Pacific Oak Strategic Opportunity REIT, Inc. - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q

______________________________________________________

(Mark One)


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

For the quarterly period ended September 30, 2022


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

For the transition period from to

Commission file number 000-54382

______________________________________________________

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________________________________________


Maryland		26-3842535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
11766 Wilshire Blvd., Suite 1670
Los Angeles,	California	90025
(Address of Principal Executive Offices)		(Zip Code)

(424) 208-8100

(Registrant’s Telephone Number, Including Area Code)

______________________________________________________________________

Securities registered pursuant to Section 12(b) for the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	N/A	N/A

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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

☒

Smaller reporting company

☐

Emerging growth company

☐

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

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

As of November 11, 2022, there were 104,041,817 outstanding shares of common stock of Pacific Oak Strategic Opportunity REIT, Inc.

Table of Contents

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

September 30, 2022

INDEX


PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	2
		Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	3
		Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021	4
		Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2022 and 2021	6
		Condensed Notes to Consolidated Financial Statements as of September 30, 2022 (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	42
PART II.	OTHER INFORMATION		43
	Item 1.	Legal Proceedings	43
	Item 1A.	Risk Factors	43
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
	Item 3.	Defaults upon Senior Securities	44
	Item 4.	Mine Safety Disclosures	44
	Item 5.	Other Information	44
	Item 6.	Exhibits	45
SIGNATURES			46

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)


	September 30, 2022		December 31, 2021
	(unaudited)
Assets
Real estate held for investment, net	$	1,234,197	$	1,118,550

Real estate held for sale, net	—		96,249
Real estate equity securities	63,784		112,096

Total real estate and real estate-related investments, net	1,297,981		1,326,895
Cash and cash equivalents	85,368		84,172
Restricted cash	57,325		21,259
Investments in unconsolidated entities	72,838		88,256
Rents and other receivables, net	21,140		21,795
Above-market leases, net	2,364		2,642
Due from affiliate	13		7,039
Prepaid expenses and other assets	21,902		18,108
Goodwill	5,436		13,534
Assets related to real estate held for sale, net	—		919
Total assets	$	1,564,367	$	1,584,619
Liabilities, mezzanine equity and equity

Notes and bonds payable related to real estate held for investment, net	$	1,042,860	$	935,073
Note payable related to real estate held for sale, net	—		63,876
Notes and bonds payable, net	1,042,860		998,949
Accounts payable and accrued liabilities	27,236		23,852
Due to affiliates	3,252		1,903
Below-market leases, net	2,986		4,080
Other liabilities	52,431		42,851
Redeemable common stock payable	1,567		684
Restricted stock payable	508		508
Dividends payable	—		11,016
Liabilities related to real estate held for sale, net	—		662
Total liabilities	1,130,840		1,084,505
Commitments and contingencies
Mezzanine equity

Noncontrolling cumulative convertible redeemable preferred stock	15,233		15,233
Redeemable noncontrolling interest	—		2,822
Equity
Pacific Oak Strategic Opportunity REIT, Inc. stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 104,076,881 and 94,141,251 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively	1,041		941
Additional paid-in capital	909,533		818,440
Cumulative distributions and net loss	(494,998)		(347,691)
Total Pacific Oak Strategic Opportunity REIT, Inc. stockholders’ equity	415,576		471,690
Noncontrolling interests	2,718		10,369
Total equity	418,294		482,059
Total liabilities, mezzanine equity and equity	$	1,564,367	$	1,584,619

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (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 September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues:
Rental income	$	31,445	$	29,504	$	89,806	$	94,812
Hotel revenues	9,182		12,153		27,952		24,578
Other operating income	830		923		2,559		3,118
Dividend income from real estate equity securities	2,148		3,189		5,354		6,693
Total revenues	43,605		45,769		125,671		129,201
Expenses:
Operating, maintenance, and management	12,342		10,668		32,560		31,444
Real estate taxes and insurance	5,650		5,262		15,753		15,949
Hotel expenses	5,377		6,483		17,485		15,715
Asset management fees to affiliate	3,630		3,422		9,945		10,802
General and administrative expenses	2,504		2,365		8,486		7,120
Foreign currency transaction (gain) loss, net	(6,001)		2,271		(37,100)		(568)
Depreciation and amortization	12,717		13,895		39,379		45,969
Interest expense	12,976		10,092		33,319		30,713
Impairment charges on real estate	11,942		10,971		11,942		10,971
Impairment charges on goodwill	8,098		2,808		8,098		2,808
Total expenses	69,235		68,237		139,867		170,923
Other (loss) income:
Equity in loss of unconsolidated entities	(3,376)		(569)		(6,130)		(144)
Casualty-related gain	—		27		—		27
Other interest income	61		55		155		148
(Loss) gain on real estate equity securities	(20,722)		(2,614)		(48,312)		12,939
Change in subordinated performance fee due upon termination to affiliate	—		(1,545)		—		(1,745)
(Loss) gain on sale of real estate	(75)		216		3,273		31,385
Gain on extinguishment of debt	—		1,352		2,367		1,365
Gain from consolidation of previously unconsolidated entity	18,742		—		18,742		—
Total other (loss) income, net	(5,370)		(3,078)		(29,905)		43,975
Net (loss) income	(31,000)		(25,546)		(44,101)		2,253
Net loss attributable to noncontrolling interests	881		1,188		844		1,949
Net loss attributable to redeemable noncontrolling interest	—		33		81		113
Preferred stock dividends	(373)		(191)		(1,091)		(644)
Net (loss) income attributable to common stockholders	$	(30,492)	$	(24,516)	$	(44,267)	$	3,671
Net (loss) income per common share, basic and diluted	$	(0.29)	$	(0.25)	$	(0.43)	$	0.04
Weighted-average number of common shares outstanding, basic and diluted	104,180,800		97,659,731		103,351,040		97,879,983

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Three Months Ended September 30, 2022 and 2021

(unaudited)

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, June 30, 2022	104,319,092	$	1,043	$	914,463	$	(464,506)	$	451,000	$	10,373	$	461,373

Net loss	—	—		—		(30,492)		(30,492)		(881)		(31,373)

Transfers to redeemable common stock payable, net	—	—		(188)		—		(188)		—		(188)
Redemptions of common stock	(243,135)	(2)		(2,311)		—		(2,313)		—		(2,313)




Stock distribution issued	924	—		—		—		—		—		—
Acquisition of noncontrolling interest	—	—		—		—		—		1,125		1,125
Noncontrolling interests distributions	—	—		(2,431)		—		(2,431)		(8,199)		(10,630)
Noncontrolling interest contribution	—	—		—		—		—		300		300
Balance, September 30, 2022	104,076,881	$	1,041	$	909,533	$	(494,998)	$	415,576	$	2,718	$	418,294

	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, June 30, 2021	97,906,268	$	979	$	829,294	$	(297,533)	$	532,740	$	12,560	$	545,300
Net loss	—	—		—		(24,516)		(24,516)		(1,188)		(25,704)

Transfers to redeemable common stock payable, net	—	—		(1,955)		—		(1,955)		—		(1,955)
Redemptions of common stock	(3,641,866)	(37)		(28,080)		—		(28,117)		—		(28,117)

Change in classification of restricted stock	—	—		21,123		—		21,123		—		21,123
Noncontrolling interest contribution	—	—		—		—		—		20		20



Balance, September 30, 2021	94,264,402	$	942	$	820,382	$	(322,049)	$	499,275	$	11,392	$	510,667

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Nine Months Ended September 30, 2022 and 2021

(unaudited)

(in thousands, except share amounts)


	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, December 31, 2021	94,141,251	$	941	$	818,440	$	(347,691)	$	471,690	$	10,369	$	482,059

Net loss	—	—		—		(44,267)		(44,267)		(844)		(45,111)

Transfers to redeemable common stock payable, net	—	—		(883)		—		(883)		—		(883)
Redemptions of common stock	(485,471)	(4)		(4,583)		—		(4,587)		—		(4,587)



Adjustment to value of redeemable noncontrolling interest	—	—		—		(3,946)		(3,946)		—		(3,946)
Stock distribution issued	10,421,101	104		98,990		(99,094)		—		—		—
Acquisition of noncontrolling interest	—	—		—		—		—		1,125		1,125
Noncontrolling interests distributions	—	—		(2,431)		—		(2,431)		(8,232)		(10,663)
Noncontrolling interest contribution	—	—		—		—		—		300		300

Balance, September 30, 2022	104,076,881	$	1,041	$	909,533	$	(494,998)	$	415,576	$	2,718	$	418,294

	Common Stock			Additional Paid-in Capital		Cumulative Distributions and Net Loss		Total Stockholders' Equity		Noncontrolling Interests		Total Equity
	Shares	Amounts
Balance, December 31, 2020	98,054,582	$	979	$	831,295	$	(325,720)	$	506,554	$	13,158	$	519,712
Net income (loss)	—	—		—		3,671		3,671		(1,949)		1,722
Transfers to redeemable common stock payable, net	—	—		(2,521)		—		(2,521)		—		(2,521)
Redemptions of common stock	(3,790,180)	(37)		(29,515)		—		(29,552)		—		(29,552)
Change in classification of restricted stock	—	—		21,123		—		21,123		—		21,123
Noncontrolling interests contributions	—	—				—		—		183		183
Balance, September 30, 2021	94,264,402	$	942	$	820,382	$	(322,049)	$	499,275	$	11,392	$	510,667

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended September 30,
	2022		2021
Cash Flows from Operating Activities:
Net (loss) income	$	(44,101)	$	2,253
Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Change in subordinated performance fee due upon termination to affiliate	—		1,745
Impairment charges on real estate	11,942		10,971
Impairment charges on goodwill	8,098		2,808

Equity in loss of unconsolidated entities	6,130		144
Depreciation and amortization	39,379		45,969
Loss (gain) on real estate equity securities	48,312		(12,939)
Loss (gain) on sale of real estate	(3,273)		(31,385)
Gain from consolidation of previously unconsolidated entity	(18,742)		—
Unrealized (gain) loss on interest rate caps	(1,103)		17
Deferred rent	(1,966)		(1,529)
Gain on extinguishment of debt	(2,367)		(1,365)
Amortization of above- and below-market leases, net	(762)		(1,015)
Amortization of deferred financing costs and discount on bonds and notes payable	5,953		4,376

Foreign currency transaction gain, net	(37,100)		(568)
Changes in assets and liabilities:
Rents and other receivables	2,403		(1,898)
Prepaid expenses and other assets	(3,010)		(4,371)
Accounts payable and accrued liabilities	(955)		(984)
Due to affiliates	1,201		(726)
Other liabilities	(1,379)		(190)
Net cash provided by operating activities	8,660		11,313
Cash Flows from Investing Activities:
Acquisitions of real estate	(6,689)		(4,107)
Improvements to real estate	(16,515)		(12,923)
Proceeds from sales of real estate, net	97,933		194,528

Cash and restricted cash received upon consolidation of previously unconsolidated entity	1,834		—
Contributions to unconsolidated entities	(23,887)		(4,769)
Distributions of capital from unconsolidated entities	569		—
Purchase of interest rate cap	(566)		(18)

Proceeds from the sale of real estate equity securities	—		14,439


Advance to affiliate	(1,201)		—
Proceeds from advances due from affiliates	8,227		—
Escrow deposits for future real estate sales	17,000		—
Proceeds for future development obligations	—		6,203
Funding for development obligations	(6,407)		—
Net cash provided by investing activities	70,298		193,353
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable	191,667		157,246
Principal payments on notes and bonds payable	(190,515)		(233,964)
Payments of deferred financing costs	(4,686)		(2,745)
Payments to redeem common stock	(4,587)		(29,552)
Payment to redeem restricted stock	—		(5,656)
Payment of prepaid other offering costs	—		(164)
Payment to redeem noncontrolling interests	(6,687)		—
Distributions paid	(11,016)		—
Preferred dividends paid	(1,091)		(644)
Noncontrolling interests distributions	(10,663)		—
Noncontrolling interest contribution	300		183
Other financing proceeds	—		2,367


Net cash used in financing activities	(37,278)		(112,929)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(4,418)		182
Net increase in cash, cash equivalents and restricted cash	37,262		91,919
Cash, cash equivalents and restricted cash, beginning of period	105,431		74,319
Cash, cash equivalents and restricted cash, end of period	$	142,693	$	166,238

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(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”) beginning with the taxable year ended December 31, 2010. 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, 2021. 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, 2021 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 nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, Pacific Oak SOR BVI and their direct and indirect wholly owned subsidiaries, joint ventures in which the Company has a controlling interest and VIEs in which the Company is the primary beneficiary. All significant intercompany balances and transactions are eliminated in consolidation.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Liquidity

The Company generally finances its real estate investments using notes payable that are typically structured as non-recourse secured mortgages with maturities of approximately three to five years, with short term extension options available upon the Company meeting certain debt covenants. 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 5, the Company has $383.0 million of debt obligations coming due over the next 12-month period. In order to satisfy obligations as they mature, management will evaluate its options and may seek to utilize extension options available in the respective loan agreements, may make partial loan pay downs 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, 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’s plans. See Note 5 for further details.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. In that regard, the Company reclassified held for sale activity related to dispositions in its consolidated balance sheets as of December 31, 2021.

