilities, respectively, for all periods presented. Additionally, the Company sold residential homes during the six months ended June 30, 2024 and as a result, certain assets and liabilities were reclassified to held for sale in the accompanying consolidated balance sheets for all periods presented. These reclassifications have not changed the results of operations of the prior period. Square Footage, Occupancy and Other Measures Any references to square footage, acreage, occupancy or annualized base rent are unaudited and outside the scope of the Company's independent registered public accounting firm's review of the Company's financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board. Recently Issued Accounting Standards Updates There have been no recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the six months ended June 30, 2024, that are of significance or potential significance to the Company. 3. REAL ESTATE HELD FOR INVESTMENT As of June 30, 2024, the Company consolidated nine office complexes, encompassing, in the aggregate, approximately 3.2 million rentable square feet and these properties were 68 % occupied. In addition, the Company owned one residential home portfolio consisting of 2,155 residential homes, and two apartment properties, containing 609 units, which were 95 % and 91 % occupied, respectively. The Company

FINANCIAL INFORMATION (CONTINUED)

PART I. FINANCIAL INFORMATION (CONTINUED)

Financial Statements (continued)

Item 1. Financial Statements (continued) PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) June 30, 2024 (unaudited) During the three and six months ended June 30, 2024, the Company recognized deferred rent from tenants of $ 0.3 million and $ 0.4 million, net of lease incentive amortization, respectively. During the three and six months ended June 30, 2023, the Company recognized deferred rent from tenants of $ 0.7 million and $ 1.5 million, net of lease incentive amortization, respectively. As of June 30, 2024 and December 31, 2023, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $ 20.1 million and $ 19.1 million, respectively, and is included in rents and other receivables in the accompanying consolidated balance sheets. The cumulative deferred rent balance included $ 3.0 million and $ 2.5 million of unamortized lease incentives as of June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, the future minimum rental income from the Company's office complexes, under non-cancelable operating leases was as follows (in thousands): July 1, 2024 through December 31, 2024 $ 29,761 2025 56,600 2026 44,974 2027 36,444 2028 29,428 Thereafter 69,286 $ 266,493 Geographic Concentration Risk As of June 30, 2024, the Company's real estate investments in California and Georgia represented 20.2 % and 10.5 %, 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 Georgia 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

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