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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, 2021

OR

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

For the transition period from              to             

Commission file number 000-54382

______________________________________________________

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):

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 10, 2021, there were 93,896,447 outstanding shares of common stock of Pacific Oak Strategic Opportunity REIT, Inc.

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

September 30, 2021

INDEX 

PART I.			FINANCIAL INFORMATION						2
			Item 1.			Financial Statements			2
						Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020			2
						Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			3
						Consolidated Statements of Equity (unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020			4
						Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2021 and 2020			6
						Condensed Notes to Consolidated Financial Statements as of September 30, 2021 (unaudited)			7
			Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
			Item 3.			Quantitative and Qualitative Disclosures about Market Risk			55
			Item 4.			Controls and Procedures			56
PART II.			OTHER INFORMATION						57
			Item 1.			Legal Proceedings			57
			Item 1A.			Risk Factors			57
			Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			57
			Item 3.			Defaults upon Senior Securities			59
			Item 4.			Mine Safety Disclosures			59
			Item 5.			Other Information			59
			Item 6.			Exhibits			60
SIGNATURES									61

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

See accompanying condensed notes to consolidated financial statements.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
Revenues:
Rental income						$	29,504					$	23,871					$	94,812					$	67,808
Hotel revenues						12,153						—						24,578						—
Other operating income						923						888						3,118						2,722
Dividend income from real estate equity securities						3,189						2,986						6,693						5,339
Total revenues						45,769						27,745						129,201						75,869
Expenses:
Operating, maintenance, and management costs						10,668						7,888						31,444						22,258
Real estate taxes and insurance						5,262						3,791						15,949						10,570
Hotel expenses						6,483						—						15,715						—
Asset management fees to affiliate						3,422						2,426						10,802						6,867
General and administrative expenses						2,365						1,960						7,120						6,302
Foreign currency transaction loss (gain), net						2,271						445						(568)						(12,338)
Depreciation and amortization						13,895						9,470						45,969						27,417
Interest expense						10,092						6,274						30,713						19,055
Impairment charges on real estate						10,971						—						10,971						—
Impairment charges on goodwill						2,808						—						2,808						—
Total expenses						68,237						32,254						170,923						80,131
Other income (loss):
Gain from remeasurement of prior equity interest						—						2,009						—						2,009
Equity in (loss) income of unconsolidated entities						(569)						519						(144)						1,564
Casualty-related gain						27						—						27						51
Other interest income						55						19						148						297
(Loss) gain on real estate equity securities						(2,614)						(6,527)						12,939						(21,620)
Change in subordinated performance fee due upon termination to affiliate						(1,545)						1,121						(1,745)						814
Gain on sale of real estate						216						—						31,385						—
Gain on extinguishment of debt						1,352						—						1,365						—
Total other (loss) income, net						(3,078)						(2,859)						43,975						(16,885)
Net (loss) income						(25,546)						(7,368)						2,253						(21,147)
Net loss attributable to noncontrolling interests						1,188						43						1,949						115
Net loss attributable to redeemable noncontrolling interest						33						23						113						23
Preferred stock dividends						(191)						(191)						(644)						(788)
Net (loss) income attributable to common stockholders						$	(24,516)					$	(7,493)					$	3,671					$	(21,797)
Net (loss) income per common share, basic and diluted						$	(0.25)					$	(0.11)					$	0.04					$	(0.32)
Weighted-average number of common shares outstanding, basic and diluted						97,659,731						69,225,212						97,879,983						68,179,046

See accompanying condensed notes to consolidated financial statements.

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, 2021 and 2020

(unaudited)

(dollars in thousands)

			Common Stock												Additional Paid-in Capital						Cumulative Distributions and Net Income (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) income			—						—						—						(24,516)												(24,516)						(1,188)						(25,704)
Transfers to redeemable common stock			—						—						(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
			Common Stock												Additional Paid-in Capital						Cumulative Distributions and Net Income (Loss)												Total Stockholders' Equity						Noncontrolling Interests						Total Equity
			Shares						Amounts
Balance, June 30, 2020			69,225,617						$	693					$	553,129					$	(292,096)											$	261,726					$	795					$	262,521
Net loss			—						—						—						(7,493)												(7,493)						(43)						(7,536)
Transfers from redeemable common stock			—						—						6						—												6						—						6
Redemptions of common stock			(601)						—						(6)						—												(6)						—						(6)
Distribution of noncontrolling interest			—						—						—						—												—						(28)						(28)
Balance, September 30, 2020			69,225,016						$	693					$	553,129					$	(299,589)											$	254,233					$	724					$	254,957

See accompanying condensed notes to consolidated financial statements.