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.

Restricted Cash

Restricted cash is comprised of escrow deposits for future real estate sales and lender impound reserve accounts on the Company’s borrowings for security deposits, property taxes, insurance, debt service obligations and capital improvements and replacements.

Segments

The Company operates in three reportable business segments: opportunistic real estate and real estate-related investments, residential homes, and hotel, which is how the Company’s management manages the business. In general, the Company intends to hold its investments in opportunistic real estate and real estate-related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and 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 real estate-related assets as similar investments and aggregated them into one reportable business segment. The Company owns residential homes in 18 markets which are all aggregated into one reportable business segment due to the homes being stabilized, having high occupancy rates and have similar economic characteristics. Additionally, as of September 30, 2022, the Company owns one hotel which is aggregated into one reportable business segment due to the nature of the hotel business with short-term stays. See Note 10 for further details.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Per Share Data

The Company determines basic earnings per share and basic earnings per unit based on the weighted average number of shares of common stock or units, as applicable, outstanding during the period and the Company considers any participating securities, including unvested restricted stock, for purposes of applying the two-class method. The Company determines diluted earnings per share and diluted earnings per unit based on the weighted average number of shares of common stock or units, as applicable, outstanding combined with the incremental weighted average number of shares or units, as applicable, that would have been outstanding assuming all potentially dilutive securities were converted into shares of common stock or units, as applicable, at the earliest date possible. The noncontrolling Series A convertible redeemable preferred shares of Pacific Oak Residential Trust, Inc. (“PORT”) were not included as the shares are contingent on PORT being public.

Square Footage, Occupancy and Other Measures

Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Recently Adopted Accounting Pronouncements

Reference Rate Reform — In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional relief to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Additionally, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (ASC Topic 848), which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The Company adopted ASC Topic 848 on September 30, 2022 and the related prospective optional expedients for its variable rate debt and related derivatives is not expected to have a material impact to the Company.

There have been no other recent accounting pronouncements, changes in accounting pronouncements or recently adopted accounting guidance during the nine months ended September 30, 2022 that are of significance or potential significance to the Company.

3. REAL ESTATE HELD FOR INVESTMENT

As of September 30, 2022, the Company owned eight office properties, one office portfolio consisting of two office buildings and 14 acres of undeveloped land, encompassing, in the aggregate, approximately 3.2 million rentable square feet. As of September 30, 2022, these properties were 70% occupied. As of September 30, 2022, the Company owned one residential home portfolio consisting of 2,458 residential homes and encompassing approximately 3.5 million rental square feet. In addition, the Company owned two apartment properties, containing 609 units and encompassing approximately 0.5 million rentable square feet, which were 96% and 95% occupied, respectively, as of September 30, 2022. As of September 30, 2022, the Company also owned one hotel property with 196 rooms and three investments in undeveloped land with approximately 800 developable acres and one office/retail development property. The following table summarizes the Company’s real estate held for investment as of September 30, 2022 and December 31, 2021, respectively (in thousands):


	September 30, 2022		December 31, 2021
Land	$	275,715	$	245,200
Buildings and improvements	1,062,342		954,851
Tenant origination and absorption costs	30,785		43,375
Total real estate, cost	1,368,842		1,243,426
Accumulated depreciation and amortization	(134,645)		(124,876)
Total real estate held for investment, net	$	1,234,197	$	1,118,550

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Operating Leases

Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2022, the leases, excluding options to extend, apartment leases and residential homes, which have terms that are generally one year or less, had remaining terms of up to 12.9 years with a weighted-average remaining term of 3.7 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets totaled $6.0 million as of September 30, 2022 and December 31, 2021, respectively.

During the three and nine months ended September 30, 2022, the Company recognized deferred rent from tenants of $0.5 million and $2.0 million, respectively, net of lease incentive amortization. During the three and nine months ended September 30, 2021, the Company recognized deferred rent from tenants of $0.4 million and $1.5 million, respectively, net of lease incentive amortization. As of September 30, 2022 and December 31, 2021, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $17.8 million and $16.3 million, respectively, and is included in rents and other receivables on the accompanying consolidated balance sheets. The cumulative deferred rent balance included $3.0 million and $3.3 million of unamortized lease incentives as of September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022, the future minimum rental income from the Company’s properties, excluding apartment leases and residential homes, under non-cancelable operating leases was as follows (in thousands):



October 1, 2022 through December 31, 2022	$	15,105
2023	59,457
2024	54,145
2025	43,184
2026	30,074
Thereafter	72,929
	$	274,894

As of September 30, 2022, the Company’s commercial real estate properties were leased to approximately 300 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:


Industry	Number of Tenants	Annualized Base Rent (1) (in thousands)		Percentage of Annualized Base Rent
Public Administration	14	$	7,762	12.6	%
Professional, Scientific, and Technical Services	38	7,346		11.9	%
Computer Systems Design and Related Services	30	7,037		11.4	%
		$	22,145	35.9	%

_____________________

(1) Annualized base rent represents annualized contractual base rental income as of September 30, 2022, 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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Geographic Concentration Risk

As of September 30, 2022, the Company’s real estate investments in California and Georgia represented 21.9% and 10.3%, respectively, of the Company’s total assets. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California 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 the Company’s operating results and its ability to make distributions to stockholders.

Hotel Revenues

The following table provides detailed information regarding the Company’s hotel revenues for its two hotel properties (the Springmaid Beach Resort was sold on September 1, 2022) during the three and nine months ended September 30, 2022 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Hotel revenues:
Room	$	7,223	$	9,396	$	21,423	$	18,508
Food, beverage and convention services	217		1,452		807		2,830
Campground	984		280		3,379		792
Other	757		1,025		2,343		2,448
Hotel revenues	$	9,181	$	12,153	$	27,952	$	24,578

Contract Liabilities

The following table summarizes the Company’s contract liabilities, which are comprised of hotel advanced deposits and deferred proceeds from historical and future land sales received from the buyers of the Park Highlands land sales (discussed below) and another developer for the value of land that was contributed to a master association that is consolidated by the Company, which are included in other liabilities in the accompanying consolidated balance sheets, as of September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022		December 31, 2021
Contract liability	$	23,115	$	7,313
Revenue recognized in the period from:
Amounts included in contract liability at the beginning of the period	$	449	$	159

Recent Real Estate Sales

On January 24, 2022, the Company, through an indirect wholly owned subsidiary, sold two office buildings related to the Richardson Portfolio and containing 141,950 rentable square feet in Richardson, Texas (“Greenway Buildings”) to a purchaser unaffiliated with the Company or the Advisor (as defined in Note 7), for $11.0 million, before closing costs and credits. The carrying value of the Greenway Buildings as of the disposition date was $5.6 million, which was net of $3.2 million of accumulated depreciation and amortization. In connection with the sale of the Greenway Buildings, the Company repaid $9.1 million of the outstanding principal balance due under the mortgage loan secured by the Greenway Buildings. The Company recognized a gain on sale of $3.6 million related to the disposition of the Greenway Buildings, net of closing costs and adjustments. As a result of the sale of the Greenway Buildings, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets as of December 31, 2021.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

On September 1, 2022, the Company, through an indirect wholly owned subsidiary, sold the Springmaid Beach Resort to a purchaser unaffiliated with the Company or the Advisor for $91.0 million, before closing costs and credits. The carrying value of the Springmaid Beach Resort as of the disposition date was $87.2 million, which was net of $3.4 million of accumulated depreciation and amortization and $2.5 million of impairment charges. In connection with the sale of the Springmaid Beach Resort, the Company repaid $52.0 million of the outstanding principal balance due under the mortgage loan secured by the Springmaid Beach Resort and $1.3 million of the proceeds were held for contingent repairs related to the property. As a result of the sale of the Springmaid Beach Resort, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets as of December 31, 2021.

Park Highlands Land Purchase and Sale Contracts

The Company enters into land purchase and sale contracts to dispose of Park Highlands developed and undeveloped land. Under these contracts, the Company will receive a stated deposit from the buyer, held in escrow, in consideration for the right, but not the obligation, to purchase the land at a future point in time with predetermined terms. After a contractually specified date, the deposits are not refundable even in the event the contract terminates, at which point the Company records restricted cash and other liabilities on the consolidated balance sheets.

On November 11, 2021, the Company, through an indirect wholly owned subsidiary, entered into a purchase and sale agreement, as amended, to sell 234 developable acres of undeveloped land located in North Las Vegas, Nevada, (“Park Highlands”) for gross sales proceeds of approximately $121.4 million, before closing costs and credits. The due diligence period expired on February 23, 2022 and the buyer’s deposit of $13.5 million is no longer refundable and is recognized as restricted cash on the consolidated balance sheets. This deposit is held in an escrow account and will become available once the sale is completed. Actions are required by the Company to complete the planned sale.

On March 10, 2022, the Company, through an indirect wholly owned subsidiary, entered into a purchase and sale agreement, as amended, to sell 77 developable acres of Park Highlands for gross sales proceeds of approximately $52.9 million, before closing costs and credits. The due diligence period expired on May 31, 2022 and the buyer’s deposit of $3.5 million is no longer refundable and is recognized as restricted cash on the consolidated balance sheets. This deposit is held in an escrow account and will become available once the sale is completed. Actions are required by the Company to complete the planned sale.

On June 22, 2022, the Company, through an indirect wholly owned subsidiary, entered into a purchase and sale agreement, to sell 67 developable acres of Park Highlands for gross sales proceeds of approximately $55.0 million, before closing costs and credits. The due diligence period expired on October 20, 2022, after which the buyer’s deposit of $3.0 million is no longer be refundable and is recognized as restricted cash on the consolidated balance sheets. This deposit is held in an escrow account and will become available once the sale is completed. Actions are required by the Company to complete the planned sale.

Impairment of Real Estate

During the three and nine months ended September 30, 2022, the Company recorded impairment charges on real estate in the aggregate of $11.9 million, to write down the carrying value of 210 West 31st Street by $4.4 million, a development property located in New York, New York (“210 West 31st Street”) and Oakland City Center by $5.0 million, an office property located in Oakland, California, to their estimated fair value due to a change in the projected hold period and related decrease in projected cash flows. Additionally, the Company determined that based on the amended sale price of the Springmaid Beach Resort, the book value was not recoverable and the Company wrote down the carrying value of Springmaid Beach Resort by $2.5 million.

During the three and nine months ended September 30, 2021, the Company recorded impairment charges on real estate in the aggregate of $11.0 million, to write down the carrying value of 210 West 31st Street by $6.6 million and Lincoln Court by $4.4 million, an office property located in Campbell, California, to their estimated fair value due to a change in the projected hold period and related decrease in projected cash flows.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

PORT II Consolidation

On July 1, 2022, the Company became the primary beneficiary of Pacific Oak Residential Trust II, Inc. (“PORT II”), a related party and consolidated PORT II into the Company's financial statements. As of July 1, 2022, PORT II had 588 residential homes. Refer to Note 8 for additional details on PORT II and the consolidation. The following table summarizes the components of the PORT II and the gain recognized by the Company (in thousands):


PORT II's assets and liabilities, based upon fair values as determined by the Company, as follows:
Assets:



Real estate held for investment, net	$	135,096
Cash and cash equivalents	1,473
Restricted cash	361
Prepaid expenses and other assets	639
Total Assets	137,569
Liabilities:
Notes payable, net	(82,646)
Accounts payable and accrued liabilities	(804)
Due to affiliates	(147)
Other liabilities	(1,499)
Total Liabilities	(85,096)
Noncontrolling interest	(1,125)
Elimination of the Company’s investment in PORT II	(32,606)
Gain from consolidation of previously unconsolidated entity	$	18,742

4. REAL ESTATE EQUITY SECURITIES

The following summarizes the portion of gain and loss for the period related to real estate equity securities held during the three and nine months ended September 30, 2022 and 2021 (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net (loss) gain recognized during the period on real estate equity securities	$	(20,722)	$	(2,614)	$	(48,312)	$	12,939
Less net gain recognized during the period on real estate equity securities sold during the period	—		—		—		(225)
Unrealized (loss) gain recognized during the reporting period on real estate equity securities held at the end of the period	$	(20,722)	$	(2,614)	$	(48,312)	$	12,714

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

5. NOTES AND BONDS PAYABLE

As of September 30, 2022 and December 31, 2021, the Company’s notes and bonds payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):


	Book Value as of September 30, 2022		Book Value as of December 31, 2021		Contractual Interest Rate as of September 30, 2022	Effective Interest Rate at September 30, 2022 (1)	Payment Type (2)	Maturity Date (3)
Richardson Portfolio Mortgage Loan	$	18,944	$	28,470	LIBOR + 2.50%	5.64%	Principal & Interest	11/1/2022 (4)
Park Centre Mortgage Loan	26,104		26,185		BSBY + 1.75%	4.88%	Principal & Interest	06/27/2023
1180 Raymond Mortgage Loan (5)	31,070		31,070		BSBY + 2.25%	5.38%	Interest Only	12/01/2023
Pacific Oak SOR (BVI) Holdings, Ltd. Series B Debentures (6)	326,523		271,978		3.93%	3.93%	(6)	01/31/2026
Crown Pointe Mortgage Loan	53,758		52,315		SOFR + 2.30%	4.77%	Interest Only	04/01/2025
The Marq Mortgage Loan	60,998		61,874		BSBY + 1.55%	4.68%	Principal & Interest	06/06/2023
Eight & Nine Corporate Centre Mortgage Loan	48,095		48,545		BSBY + 1.60%	4.73%	Principal & Interest	06/08/2023
Georgia 400 Center Mortgage Loan	44,129		61,154		LIBOR + 1.55%	4.69%	Interest Only	05/22/2023
PORT Mortgage Loan 1	51,303		51,302		4.74%	4.74%	Interest Only	10/01/2025
PORT Mortgage Loan 2	10,523		10,523		4.72%	4.72%	Interest Only	03/01/2026
PORT MetLife Loans	153,703		60,000		3.90%	3.90%	Interest Only	04/10/2026
Springmaid Beach Resort Mortgage Loan	(7)		55,491		(7)	(7)	(7)	(7)
Q&C Hotel Mortgage Loan	24,815		25,000		LIBOR + 2.50% (8)	5.64%	Principal & Interest	12/23/2022
Lincoln Court Mortgage Loan (5)	35,314		34,623		SOFR + 3.25%	5.72%	Interest Only	08/07/2025
Lofts at NoHo Commons Mortgage Loan	71,536		74,536		SOFR + 2.18% (9)	4.65%	Interest Only	09/09/2023
210 West 31st Street Mortgage Loan (5)	3,000		8,850		BSBY + 3.00%	6.13%	Principal & Interest	12/16/2022
Oakland City Center Mortgage Loan (5)	89,250		96,075		BSBY + 3.00%	6.13%	Principal & Interest	09/01/2023
Madison Square Mortgage Loan	17,671		17,500		4.63%	4.63%	Interest Only	10/07/2024
Total Notes and Bonds Payable principal outstanding	1,066,736		1,015,491
Discount on Notes and Bonds Payable, net (10)	(13,376)		(8,146)
Deferred financing costs, net	(10,500)		(8,396)
Total Notes and Bonds Payable, net	$	1,042,860	$	998,949

_____________________

(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2022. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2022 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at September 30, 2022, where applicable.

(2) Represents the payment type required under the loan as of September 30, 2022. Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.

(3) Represents the initial maturity date or the maturity date as extended as of September 30, 2022; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

(4) Subsequent to September 30, 2022, the Company extended the Richardson Portfolio Mortgage Loan to October 10, 2022.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

(5) The Company’s notes and bond’s payable are generally non-recourse. These mortgage loans have guarantees over certain balances whereby the Company would be required to make guaranteed payments in the event that the Company turned the property over to the lender. The guarantees are typically 25% of the outstanding loan balance. As of September 30, 2022, the guaranteed amount in the aggregate was $41.9 million.

(6) See “Israeli Bond Financings” below.

(7) The Springmaid Beach Resort Mortgage Loan was paid off in conjunction with the sale of the Springmaid Beach Resort. See Note 3 for further details.

(8) The interest rate is variable at the higher of one-month LIBOR + 2.5% or 4.5%.

(9) The variable rate is at the higher of one-month SOFR or 1.75%, plus 2.18%.

(10) Represents the unamortized premium/discount on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bonds payable.

During the three and nine months ended September 30, 2022, the Company incurred $13.0 million and $33.3 million, respectively, of interest expense. Included in interest expense for the three and nine months ended September 30, 2022 was $1.0 million and $2.6 million, respectively, of amortization of deferred financing costs. Included in interest expense for the three and nine months ended September 30, 2022 was $1.1 million and $3.4 million, respectively, of amortization on discount on notes and bonds payable, net. Additionally, during the three and nine months ended September 30, 2022, the Company capitalized $0.7 million and $1.7 million, respectively, of interest related to its investments in undeveloped land.

During the three and nine months ended September 30, 2021, the Company incurred $10.1 million and $30.7 million, respectively, of interest expense. Included in interest expense for the three and nine months ended September 30, 2021 was $0.8 million and $2.5 million, respectively, of amortization of deferred financing costs. Included in interest expense for the three and nine months ended September 30, 2021 was $0.5 million and $1.9 million, respectively, of amortization on discount on notes and bonds payable, net. Additionally, during the three and nine months ended September 30, 2021, the Company capitalized $0.5 million and $1.6 million, respectively of interest related to its investments in undeveloped land.

As of September 30, 2022 and December 31, 2021, the Company’s interest payable was $5.2 million and $6.6 million, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of September 30, 2022 (in thousands):



October 1, 2022 through December 31, 2022	$	49,443
2023	368,500
2024	126,512
2025	249,216
2026	273,065
Thereafter	—
	$	1,066,736

As of November 14, 2022, the Company had a total of $383.0 million of debt obligations scheduled to mature over the next 12 months. The Company has extension options with respect to $185.4 million of the debt obligations outstanding that are scheduled to mature over the next 12 months; however, the Company cannot exercise these options if not then in compliance with certain financial covenants in the loans without making a cash payment and there is no assurance that the Company will be able to meet these requirements. All of the Company’s debt obligations are generally non-recourse, subject to certain limited guaranty payments, as outlined in the table above, except for the Company’s Series B Debentures. The Company plans to utilize available extension options or refinance the notes payable. The Company may also choose to market the properties for sale or may negotiate a turnover of the secured properties back to the related mortgage lender.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

The Company’s notes payable contain financial debt covenants, including minimum equity requirements and liquidity ratios. As of September 30, 2022, the Company was in compliance with all of these debt covenants with the exception that the Oakland City Center Mortgage Loan and Georgia 400 Center Mortgage Loan were not in compliance with the debt service coverage requirement. As a result of such non-compliance, the Company is required to provide a cash sweep for the Georgia 400 Center Mortgage Loan. Additionally, the Company may be required to partially pay down the Oakland City Center Mortgage Loan if the non-compliance continues through September 2023.

Israeli Bond Financings

On February 16, 2020, Pacific Oak SOR BVI issued 254.1 million Israeli new Shekels (approximately $74.1 million as of February 16, 2020) of Series B Debentures to Israeli investors pursuant to a public offering registered with the Israel Securities Authority. The Series B Debentures will bear interest at the rate of 3.93% per year. The Series B Debentures have principal installment payments equal to 33.33% of the face amount of the Series B Debentures on January 31st of each year from 2024 to 2026. On November 1, 2021, Pacific Oak SOR BVI issued additional Series B Debentures in the amount of 536.4 million Israeli new Shekels par value through a public offering. The public offering Series B Debentures were issued at a 2.6% discount resulting in a total consideration of 522.4 million Israeli new Shekels ($166.8 million as of November 1, 2021). On November 8, 2021, Pacific Oak SOR BVI also issued Series B Debentures in the amount of 53.6 million Israeli new Shekels par value through a private offering. The private offering Series B Debentures were issued at a 3.1% discount resulting in a total consideration of 52.0 million Israeli new Shekels ($16.7 million as of November 8, 2021).

Additionally, on May 2, 2022, Pacific Oak SOR BVI issued Series B Debentures in the amount of 320.4 million Israeli new Shekels par value through a private offering. The private offering Series B Debentures were issued at a 4.0% discount, resulting in a total consideration of 307.6 million Israeli new Shekels ($95.3 million as of May 2, 2022). The additional Series B Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series B Debentures, without any right of precedence or preference between any of them.

The deed of trust that governs the Series B Debentures contain various financial covenants. As of September 30, 2022, the Company was in compliance with all of these financial debt covenants.

6. FAIR VALUE DISCLOSURES

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2022 and December 31, 2021, which carrying amounts do not approximate the fair values (in thousands):


	September 30, 2022						December 31, 2021
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value


Financial liabilities (Level 3):
Notes and bond payable	$	740,213	$	732,676	$	720,286	$	743,513	$	740,176	$	740,347
Financial liabilities (Level 1):

Pacific Oak SOR (BVI) Holdings, Ltd. Series B Debentures	$	326,523	$	310,184	$	306,099	$	271,978	$	258,773	$	274,697

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

As of September 30, 2022, the Company measured the following assets at fair value (in thousands):


			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Real estate equity securities	$	63,784	$	63,784	$	—	$	—
Asset derivative - interest rate caps	$	1,971	$	—	$	1,971	$	—
Nonrecurring Basis:
Impaired real estate	$	220,360	$	—	$	—	$	220,360
Impaired goodwill	$	5,436	$	—	$	—	$	5,436

As of September 30, 2022, two of the Company’s real estate properties were measured at their estimated fair value. 210 West 31st Street was based on a sales comparison approach as of September 30, 2022. Oakland City Center was based on an income approach with the significant unobservable inputs used in measuring the estimated fair value of this property include a discount rate of 6.50% and a terminal cap rate of 5.75%. Additionally, the Springmaid Beach Resort was measured at it’s estimated fair value based on the contractual sale price. During the three and nine months ended September 30, 2022, the Company recorded impairment charges on real estate in the aggregate of $11.9 million, to write down the carrying value of 210 West 31st Street, Oakland City Center, and the Springmaid Beach Resort. The fair value of the Company's real estate were measured using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2022, which included contractual sale price, discounted cash flows, terminal capitalization rates, and discount rates.

As of September 30, 2022, the Company determined that based on the sale of the Springmaid Beach Resort and a decline in projected cash flows for Oakland City Center, it was more likely than not that the fair value of the reporting units that included Oakland City Center and Springmaid Beach Resort were less than book value. The resulting real estate impairment charge on Oakland City Center and the sale of Springmaid Beach Resort, resulted in the fair value of the reporting units to be below fair value and the entirety of the goodwill associated to the reporting units to be written off. During the three and nine months ended September 30, 2022, the Company recorded goodwill impairment charges of $8.1 million in the consolidated statement of operations.

The following table summarizes the goodwill impairment activity during nine months ended September 30, 2022 (in thousands):


	Gross Goodwill		Accumulated Impairment		Net Goodwill
Balance, December 31, 2021	$	16,342	$	(2,808)	$	13,534
Impairment charges on goodwill	—		(8,098)		(8,098)
Balance, September 30, 2022	$	16,342	$	(10,906)	$	5,436

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

As of December 31, 2021, the Company measured the following assets at fair value (in thousands):


			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Real estate equity securities	$	112,096	$	112,096	$	—	$	—
Asset derivative - interest rate caps	$	8	$	—	$	8	$	—
Nonrecurring Basis:
Impaired real estate (1)	$	97,600	$	—	$	—	$	97,600
Impaired goodwill (1)	$	13,534	$	—	$	—	$	13,534

_____________________

(1) The fair value of these assets were assessed as of September 30, 2021.

7. RELATED PARTY TRANSACTIONS

Pacific Oak Capital Advisors, LLC

As described further below, the Company has entered into agreements with certain affiliates pursuant to which they provide services to the Company. Keith D. Hall and Peter McMillan III control and indirectly own Pacific Oak Holding Group, LLC (“Pacific Oak Holding”), the Company’s sponsor since November 1, 2019. Pacific Oak Holding is the sole owner of Pacific Oak Capital Advisors, LLC (the “Advisor”), the Company’s advisor since November 1, 2019. Messrs. Hall and McMillan are also two of the Company’s executive officers and directors.

Subject to certain restrictions and limitations, the business of the Company is externally managed by the Advisor pursuant to an advisory agreement (the “Advisory Agreement”). The Advisory Agreement is currently effective through November 1, 2023; however the Company or the Advisor may terminate the Advisory Agreement without cause or penalty upon providing 60 days’ written notice. The Advisor conducts the Company’s operations and manages its portfolio of real estate and other real estate-related investments.

Pacific Oak Residential Advisors, LLC

Effective September 1, 2022, the Company entered into an advisory agreement with Pacific Oak Residential Advisors, LLC (“PORA”) (the “PORT Advisory Agreement”) pursuant to which PORA will act as a product specialist with respect to the Company’s residential homes portfolio, held through a wholly owned subsidiary. The PORT Advisory Agreement has an initial two-year term and may be renewed for additional one-year terms. Pursuant to the PORT Advisory Agreement, the Company will pay PORA: (1) an acquisition fee equal to 1.0% of the cost of each asset which consists of the price paid for the asset plus any amounts funded or budgeted at the time of acquisition for capital expenditures; and (2) a quarterly asset management fee equal to 0.25% (1.0% annually) on the aggregate value of the Company’s residential homes portfolio assets, as determined in accordance with the Company’s valuation guidelines, as of the end of each quarter. In the case of investments made through a joint venture, the acquisition fee will be based on the Company’s proportionate share of the joint venture. For substantial assistance in connection with the sale of properties or other investments related to the Company’s residential homes portfolio, the Company also pays PORA or its affiliates 1.0% of the contract sales price with a limit to not exceed commission paid to unaffiliated third parties.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

In connection with the PORT Advisory Agreement, the Company amended and restated its advisory agreement with the Advisor, also effective September 1, 2022 (the “Amended Company Advisory Agreement”). Under the Amended Company Advisory Agreement, the Company will no longer pay acquisition fees, asset management fees or disposition fees to the Advisor with respect to the Company’s residential homes portfolio. The Company’s residential homes portfolio will still be considered when computing any potential incentive fees due to the Advisor under the Amended Company Advisory Agreement.

DMH Realty, LLC

Effective September 1, 2022, the Company entered into a property management agreement with DMH Realty, LLC (“DMH Realty”), an affiliate of PORA and the Advisor (the “PORT Property Management Agreement”) for the Company’s residential homes portfolio. The PORT Property Management Agreement has an initial two-year term and may be renewed for additional one-year terms. Pursuant to the PORT Property Management Agreement, the Company will pay DMH Realty a property management fee equal to the following: (a) 8% of Collected Rental Revenues, as defined below, up to $50.0 million per annum; (b) 7% of Collected Rental Revenues in excess of $50.0 million per annum, but less than or equal to $75.0 million per annum; and (c) 6% of Collected Rental Revenues in excess of $75.0 million per annum, “Collected Rental Revenues” means the amount of rental revenue actually collected for each property per the terms of the lease pertaining to each property (including lease breakage fees) or pursuant to any early termination buyouts, but excluding other income items, fees or revenue collected by DMH Realty, including but not limited to: application fees, insufficient funds fees, late fees, move-in fees, pet fees, and security deposits (except to the extent applied to rent per the terms of the lease pertaining to any property).

Pacific Oak Capital Markets, LLC

On September 9, 2022, the Company, through PORT, commenced a private offering of up to $500 million of common stock in a primary offering and up to $50 million of common stock under its distribution reinvestment plan (the “Private Offering”). PORT engaged Pacific Oak Capital Markets, LLC (“POCM”), an affiliate of the Advisor, PORA and DHM Realty, to be the dealer manager for the Private Offering, pursuant to a dealer manager agreement effective as of September 9, 2022 (the “PORT Dealer Manager Agreement”). Pursuant to the PORT Dealer Manager Agreement, with respect to Class A shares, PORT will generally pay POCM: (1) selling commissions equal to up to 6.0% of the net asset value (“NAV”) of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; (2) a dealer manager fee equal to up to 1.5% of the NAV of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; and (3) a placement agent fee equal to up to 1.5% of the NAV of each share sold in the primary offering. With respect to Class T shares, PORT will generally pay POCM: (1) selling commissions equal to up to 3.0% of the NAV of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; (2) a dealer manager fee equal to up to 0.75% of the NAV of each share sold in the primary offering, which POCM may reallow in part or in full to participating broker-dealers; and (3) a placement agent fee equal to up to 0.75% of the NAV of each share sold in the primary offering. PORT will not pay any selling commissions, dealer manager or placement agent fees in connection with the sale of shares under the distribution reinvestment plan. The Advisor is the sponsor for the Private Offering and as the sponsor, they will incur reimbursable organization and offering costs on behalf of PORT. PORT will incur an organization and offering expense fee equal to 0.5% of the NAV of each share sold in the Private Offering to help fund the reimbursement to the sponsor.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Pursuant to the terms of the related party agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 2022 and 2021, respectively, and any related amounts payable as of September 30, 2022 and December 31, 2021 (in thousands):


	Incurred								Payable as of
	Three Months Ended September 30,				Nine Months Ended September 30,				September 30, 2022		December 31, 2021
Expensed	2022		2021		2022		2021
Asset management fees	$	3,630	$	3,422	$	9,945	$	10,802	$	3,252	$	1,903

Property management fees	294		119		552		362		—		—
Disposition fees (1)	637		692		744		1,196		—		—
Change in subordinated performance fee due upon termination to affiliate (2)	—		1,545		—		1,745		(2)		(2)
Capitalized
Acquisition fees on real estate (3)	67		—		67		20		—		—

Acquisition fee on investment in unconsolidated entities	—		—		—		45		—		—
	$	4,628	$	5,778	$	11,308	$	14,170	$	3,252	$	1,903

_____________________

(1) Disposition fees with respect to real estate sold are included in the gain (loss) on sale of real estate in the accompanying consolidated statements of operations.

(2) Change in estimate of fees payable to the Company’s previous advisor, KBS Capital Advisors LLC (“KBS Capital Advisors) due to the termination of the former advisory agreement with KBS Capital Advisors.

(3) Acquisition fees associated with asset acquisitions are capitalized, while costs associated with business combinations expensed as incurred.

PORT OP LP Share Redemption

On June 24, 2022, the Company’s board of directors authorized and approved the redemption of the 510,816 Special Common Units of PORT OP LP, a consolidated subsidiary of the Company (“PORT OP”), representing approximately 3.20% interest, held by BPT Holdings, LLC (“BPT Holdings”), a subsidiary of the Advisor, for a price of $13.09 per unit. In July 2022, the Company redeemed the special common units of PORT OP for $6.7 million. Following the redemption, the Company owned 100% of PORT OP.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Pacific Oak Opportunity Zone Fund I

As of September 30, 2022, the Company’s investment balance in the Pacific Oak Opportunity Zone Fund I, LLC (“Pacific Oak Opportunity Zone Fund I”) is $26.3 million, which is included in investments in unconsolidated entities on the consolidated balance sheets. The Advisor is entitled to certain fees in connection with the fund. Pacific Oak Opportunity Zone Fund I will pay an acquisition fee equal to 1.5% of the purchase price of each asset (including any debt incurred or assumed and significant capital improvement costs budgeted as of the date of acquisition) with a purchase price less than or equal to $25.0 million plus 1.0% of the purchase price in excess of $25.0 million; a quarterly asset management fee equal to 0.25% of the total purchase price of all assets (including any debt incurred or assumed and significant capital improvement costs budgeted as of the date of acquisition) as of the end of the applicable quarter; and a financing fee equal to 0.5% of the original principal amount of any indebtedness incurred (reduced by any financing fee previously paid with respect to indebtedness being refinanced). In the case of investments made through joint ventures, the fees above will be determined based on the Company’s proportionate share of the investment. The Advisor is also entitled to certain distributions paid by the Pacific Oak Opportunity Zone Fund I after the Class A Members have received their preferred return. These fees and distributions have been waived for the Company’s investment. In addition, side letter agreements between the Advisor and Pacific Oak Opportunity Zone Fund I were executed on February 28, 2020 and stipulate that any asset management fees allocable to the Company and waived by Pacific Oak Capital Advisors for Pacific Oak Opportunity Zone Fund I will distributed to the Company. During the three and nine months ended September 30, 2022, the Company recorded $0.3 million and $0.4 million, respectively, of waived asset management fees recorded as equity in income of unconsolidated entities. During the three and nine months ended September 30, 2021, the Company recorded $0.2 million and $0.3 million, respectively, of waived asset management fees recorded as equity in income of unconsolidated entities.

8. INVESTMENT IN UNCONSOLIDATED ENTITIES

As of September 30, 2022 and December 31, 2021, the Company’s investments in unconsolidated entities were composed of the following (dollars in thousands):


	Number of Properties as of September 30, 2022			Investment Balance at
Joint Venture		Location	Ownership %	September 30, 2022		December 31, 2021
110 William Joint Venture	1	New York, New York	60.0%	$	—	$	—
353 Sacramento Joint Venture	1	San Francisco, California	55.0%	46,572		49,916
Pacific Oak Opportunity Zone Fund I	3	Various	46.0%	26,266		27,215
PORT II OP LP	(1)	(1)	(1)	(1)		11,125
				$	72,838	$	88,256

_____________________

(1) On July 1, 2022, the Company, through PORT OP, made a tender offer to purchase 76,735 shares of PORT II common stock held by unrelated parties for a price of $14.66 per share. As a result, the Company determined that it became the primary beneficiary of PORT II, which resulted in the consolidation of PORT II into the Company’s consolidated financial statements. On July 29, 2022, the Company consummated the transactions with the unrelated parties and owned 100% of PORT II. See Note 3 for the assessment of the fair value of the assets and liabilities of PORT II. There are no liquidity arrangements or agreements to fund capital or purchase assets that could require the Company to provide financial support to PORT II. The Company and the aforementioned unrelated parties did not guarantee any debt in connection with the transaction.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

9. SUPPLEMENTAL CASH FLOW AND SIGNIFICANT NONCASH TRANSACTION DISCLOSURES

Supplemental cash flow and significant noncash transaction disclosures were as follows (in thousands):


	Nine Months Ended September 30,
	2022		2021
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $1,703 and $1,579 for the nine months ended September 30, 2022 and 2021, respectively	$	29,839	$	29,220
Supplemental Disclosure of Significant Noncash Transactions:
Assets acquired in the consolidation of previously unconsolidated entity	137,569		—
Liabilities assumed in the consolidation of previously unconsolidated entity	85,096		—
Accrued improvements to real estate	6,389		1,721

Redeemable common stock payable	1,567		3,385
Distributions paid to common stockholders through common stock issuances	99,094		—
Accrued preferred dividends	225		225
PPP notes forgiveness	2,367		1,500

10. REPORTING SEGMENTS

The Company recognizes three reporting segments for the three and nine months ended September 30, 2022 and 2021: strategic opportunistic properties, residential homes and hotels. All corporate related costs are included in the strategic opportunistic properties segment to align with how financial information is presented to the chief operating decision maker. On July 1, 2022, the Company made a prospective name change to the “Single-Family Homes” segment to “Residential Homes” to reflect the Company’s acquisition of PORT II multifamily homes, see Note 3 for further details on the acquisition. On September 1, 2022, the Company made a prospective name change to the “Hotels” segment to “Hotel” to reflect the September 1, 2022 disposition of the Springmaid Beach Resort, see Note 3 for further details on the disposition. The selected financial information for reporting segments for the three and nine months ended September 30, 2022 and 2021 are as follows (in thousands):



	Three Months Ended September 30, 2022
	Strategic Opportunistic Properties		Residential Homes		Hotel		Total
Total revenues	$	25,847	$	8,576	$	9,182	$	43,605
Total expenses	(46,453)		(10,726)		(12,056)		(69,235)
Total other (loss) income	(24,052)		18,671		11		(5,370)
Net (loss) income	$	(44,658)	$	16,521	$	(2,863)	$	(31,000)

	Nine Months Ended September 30, 2022
	Strategic Opportunistic Properties		Residential Homes		Hotel		Total
Total revenues	$	77,599	$	20,120	$	27,952	$	125,671
Total expenses	(87,232)		(23,735)		(28,900)		(139,867)
Total other (loss) income	(50,436)		18,149		2,382		(29,905)
Net (loss) income	$	(60,069)	$	14,534	$	1,434	$	(44,101)

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)



	Three Months Ended September 30, 2021
	Strategic Opportunistic Properties		Single-Family Homes		Hotels		Total
Total revenues	$	28,050	$	5,566	$	12,153	$	45,769
Total expenses	(52,891)		(6,398)		(8,948)		$	(68,237)
Total other (loss) income	(4,435)		81		1,276		$	(3,078)
Net (loss) income	$	(29,276)	$	(751)	$	4,481	$	(25,546)

	Nine Months Ended September 30, 2021
	Strategic Opportunistic Properties		Single-Family Homes		Hotels		Total
Total revenues	$	88,187	$	16,436	$	24,578	$	129,201
Total expenses	(128,418)		(19,581)		$	(22,924)	$	(170,923)
Total other income	42,527		159		$	1,289	$	43,975
Net income (loss)	$	2,296	$	(2,986)	$	2,943	$	2,253

Total assets and goodwill related to the reporting segments as of September 30, 2022 and December 31, 2021 are as follows (in thousands):


	September 30, 2022
	Strategic Opportunistic Properties		Residential Homes		Hotel		Total
Total assets	$	1,174,855	$	337,513	$	51,999	$	1,564,367
Goodwill (1)	4,220		—		1,216		5,436

	December 31, 2021
	Strategic Opportunistic Properties		Single-Family Homes		Hotels		Total
Total assets	$	1,223,122	$	211,050	$	150,447	$	1,584,619
Goodwill (1)	9,489		—		4,045		13,534

_____________________

(1) During the three and nine months ended September 30, 2022, the Company recorded impairment charges on goodwill of $5.5 million and $2.6 million related to the Strategic Opportunistic Properties and Hotel segments, respectively. During the three and nine months ended September 30, 2021, the Company recorded impairment charges on goodwill of $2.8 million related to the Strategic Opportunistic Properties segment.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

11. PORT MEZZANINE EQUITY

The following is a reconciliation of PORT’s noncontrolling cumulative convertible redeemable preferred stock for the nine months ended September 30, 2022 and 2021 (dollars in thousands):


	Series A Preferred Stock			Series B Preferred Stock
	Shares	Amounts		Shares	Amounts


Balance, December 31, 2021	15,000	$	15,134	125	$	99
Dividends Available Upon Redemption	—	1,045		—	8
Dividends Paid	—	(1,045)		—	(8)
Balance, September 30, 2022	15,000	$	15,134	125	$	99


	Series A Preferred Stock			Series B Preferred Stock
	Shares	Amounts		Shares	Amounts


Balance, December 31, 2020	15,000	$	15,134	125	$	99
Dividends Available Upon Redemption	—	453		—	—
Dividends Paid	—	(453)		—	—
Balance, September 30, 2021	15,000	$	15,134	125	$	99

On July 1, 2020, the Company acquired, through its subsidiaries, Battery Point Trust Inc. (“Battery Point”). Battery Point is a real estate investment trust that owned, at the time of acquisition, 559 single-family rental homes throughout the midwestern and southeastern United States. All of these assets are held by the Company through its subsidiary, PORT OP.

The Company acquired Battery Point by acquiring all the 1,000,000 outstanding shares of Battery Point common stock from BPT Holdings. The Advisor is the Company’s external advisor and is owned and controlled by Keith D. Hall, the Company’s Chief Executive Officer and a director, and Peter M. McMillan, the Company’s President and Chairman of the Board. In exchange, BPT Holdings received 510,816 Special Common Units in PORT OP, approximately 4.5% of the outstanding common equity units, as of July 1, 2020. The value of the interests exchanged was estimated by the participants at approximately $3.0 million. The common equity units issued to BPT Holdings are redeemable after one year at the request of BPT Holdings for all or a portion of the common equity units at a redemption price equal to and in the form of cash based on the unit price of PORT OP. The following table summarizes the redeemable non-controlling interest activity related to the PORT OP equity units held by BPT Holdings for the nine months ended September 30, 2022 and 2021 (in thousands):



December 31, 2021	$	2,822
Net loss attributable to redeemable noncontrolling interest	(81)
Adjustment to value of redeemable noncontrolling interest (1)	3,946
Payment to redeem noncontrolling interest	(6,687)
September 30, 2022	$	—

December 31, 2020	$	2,968
Net loss attributable to redeemable noncontrolling interest	(113)
September 30, 2021	$	2,855

_____________________

(1) On June 24, 2022, the Company’s board of directors approved the redemption of the 510,816 PORT OP Special Common Units held by BPT Holdings for a price of $13.09 per unit.and recorded at its fair value. The Company redeemed the noncontrolling interest in PORT OP in July 2022.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

12. COMMITMENTS AND CONTINGENCIES

Lease Obligations

As of September 30, 2022, the Company’s lease and rights to a leasehold interest with respect to 210 West 31st Street, which was accounted for as a finance lease, are included in the consolidated balance sheet as follows:



Right-of-use asset (included in real estate held for investment, net) (1)	$	7,281
Lease obligation (included in other liabilities)	9,424

Remaining lease term	91.3 years
Discount rate	4.8		%

The components of lease expense were as follows:
Interest on lease obligation for the three months ended September 30, 2022	112
Interest on lease obligation for the nine months ended September 30, 2022	334

_____________________

(1) During the three and nine months ended September 30, 2022, the Company wrote down its right-of-use asset and recorded an impairment charge of $0.8 million on 210 West 31st Street.

As of September 30, 2022, the Company had a leasehold interest expiring in 2114. Future minimum lease payments owed by the Company under the finance lease as of September 30, 2022 are as follows (in thousands):



July 1, 2021 through December 31, 2021	$	90
2022	360
2023	360
2024	393
2025	396
Thereafter	52,167
Total expected minimum lease obligations	53,766
Less: Amount representing interest (1)	(44,342)
Present value of net minimum lease payments (2)	$	9,424

_____________________

(1) Interest includes the amount necessary to reduce the total expected minimum lease obligations to present value calculated at the Company’s incremental borrowing rate at acquisition.

(2) The present value of net minimum lease payments are presented in other liabilities in the accompanying consolidated balance sheets.

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide these services, the Company will be required to obtain such services from other sources.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2022

(unaudited)

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations as of September 30, 2022. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is a party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and the possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

13. SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Dividends on and accretion to redemption value of Series A Redeemable Preferred Stock

On October 25, 2022, the Company received notice by the holders of PORT’s Series A noncontrolling cumulative convertible redeemable preferred stock to redeem their outstanding redeemable preferred stock. If outstanding on November 4, 2022, the Series A redeemable preferred stock must be redeemed by the Company within 120 days after November 4, 2022. The Company authorized and approved the redemption of all 15,000 outstanding Series A Preferred Shares, at a price of (i) $1,120 per Series A Preferred Share, plus (ii) all accrued but unpaid dividends, through the redemption date.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Pacific Oak Strategic Opportunity REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to Pacific Oak Strategic Opportunity REIT, Inc., a Maryland corporation, and, as required by context, Pacific Oak Strategic Opportunity Limited Partnership, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of Pacific Oak Strategic Opportunity REIT, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•We depend on our advisor to conduct our operations and eventually dispose of our investments.

•Because our advisor, Pacific Oak Capital Advisors, LLC, was recently formed, it could face challenges with employee hiring and retention, information technology, vendor relationships, and funding; if Pacific Oak Capital Advisors faces challenges in performing its obligations to us, it could negatively impact our ability to achieve our investment objectives.

•We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our property investments could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, limiting our ability to pay distributions to our stockholders.

•Our opportunistic investment strategy involves a higher risk of loss than would a strategy of investing in some other types of real estate and real estate-related investments.

•We have paid distributions from financings and in the future we may not pay distributions solely from our cash flow from operations or gains from asset sales. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have less funds available for investment in loans, properties and other assets, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

•All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and other Pacific Oak-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other Pacific Oak-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. Fees paid to our advisor in connection with transactions involving the origination, acquisition and management of our investments are based on the cost of the investment, not on the quality of the investment or services rendered to us. This arrangement could influence our advisor to recommend riskier transactions to us.

•We pay substantial fees to and expenses of our advisor and its affiliates. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase our stockholders’ risk of loss.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

•We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program, future funding obligations under any real estate loans receivable we acquire, the funding of capital expenditures on our real estate investments or the repayment of debt. If such funds are not available from the dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.

•We have focused, and may continue to focus, our investments in non-performing real estate and real estate-related loans, real estate-related loans secured by non-stabilized assets and real estate-related securities, which involve more risk than investments in performing real estate and real estate-related assets.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”).

Overview

We were formed on October 8, 2008 as a Maryland corporation, elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010 and intend to operate in such manner. Pacific Oak Capital Advisors, LLC (“Pacific Oak Capital Advisors”) is our advisor and as our advisor, Pacific Oak Capital Advisors manages our day-to-day operations and our portfolio of investments. Pacific Oak Capital Advisors also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors. Pacific Oak Capital Advisors also provides asset-management, marketing, investor-relations and other administrative services on our behalf. We have sought to invest in and manage a diverse portfolio of real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments. We conduct our business primarily through our operating partnership, of which we are the sole general partner.

Market Outlook – Real Estate and Real Estate Finance Markets

Volatility in global financial markets and changing political environments can cause fluctuations in the performance of the U.S. commercial real estate markets. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. To the extent there are increases in the cost of financing due to higher interest rates, this may cause difficulty in refinancing debt obligations at terms as favorable as the terms of existing indebtedness. Further, increases in interest rates would increase the amount of our debt payments on our variable rate debt to the extent the interest rates on such debt are not limited by interest rate caps. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. Management continuously reviews our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure.

Liquidity and Capital Resources

Our principal demand for funds during the short and long-term is and will be for the acquisition of real estate and real estate-related investments, payment of operating expenses, capital expenditures and general and administrative expenses, payments under debt obligations, redemptions and purchases of our common stock and payments of distributions to stockholders. To date, we have had six primary sources of capital for meeting our cash requirements:

•Proceeds from the primary portion of our initial public offering;

•Proceeds from our dividend reinvestment plan;

•Proceeds from our public bond offering in Israel;

•Debt financing;

•Proceeds from the sale of real estate and the repayment of real estate-related investments; and

•Cash flow generated by our real estate and real estate-related investments.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

We sold 56,584,976 shares of common stock in the primary portion of our initial public offering for gross offering proceeds of $561.7 million. We ceased offering shares in the primary portion of our initial public offering on November 14, 2012. We continue to offer shares of common stock under the dividend reinvestment plan. As of September 30, 2022, we had sold 6,851,969 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $76.5 million. To date, we have invested all of the net proceeds from our initial public offering in real estate and real estate-related investments. We intend to use our cash on hand, proceeds from asset sales, proceeds from debt financing, cash flow generated by our real estate operations and real estate-related investments and proceeds from our dividend reinvestment plan as our primary sources of immediate and long-term liquidity.

Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures and corporate general and administrative expenses. Cash flow from operations from our real estate investments is primarily dependent upon the occupancy levels of our properties, the net effective rental rates on our leases, the collectability of rent and operating recoveries from our tenants and how well we manage our expenditures. As of September 30, 2022, our office properties were collectively 70% occupied, our residential home portfolio was 96% occupied and our apartment properties were 95% occupied.

Our investments in hotel properties generate cash flow in the form of room, food, beverage and convention services, campground and other revenues, which are reduced by hotel expenses, capital expenditures, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our hotel properties are primarily dependent upon the occupancy levels of our hotels, the average daily rates and how well we manage our expenditures. The following table provides summary information regarding our hotel properties for the nine months ended September 30, 2022 and 2021:



		Percentage Occupied for the Nine Months Ended September 30,		Average Daily Rate for the Nine Months Ended September 30,		Average Revenue per Available Room for the Nine Months Ended September 30,
Property	Number of Rooms	2022	2021	2022	2021	2022	2021
Springmaid Beach Resort (1)	453	61.4%	58.4%	$226.60	$218.28	$139.05	$127.49
Q&C Hotel	196	59.3%	42.3%	$192.73	$121.24	$114.30	$51.24

_____________________

(1) The Springmaid Beach Resort was sold on September 1, 2022.

Investments in real estate equity securities generate cash flow in the form of dividend income, which is reduced by asset management fees. As of September 30, 2022, we had three investments in real estate equity securities outstanding with a total carrying value of $63.8 million.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expenses for the four fiscal quarters ended September 30, 2022 did not exceed the charter-imposed limitation.

For the nine months ended September 30, 2022, our cash needs for capital expenditures, redemptions of common stock and debt servicing were met with proceeds from dispositions of real estate, proceeds from debt financing and cash on hand. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments and cash on hand. As of September 30, 2022, we had outstanding debt obligations in the aggregate principal amount of $1.1 billion, with a weighted-average remaining term of 2.3 years. As of September 30, 2022, we had a total of $386.9 million of debt obligations scheduled to mature within 12 months of that date. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates.

We have elected to be taxed as a REIT and intend to operate as a REIT. To maintain our qualification as a REIT, we are required to make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (computed without regard to the dividends paid deduction and excluding net capital gain). Our board of directors may authorize distributions in excess of those required for us to maintain REIT status depending on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum distribution level.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Flows from Operating Activities

Cash Flows from Investing Activities

Net cash provided by investing activities was $70.3 million for the nine months ended September 30, 2022 and primarily consisted of the following:

•Proceeds from sales of real estate, net of $97.9 million;

•Contributions to unconsolidated entities of $23.9 million;

•Earnest money received of $17.0 million related to the pending sale of Park Highlands land;

•Improvements to real estate of $16.5 million;

•Proceeds from advances due from affiliates of $8.2 million;

•Acquisitions of real estate of $6.7 million; and

•Funding of $6.4 million for development obligations related to Park Highlands land.

Cash Flows from Financing Activities

Net cash used in financing activities was $37.3 million for the nine months ended September 30, 2022 and primarily consisted of the following:

•$11.0 million of cash distributions paid;

•$10.7 million of distributions paid to noncontrolling interests;

•$4.6 million of cash used for redemptions of common stock; and

•$3.5 million of net cash used for principal payments on notes payable of $190.5 million and payments of deferred financing costs of $4.7 million and partially offset by proceeds from notes payable of $191.7 million.

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets; however, we may exceed that limit if a majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. As of September 30, 2022, our borrowings and other liabilities were both approximately 70% of the cost (before depreciation and other noncash reserves) and the book value (before depreciation) of our tangible assets.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

On February 16, 2020, Pacific Oak Strategic Opportunity BVI issued 254.1 million Israeli new Shekels (approximately $74.1 million as of February 16, 2020) of the Series B Debentures to Israeli investors pursuant to a public offering registered with the Israel Securities Authority. The Series B Debentures will bear interest at the rate of 3.93% per year. The Series B Debentures have principal installment payments equal to 33.33% of the face amount of the Series B Debentures on January 31st of each year from 2024 to 2026. On November 1, 2021, Pacific Oak Strategic Opportunity BVI issued additional Series B Debentures in the amount of 536.4 million Israeli new Shekels par value through a public offering. The public offering Series B Debentures were issued at a 2.6% discount resulting in a total consideration of 522.4 million Israeli new Shekels ($166.8 million as of November 1, 2021). On November 8, 2021, Pacific Oak Strategic Opportunity BVI also issued Series B Debentures in the amount of 53.6 million Israeli new Shekels par value through a private offering. The private offering Series B Debentures were issued at a 3.1% discount resulting in a total consideration of 52.0 million Israeli new Shekels ($16.7 million as of November 8, 2021).

Additionally, on May 2, 2022, Pacific Oak Strategic Opportunity BVI also issued Series B Debentures in the amount of 320.4 million Israeli new Shekels par value through a private offering. The private offering Series B Debentures were issued at a 4.0% discount resulting in a total consideration of 307.6 million Israeli new Shekels ($95.3 million as of May 2, 2022). All additional Series B Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series B Debentures, which were initially issued, without any right of precedence or preference between any of them.

In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our advisor and our dealer manager. During our offering stage, these payments included payments to our dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to our dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. During our acquisition and development stage, we expect to continue to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us as well as for any dispositions of assets (including the discounted payoff of non-performing loans).

Among the fees payable to our advisor is an asset management fee. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment, inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan or other investment, plus the fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the sum of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property, and inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment, inclusive of our proportionate share of any fees and expenses related thereto.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of September 30, 2022 (in thousands):


			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2022		2023-2024		2025-2026		Thereafter
Outstanding debt obligations (1)	$	1,066,736	$	49,441	$	495,012	$	522,283	$	—
Interest payments on outstanding debt obligations (2)	85,083		12,459		55,469		17,155		—
Finance lease obligation	53,766		90		720		789		52,167

_____________________

(1) Amounts include principal payments only.

(2) Projected interest payments are based on the outstanding principal amounts, maturity dates, foreign currency rates and interest rates in effect at September 30, 2022.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Results of Operations

Overview

As of September 30, 2022, we consolidated eight office properties, one office portfolio consisting of two office buildings and 14 acres of undeveloped land, two apartment properties, one hotel property, one residential home portfolio consisting of 2,458 residential homes, three investments in undeveloped land with approximately 800 developable acres, one office/retail development property and owned three investments in unconsolidated entities and three investments in real estate equity securities. As of September 30, 2021, we consolidated eight office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, two apartment properties, two hotel properties, one residential home portfolio consisting of 1,806 single-family homes, three investments in undeveloped land with approximately 800 developable acres, one office/retail development property, and owned four investments in unconsolidated entities and three investments in real estate equity securities. Our results of operations for the three and nine months ended September 30, 2022 may not be indicative of those in future periods due to acquisition and disposition activities. Additionally, the occupancy in our properties, excluding our residential home portfolio, has not been stabilized. As of September 30, 2022, our office properties were collectively 70% occupied, our residential home portfolio was 96% occupied and our apartment properties were 95% occupied. However, due to the amount of near-term lease expirations, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our assets will increase, or that we will recognize a gain on the sale of our assets. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and acquiring additional assets but decrease due to disposition activity.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended September 30, 2022 versus the three months ended September 30, 2021

The following table provides summary information about our results of operations for the three months ended September 30, 2022 and 2021 (dollar amounts in thousands):


	Three Months Ended September 30,				Increase (Decrease)		Percentage Change		$ Change Due to Acquisitions/ Dispositions (1)		$ Change Due to Investments Held Throughout Both Periods (2)
	2022		2021
Rental income	$	31,445	$	29,504	$	1,941	7	%	$	1,511	$	430
Hotel revenues	9,182		12,153		(2,971)		(24)	%	(2,892)		(79)
Other operating income	830		923		(93)		(10)	%	(89)		(4)
Dividend income from real estate equity securities	2,148		3,189		(1,041)		(33)	%	—		(1,041)
Operating, maintenance, and management	12,342		10,668		1,674		16	%	858		816
Real estate taxes and insurance	5,650		5,262		388		7	%	365		23
Hotel expenses	5,377		6,483		(1,106)		(17)	%	(1,249)		(1,106)
Asset management fees to affiliate	3,630		3,422		208		6	%	210		(2)
General and administrative expenses	2,504		2,365		139		6	%	n/a		n/a
Foreign currency transaction (gain) loss, net	(6,001)		2,271		(8,272)		(364)	%	n/a		n/a
Depreciation and amortization	12,717		13,895		(1,178)		(8)	%	436		(1,614)
Interest expense	12,976		10,092		2,884		29	%	161		2,723
Impairment charges on real estate	11,942		10,971		971		9	%	n/a		n/a
Impairment charges on goodwill	8,098		2,808		5,290		188	%	n/a		n/a
Equity in loss of unconsolidated entities	(3,376)		(569)		(2,807)		493	%	—		(2,807)
Casualty-related gain	—		27		(27)		(100)	%	n/a		n/a
Other interest income	61		55		6		11	%	n/a		n/a
Loss on real estate equity securities	(20,722)		(2,614)		(18,108)		693	%	—		(18,108)
Change in subordinated performance fee due upon termination to affiliate	—		(1,545)		1,545		(100)	%	n/a		n/a
(Loss) gain on sale of real estate	(75)		216		(291)		(135)	%	(291)		—
Gain on extinguishment of debt	—		1,352		(1,352)		100	%	n/a		n/a
Gain from consolidation of previously unconsolidated entity	18,742		—		18,742		100	%	18,742		—

_____________________

(1) Represents the dollar amount increase (decrease) for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 related to real estate and real estate-related investments acquired or disposed on or after October 1, 2021.

(2) Represents the dollar amount increase (decrease) for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

Rental income increased from $29.5 million for the three months ended September 30, 2021 to $31.4 million for the three months ended September 30, 2022, primarily as a result of the PORT II consolidation, which attributed to a $3.0 million increase and partially offset by the disposition of City Tower on July 27, 2021, which attributed to a $1.1 million decrease. There were no significant changes to the occupancy rate and annualized base rent per square foot of our office properties held throughout both periods. We expect rental income to increase in future periods as a result of leasing additional space and to the extent we acquire additional properties, but to decrease to the extent we dispose of properties.

Hotel revenues decreased from $12.2 million for the three months ended September 30, 2021 to $9.2 million for the three months ended September 30, 2022, primarily as a result of the disposition of the Springmaid Beach Resort on September 1, 2022, and partially offset by the increase in occupancy for the Q&C Hotel.

Property operating costs increased from $10.7 million for the three months ended September 30, 2021 to $12.3 million for the three months ended September 30, 2022, primarily as a result of the PORT II consolidation, which attributed to a $1.5 million increase and partially offset by a $0.3 million decrease due to the disposition of City Tower. Real estate taxes and insurance slightly increased between the two periods. We expect property operating costs and real estate taxes and insurance to increase in future periods to the extent we acquire additional properties, increase occupancy of our real estate assets and due to general inflation, but to decrease to the extent we dispose of properties.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Hotel expenses decreased from $6.5 million for the three months ended September 30, 2021 to $5.4 million for the three months ended September 30, 2022, primarily due to the disposition of the Springmaid Beach Resort, which resulted in a decrease of $0.7 million. We expect hotel expenses to vary in future periods based on occupancy rates.

Asset management fees slightly increased from $3.4 million for the three months ended September 30, 2021 to $3.6 million for the three months ended September 30, 2022, primarily as a result of the PORT II consolidation, which attributed to a $0.4 million increase and partially offset by the disposition of City Tower, which attributed to a $0.2 million decrease. We expect asset management fees to increase in future periods to the extent we acquire additional properties, but to decrease to the extent we dispose of properties.

We recognized a $6.0 million foreign currency transaction gain, net for the three months ended September 30, 2022 and $2.3 million of foreign currency transaction loss, net, for the three months ended September 30, 2021, related to the debentures in Israel. These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses based on changes in foreign currency exchange rates.

Depreciation and amortization decreased from $13.9 million for the three months ended September 30, 2021 to $12.7 million for the three months ended September 30, 2022, primarily as a result of the disposition of the Springmaid Beach Resort, which attributed to $0.5 million decrease, intangibles that were fully amortized in 2021, which attributed to a $1.0 million decrease, and partially offset by the PORT II consolidation, which attributed to a $1.0 million increase. We expect depreciation and amortization to increase in future periods to the extent we acquire additional properties, but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties.

Interest expense increased from $10.1 million for the three months ended September 30, 2021 to $13.0 million for the three months ended September 30, 2022, primarily due to increasing benchmark rates affecting our variable rate debt, increase in notes payable balance of $86.5 million related to the PORT II consolidation, and partially offset by a decrease in the notes payable balance of $53.1 million related to the disposition of the Springmaid Beach Resort.

During the three months ended September 30, 2022, we recognized impairment charges of $4.4 million, $5.0 million and $2.5 million on 210 West 31st Street, Oakland City Center and the Springmaid Beach Resort, respectively. During the three months ended September 30, 2021, we recognized impairment charges of $6.6 million on 210 West 31st Street and $4.4 million on Lincoln Court.

During the three months ended September 30, 2022, we recognized impairment charges on goodwill of $5.5 million and $2.6 million on Oakland City Center and the Springmaid Beach Resort, respectively. During the three months ended September 30, 2021, we recognized impairment charges on goodwill of $1.6 million on Lincoln Court and $1.2 million on 210 West 31st Street.

Equity in loss of unconsolidated entities increased from $0.6 million for the three months ended September 30, 2021 to $3.4 million for the three months ended September 30, 2022, primarily as a result of losses related to the 110 William Joint Venture of $1.7 million and the Pacific Oak Opportunity Zone Fund I of $0.9 million for the three months ended September 30, 2022.

Loss on real estate equity securities increased from $2.6 million for the three months ended September 30, 2021 to $20.7 million for the three months ended September 30, 2022. We expect gains and losses on real estate equity securities to fluctuate in future periods as a result of changes in share prices of our investments in real estate equity securities.

During the three months ended September 30, 2022, we consolidated PORT II and recognized a gain from consolidation of previously unconsolidated entity of $18.7 million.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the nine months ended September 30, 2022 versus the nine months ended September 30, 2021

The following table provides summary information about our results of operations for the nine months ended September 30, 2022 and 2021 (dollar amounts in thousands):


	Nine Months Ended September 30,				Increase (Decrease)		Percentage Change		$ Change Due to Acquisitions/ Dispositions (1)		$ Change Due to Investments Held Throughout Both Periods (2)
	2022		2021
Rental income	$	89,806	$	94,812	$	(5,006)	(5)	%	$	(6,133)	$	1,127
Hotel revenues	27,952		24,578		3,374		14	%	(314)		3,688
Other operating income	2,559		3,118		(559)		(18)	%	(614)		55
Dividend income from real estate equity securities	5,354		6,693		(1,339)		(20)	%	—		(1,339)
Operating, maintenance, and management	32,560		31,444		1,116		4	%	(1,012)		2,128
Real estate taxes and insurance	15,753		15,949		(196)		(1)	%	(306)		110
Hotel expenses	17,485		15,715		1,770		11	%	(16)		1,786
Asset management fees to affiliate	9,945		10,802		(857)		(8)	%	(481)		(376)
General and administrative expenses	8,486		7,120		1,366		19	%	n/a		n/a
Foreign currency transaction gain, net	(37,100)		(568)		(36,532)		6,432	%	n/a		n/a
Depreciation and amortization	39,379		45,969		(6,590)		(14)	%	(2,521)		(4,069)
Interest expense	33,319		30,713		2,606		8	%	(1,301)		3,907

Impairment charges on real estate	11,942		10,971		971		9	%	n/a		n/a
Impairment charges on goodwill	8,098		2,808		5,290		188	%	n/a		n/a
Equity in loss of unconsolidated entities	(6,130)		(144)		(5,986)		4,157	%	—		(5,986)
Casualty-related gain	—		27		(27)		(100)	%	n/a		n/a
Other interest income	155		148		7		5	%	n/a		n/a
(Loss) gain on real estate equity securities	(48,312)		12,939		(61,251)		(473)	%	225		(61,476)
Change in subordinated performance fee due upon termination to affiliate	—		(1,745)		1,745		(100)	%	n/a		n/a
(Loss) gain on sale of real estate	3,273		31,385		(28,112)		(90)	%	(28,112)		—
Gain on extinguishment of debt	2,367		1,365		1,002		73	%	n/a		n/a
Gain from consolidation of previously unconsolidated entity	18,742		—		18,742		100	%	18,742		—

_____________________

(1) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 related to real estate and real estate-related investments acquired or disposed on or after October 1, 2021.

(2) Represents the dollar amount increase (decrease) for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 with respect to real estate and real estate-related investments owned by us during the entirety of both periods presented.

Rental income decreased from $94.8 million for the nine months ended September 30, 2021 to $89.8 million for the nine months ended September 30, 2022, primarily due to the disposition of City Tower, which attributed to a $8.7 million decrease and partially offset with the PORT II consolidation, which attributed to a $3.6 million increase. There were no significant changes to the occupancy rate and annualized base rent per square foot of our office properties held throughout both periods. We expect rental income to increase in future periods as a result of leasing additional space and to the extent we acquire additional properties, but to decrease to the extent we dispose of properties.

Hotel revenues increased from $24.6 million for the nine months ended September 30, 2021 to $28.0 million for the nine months ended September 30, 2022, primarily as a result of the increase in occupancy from 58.4%% to 61.4% and average daily rate from $127.49 to $139.05 for the Springmaid Beach Resort as well as the increase in occupancy from 42.3% to 59.3% and average daily rate from $51.24 to $114.30 for the Q&C Hotel. The increase was partially offset by the Springmaid Beach Resort disposition, which attributed to a $0.4 million decrease.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Property operating costs increased from $31.4 million for the nine months ended September 30, 2021 to $32.6 million for the nine months ended September 30, 2022, primarily due to increase in legal and marketing fees related to various properties and the consolidation of PORT II, which attributed to an increase of $1.7 million and was partially offset by the disposition of City Tower, which attributed to a $2.0 million decrease. Real estate taxes and insurance slightly decreased between the two periods. We expect property operating costs and real estate taxes and insurance to increase in future periods to the extent we acquire additional properties, increase occupancy of our real estate assets and due to general inflation, but to decrease to the extent we dispose of properties.

Hotel expenses increased from $15.7 million for the nine months ended September 30, 2021 to $17.5 million for the nine months ended September 30, 2022, primarily as a result of the increase in occupancy from 58.4%% to 61.4% for the Springmaid Beach Resort as well as the increase in occupancy from 42.3% to 59.3% for the Q&C Hotel. We expect hotel expenses to vary in future periods based on occupancy rates.

Asset management fees decreased from $10.8 million for the nine months ended September 30, 2021 to $9.9 million for the nine months ended September 30, 2022, primarily as a result of the disposition of City Tower, which attributed to a $0.8 million decrease and partially offset by the PORT II consolidation, which attributed to an increase of $0.4 million. We expect asset management fees to increase in future periods to the extent we acquire additional properties, but to decrease to the extent we dispose of properties.

General and administrative expenses increased from $7.1 million for the nine months ended September 30, 2021 to $8.5 million for the nine months ended September 30, 2022, primarily due to increased accounting and advisory expenses. We expect general and administrative expenses to fluctuate in future periods based on investment and disposition activity as well as costs incurred to evaluate strategic transactions.

We recognized a $0.6 million foreign currency transaction gain, net for the nine months ended September 30, 2021 and $37.1 million foreign currency transaction gain, net, for the nine months ended September 30, 2022, related to the debentures in Israel. These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses based on changes in foreign currency exchange rates.

Depreciation and amortization decreased from $46.0 million for the nine months ended September 30, 2021 to $39.4 million for the nine months ended September 30, 2022, primarily as a result of the disposition of City Tower, which attributed to $2.4 million decrease and intangibles that were fully amortized in 2021, which attributed to a $3.4 million decrease. We expect depreciation and amortization to increase in future periods as a result of the extent we acquire additional properties, but to decrease as a result of amortization of tenant origination costs related to lease expirations and disposition of properties.

Interest expense increased from $30.7 million for the nine months ended September 30, 2021 to $33.3 million for the nine months ended September 30, 2022, primarily due to increasing benchmark rates affecting our variable rate debt, increase in notes payable balance of $86.5 million related to the PORT II consolidation, and partially offset by a decrease in the notes payable balance of $53.1 million related to the disposition of the Springmaid Beach Resort.

During the nine months ended September 30, 2022, we recognized impairment charges of $4.4 million, $5.0 million and $2.5 million on 210 West 31st Street, Oakland City Center and the Springmaid Beach Resort, respectively. During the nine months ended September 30, 2021, we recognized impairment charges of $6.6 million on 210 West 31st Street and $4.4 million on Lincoln Court.

During the nine months ended September 30, 2022, we recognized impairment charges on goodwill of $5.5 million and $2.6 million on Oakland City Center and the Springmaid Beach Resort, respectively. During the nine months ended September 30, 2021, we recognized impairment charges on goodwill of $1.6 million on Lincoln Court and $1.2 million on 210 West 31st Street.

Equity in loss of unconsolidated entities increase from $0.1 million for the nine months ended September 30, 2021 to $6.1 million for the nine months ended September 30, 2022, primarily related to losses with the: 353 Sacramento Joint Venture of $3.3 million loss, primarily as a result of the allowance for credit losses, the 110 William Joint Venture of $1.7 million and the Pacific Oak Opportunity Zone Fund I of $0.4 million .

Gain on real estate equity securities decreased from $12.9 million for the nine months ended September 30, 2021 to a $48.3 million loss for the nine months ended September 30, 2022. We expect gains and losses on real estate equity securities to fluctuate in future periods as a result of changes in share prices of our investments in real estate equity securities.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

During the nine months ended September 30, 2021, we sold approximately 193 developable acres of Park Highlands undeveloped land that resulted in a gain on sale of $31.1 million. During the nine months ended September 30, 2022, we sold two office buildings related to the Richardson Portfolio and the Springmaid Beach Resort and recognized an aggregate gain on sale of $3.3 million.

During the nine months ended September 30, 2022, we consolidated PORT II and recognized a gain from consolidation of previously unconsolidated entity of $18.7 million.

Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding gains and losses from sales of real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. In addition, we elected the option to exclude mark-to-market changes in value recognized on equity securities in the calculation of FFO. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses (to the extent that such fees and expenses have been recorded as operating expenses); adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Institute for Portfolio Alternatives (“IPA”) in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance, as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land.

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs, prior to our early adoption of ASU No. 2017-01 on January 1, 2017, from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, mark to market foreign currency transaction adjustments and extinguishment of debt are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

•Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

•Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate;

•Amortization of premium or discount on bond and notes payable. These are adjustments to interest expense as required by GAAP to recognize bond and notes payable discount and premiums on a straight-line basis over the life of the respective bond or notes payable. We have excluded these adjustments in our calculation of MFFO to appropriately reflect the current economic impact of our bond and notes payable and related interest expense;

•Loss or gain on extinguishment of debt. A loss or gain on extinguishment of debt, which includes prepayment fees related to the extinguishment of debt, represents the difference between the carrying value of any consideration transferred to the lender in return for the extinguishment of a debt and the net carrying value of the debt at the time of settlement. We have excluded the loss or gain from extinguishment of debt in our calculation of MFFO because these losses or gains do not impact the current operating performance of our investments and do not provide an indication of future operating performance;

•Unrealized gain or loss from interest rate caps. These adjustments include unrealized gains from mark-to-market adjustments on interest rate caps. The change in fair value of interest rate caps not designated as a hedge are non-cash adjustments recognized directly in earnings and are included in interest expense. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the economic impact of our interest rate cap agreements;

•Gain from consolidation of previously unconsolidated entity. The gain is recognized as part of a consolidation process of a previously unconsolidated entity, where we became the primary beneficiary. We exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis; and

•Mark-to-market foreign currency transaction adjustments. The U.S. Dollar is our functional currency. Transactions denominated in currency other than our functional currency are recorded upon initial recognition at the exchange rate on the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are remeasured at each reporting date into the foreign currency at the exchange rate on that date. In addition, we have entered into foreign currency collars and foreign currency options that results in a foreign currency transaction adjustment. These amounts can increase or reduce net income. We exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain of our investments in undeveloped land. We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net (loss) income, FFO and MFFO. In addition, adjusted MFFO includes an adjustment for casualty loss. We believe excluding this item appropriately presents the ongoing operating performance of our real estate investments on a comparative basis.

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the three and nine months ended September 30, 2022 and 2021 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2022		2021			2022		2021
Net (loss) income attributable to common stockholders	$	(30,492)	$	(24,516)		$	(44,267)	$	3,671
Depreciation of real estate assets	8,882		8,569			25,544		26,689
Amortization of lease-related costs	3,835		5,326			13,835		19,279
Loss (gain) on sale of real estate (1)	2,621		(216)			(727)		(31,385)
Impairment charges on real estate	11,942		10,971			11,942		10,971
Loss (gain) on real estate equity securities	20,722		2.614			48,312		(12,939)
Adjustments for noncontrolling interests - consolidated entities (2)	(1,724)		(400)			(2,308)		(1,238)
Adjustments for investments in unconsolidated entities (3)	(4,716)		(25)			(1,783)		747
FFO attributable to common stockholders	11,070		(288)			50,548		15,795
Straight-line rent and amortization of above- and below-market leases	(791)		(711)		0	(2,729)		(2,544)
Amortization of premium/discount on bond and notes payable, net	1,117		461			3,372		1,906
Gain on extinguishment of debt	—		(1.352)			(2,367)		(1.365)
Unrealized (gain) loss on interest rate caps	(834)		1			(1,103)		17
Gain from consolidation of previously unconsolidated entity	(18,742)		—			(18,742)		—
Mark-to-market foreign currency transaction (gain) loss, net	(6,001)		2,271			(37,100)		(568)
Adjustments for noncontrolling interests - consolidated entities (2)	(21)		(24)			(100)		(122)
Adjustments for investments in unconsolidated entities (3)	98		15			2,999		1,662
MFFO attributable to common stockholders	(14,104)		1,724			(5,222)		16,145
Other capitalized operating expenses (4)	(801)		(597)			(2,012)		(1,926)

Casualty-related gain	—		(27)			—		(27)
Change in subordinated performance fee due upon termination to affiliate	—		1,545			—		1,745
Adjusted MFFO attributable to common stockholders	(14,905)		2,645			(7,234)		15,937

_____________________

(1) Reflects an adjustment to eliminate gains or losses on sales of real estate.

(2) Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net (loss) income attributable to common stockholders to FFO, MFFO and Adjusted MFFO.

(3) Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net (loss) income attributable to common stockholders to FFO, MFFO and Adjusted MFFO for our equity investments in unconsolidated joint ventures.

(4) Reflects real estate taxes, property insurance and financing costs that are capitalized with respect to certain of our investments in undeveloped land and unconsolidated entity. During the periods in which we are incurring costs necessary to bring these investments to their intended use, certain normal recurring operating costs are capitalized in accordance with GAAP and not reflected in our net (loss) income, FFO and MFFO.

FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we continue to lease up vacant space and acquire additional assets. We expect FFO, MFFO and Adjusted MFFO to decrease as a result of dispositions.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Distributions

There were no distributions declared for the nine months ended September 30, 2022. Our net loss attributable to common stockholders for the nine months ended September 30, 2022 was $44.3 million and our cash flows provided by operations were $8.7 million. Our cumulative distributions paid and net income attributable to common stockholders from inception through September 30, 2022 were $495.0 million. We have funded our cumulative distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with prior period cash flow from operating activities in excess of distributions paid and with cash from gains realized from the disposition of properties. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have fewer funds available for investment in real estate-related loans, opportunistic real estate, real estate-related debt securities, real estate equity securities and other real estate-related investments, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments will affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.

Recently Adopted Accounting Pronouncements

Reference Rate Reform — In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional relief to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. Additionally, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (ASC Topic 848), which clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. We adopted ASC Topic 848 on September 30, 2022 and the related prospective optional expedients for its variable rate debt and related derivatives is not expected to have a material impact us.

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Dividends on and accretion to redemption value of Series A Redeemable Preferred Stock

On October 25, 2022, we received notice by the holders of PORT’s Series A noncontrolling cumulative convertible redeemable preferred stock to redeem their outstanding redeemable preferred stock. If outstanding on November 4, 2022, the Series A redeemable preferred stock must be redeemed by us within 120 days after November 4, 2022. We authorized and approved the redemption of all 15,000 outstanding Series A Preferred Shares, at a price of (i) $1,120 per Series A Preferred Share, plus (ii) all accrued but unpaid dividends, through the redemption date.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Risk

Certain transactions, assets, and liabilities are exposed to foreign currency risk. We monitor our foreign currency exposures to maximize the economic effectiveness of our foreign currency positions, including hedges. Principal currency exposure is Israeli New Shekel.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of foreign currency changes in Israel with respect to the 3.93% Series B Debentures issued to investors in Israel. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes and foreign currency changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. In order to limit the effects of changes in foreign currency on our operations, we may utilize a variety of foreign currency hedging strategies such as cross currency swaps, forward contracts, puts or calls. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and the risk that the losses may exceed the amount we invested in the instruments. Additionally, certain of these strategies may cause us to fund a margin account periodically to offset changes in foreign currency rates which may also reduce the funds available for payments to holders of our common stock.

As of September 30, 2022, we held 129.9 million Israeli new Shekels and 24.6 million Israeli new Shekels in cash and restricted cash, respectively. In addition, as of September 30, 2022, we had bonds outstanding and the related interest payable in the amounts of 1.2 billion Israeli new Shekels and 7.6 million Israeli new Shekels, respectively. Foreign currency exchange rate risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates. Based solely on the remeasurement for the nine months ended September 30, 2022, if foreign currency exchange rates were to increase or decrease by 10%, our net income would increase or decrease by approximately $25.9 million and $31.7 million, respectively, for the same period.

Interest Rate Risk

Generally, the composition of our investments is such that declining interest rates will increase our net income, while rising interest rates will decrease our net income. Recently, interest rates have remained at relatively low levels on a historical basis and the Federal Reserve maintained the federal funds target range at 0.0% to 0.25% for much of 2021. However, in March 2022, the Federal Reserve approved a 0.25% rate increase and approved four additional 0.75% rate increases in 2022. The Federal Reserve has indicated that it foresees further increases and has maintained a stance of monetary policy that is sufficiently restrictive to to return inflation to 2%.

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity, fund distributions and to fund the refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans and the acquisition of real estate securities.

We borrow funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of September 30, 2022, the fair value of our Pacific Oak SOR BVI Series B Debentures was $306.1 million and the outstanding principal balance was $326.5 million. As of September 30, 2022, excluding the Pacific Oak SOR BVI Series B Debentures, the fair value of our fixed rate debt was $216.6 million and the outstanding principal balance of our fixed rate debt was $233.2 million. The fair value estimate of our Pacific Oak SOR BVI Series B Debentures were calculated using the quoted bond price as of September 30, 2022 on the Tel Aviv Stock Exchange of 94.40 Israeli new Shekels. The fair value estimate of our fixed rate debt was calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated as of September 30, 2022. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting changes in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on variable rate debt would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of September 30, 2022, we had entered into three separate interest rate caps with an aggregate notional of $181.0 million which effectively limits our exposure to increases in one-month LIBOR and SOFR above certain thresholds. Based on interest rates as of September 30, 2022, if interest rates were 100 basis points higher or lower during the 12 months ending September 30, 2022, interest expense on our variable rate debt would increase or decrease by $4.0 million and $4.8 million, respectively.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 3. Quantitative and Qualitative Disclosures about Market Risk (continued)

The weighted-average interest rates of our fixed rate debt and variable rate debt as of September 30, 2022 were 4.10 and 5.2%, respectively. The interest rate and weighted-average interest rate represent the actual interest rate in effect as of September 30, 2022 (consisting of the contractual interest rate and the effect of contractual floor rates, if applicable), using interest rate indices as of September 30, 2022 where applicable.

We are exposed to financial market risk with respect to our real estate equity securities. Financial market risk is the risk that we will incur economic losses due to adverse changes in our real estate equity security prices. Our exposure to changes in real estate equity security prices is a result of our investment in these types of securities. Market prices are subject to fluctuation and, therefore, the amount realized in the subsequent sale of an investment may significantly differ from the reported market value. Fluctuation in the market prices of a real estate equity security may result from any number of factors, including perceived changes in the underlying fundamental characteristics of the issuer, the relative price of alternative investments, interest rates, default rates and general market conditions. In addition, amounts realized in the sale of a particular security may be affected by the relative quantity of the real estate equity security being sold. We do not currently engage in derivative or other hedging transactions to manage our real estate equity security price risk. As of September 30, 2022, we owned real estate equity securities with a book value of $63.8 million. Based solely on the prices of real estate equity securities as of September 30, 2022, if prices were to increase or decrease by 10%, our net income would increase or decrease by approximately $6.4 million.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the six months ended June 30, 2022, each as filed with the SEC.

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

a)During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.

b)Not applicable.

c)We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

Pursuant to the share redemption program there are several limitations on our ability to redeem shares:

•Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.

•During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.

•We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

•During any calendar year, we may redeem only the number of shares that we can purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year; provided, however, that this limit may be increased or decreased by us upon ten business days’ notice to our stockholders. To the extent that we redeem less than the number of shares that we can purchase in any calendar year with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year plus any additional funds approved by us, such excess capacity to redeem shares during any calendar year shall be added to our capacity to otherwise redeem shares during the subsequent calendar year. Furthermore, during any calendar year, once we have received requests for redemptions, whether in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”, or otherwise, that if honored, and when combined with all prior redemptions made during the calendar year, would result in the amount of remaining funds available for the redemption of additional shares in such calendar year being $1.0 million or less, the last $1.0 million of available funds shall be reserved exclusively for shares being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence.” To the extent that, in the last month of any calendar year, the amount of redemption requests in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” is less than the amount of available funds reserved for such redemptions in accordance with the previous sentence, any excess funds may be used to redeem shares not in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” during such month.

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PART II. OTHER INFORMATION (CONTINUED)

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds (Continued)

•We may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that, in a given fiscal quarter, we redeem less than the sum of (a) $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) and (b) any excess capacity carried over to such fiscal quarter from a prior fiscal quarter as described below, any remaining excess capacity to redeem shares in such fiscal quarter will be added to our capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during succeeding fiscal quarter. We may increase or decrease this limit upon ten business days’ notice to stockholders.

We may amend, suspend or terminate the program upon ten business days’ notice to our stockholders. We may provide notice to our stockholders by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

•Separate from the funding described in the first bullet above, on March 10, 2022 and July 22, 2022, our board of directors made available a total of $3.0 million and $2.5 million, respectively for redemptions in connection with a stockholder's death, “qualifying disability”, or “determination of incompetence” and that will carry forward until depleted. As of September 30, 2022, $1.6 million remained available.

During the nine months ended September 30, 2022, we fulfilled redemption requests eligible for redemption under our share redemption program and received in good order and funded redemptions under our share redemption program with the net proceeds from our dividend reinvestment plan and cash on hand. We redeemed shares pursuant to our share redemption program as follows:


Month	Total Number of Shares Redeemed	Average Price Paid Per Share (1)		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2022	—	$	—	(2)
February 2022	42,430	$	9.51	(2)
March 2022	22,735	$	9.51	(2)
April 2022	75,875	$	9.51	(2)
May 2022	62,376	$	9.51	(2)
June 2022	38,920	$	9.51	(2)
July 2022	178,951	$	9.51	(2)
August 2022	41,124	$	9.51	(2)
September 2022	23,060	$	9.51	(2)
Total	485,471

_____________________

(1) On January 26, 2022, our board of directors approved an estimated value per share of our common stock of $9.51. The change in the redemption price became effective for the January 2022 redemption date and is effective until the estimated value per share is updated. We expect to update our estimated value per share no later than December 2022.

(2) We limit the dollar value of shares that may be redeemed under the program as described above. During the nine months ended September 2022, we redeemed $4.6 million of common stock under the program, which represented all redemption requests received in good order and eligible for redemption through the September 2022 redemption date, except for the $134.0 million of shares in connection with redemption requests not made upon a stockholder’s death, “qualifying disability” or “determination of incompetence,” which redemption requests will be fulfilled subject to the limitations described above. Based on the Twelfth SRP, we had $1.6 million available for redemptions in the remainder of 2022 as of September 2022, all of which are in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations described above.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

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PART II. OTHER INFORMATION (CONTINUED)

Item 5. Other Information

On November 14, 2022, we renewed the advisory agreement with the Advisor. The renewed advisory agreement is effective through November 1, 2023. The terms of the renewed advisory agreement are consistent with those of the advisory agreement that was previously in effect.

Item 6. Exhibits


Ex.						Description

3.1						Second Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed February 4, 2010

3.2						Articles of Amendment, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed November 1, 2019

3.3						Articles of Amendment, incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed December 23, 2019

3.4						Third Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 1, 2019

4.1						Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, Commission File No. 333-156633 filed February 25, 2009

4.2						Fifth Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2015

10.1						Advisory Agreement, by and between the Company and Pacific Oak Capital Advisors, LLC, dated November 1, 2022

31.1						Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2						Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1						Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2						Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

99.1						Twelfth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.5 to the Company's Current Report on Form 8-K filed December 4, 2020

99.2						Amendment No. 1 to the Twelfth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K filed August 6, 2021

101.INS						Inline XBRL Instance Document

101.SCH						Inline XBRL Taxonomy Extension Schema

101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB						Inline XBRL Taxonomy Extension Label Linkbase

101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase

104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES

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



		PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

Date:	November 14, 2022	By:	/S/ KEITH D. HALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Date:	November 14, 2022	By:	/S/ MICHAEL A. BENDER
			Michael A. Bender
			Chief Financial Officer
			(principal financial officer)