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, 2021 and 2020

(unaudited)

(dollars in thousands)

			Common Stock												Additional Paid-in Capital						Cumulative Distributions and Net Income (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			—						—						(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
			Common Stock												Additional Paid-in Capital						Cumulative Distributions and Net Income (Loss)												Total Stockholders' Equity						Noncontrolling Interests						Total Equity
			Shares						Amounts
Balance, December 31, 2019			65,866,765						$	659					$	553,170					$	(277,196)											$	276,633					$	755					$	277,388
Net loss			—						—						—						(21,797)												(21,797)						(115)						(21,912)
Issuance of common stock			24,645						—						262						—												262						—						262
Transfers from redeemable common stock			—						—						567						—												567						—						567
Redemptions of common stock			(78,131)						—						(830)						—												(830)						—						(830)
Distributions declared			—						—						—						(596)												(596)						—						(596)
Other offering costs			—						—						(6)						—												(6)						—						(6)
Issuance of restricted stock			3,411,737						34						(34)						—												—						—						—
Noncontrolling interests contributions			—						—						—						—												—						112						112
Distribution to noncontrolling interest			—						—						—						—												—						(28)						(28)
Balance, September 30, 2020			69,225,016						$	693					$	553,129					$	(299,589)											$	254,233					$	724					$	254,957

See accompanying condensed notes to consolidated financial statements.

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,
						2021						2020
Cash Flows from Operating Activities:
Net income (loss)						$	2,253					$	(21,147)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Change in subordinated performance fee due upon termination to affiliate						1,745						(814)
Impairment charges on real estate						10,971						—
Impairment charges on goodwill						2,808						—
Gain from remeasurement of prior equity interest						—						(2,009)
Equity in loss (income) of unconsolidated entities						144						(1,151)
Depreciation and amortization						45,969						27,417
(Gain) loss on real estate equity securities						(12,939)						21,620
Gain on sale of real estate						(31,385)						—
Unrealized loss on interest rate caps						17						10
Deferred rent						(1,529)						(2,559)
Gain on extinguishment of debt						(1,365)						—
Amortization of above- and below-market leases, net						(1,015)						(435)
Amortization of deferred financing costs						2,470						2,481
Amortization of discount on bond and notes payable						1,906						14
Foreign currency transaction gain, net						(568)						(12,338)
Changes in assets and liabilities:
Rents and other receivables						(1,898)						(566)
Prepaid expenses and other assets						(4,371)						(2,286)
Accounts payable and accrued liabilities						(984)						(3,471)
Due to affiliates						(726)						182
Other liabilities						(190)						(142)
Net cash provided by operating activities						11,313						4,806
Cash Flows from Investing Activities:
Acquisitions of real estate, net of cash acquired						(4,107)						(19,034)
Improvements to real estate						(12,923)						(15,946)
Proceeds from sales of real estate, net						194,528						—
Contributions to unconsolidated entities						(4,769)						(1,708)
Distributions of capital from unconsolidated entities						—						1,225
Purchase of interest rate cap						(18)						(6)
Investment in real estate equity securities						—						(35,510)
Proceeds from the sale of real estate equity securities						14,439						10,964
Proceeds for future development obligations						6,203						—
Proceeds from disposition of foreign currency collars						—						14,125
Net cash provided by (used in) investing activities						193,353						(45,890)
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable						157,246						104,143
Principal payments on notes and bonds payable						(233,964)						(57,611)
Payments of deferred financing costs						(2,745)						(2,438)
Payments to redeem common stock						(29,552)						(830)
Payment to redeem restricted stock						(5,656)						—
Payment of prepaid other offering costs						(164)						(606)
Distributions paid						—						(334)
Preferred dividends paid						(644)						(563)
Noncontrolling interests contributions						183						112
Distributions to noncontrolling interests						—						(28)
Other financing proceeds						2,367						—
Net cash (used in) provided by financing activities						(112,929)						41,845
Effect of exchange rate changes on cash, cash equivalents and restricted cash						182						83
Net increase in cash, cash equivalents and restricted cash						91,919						844
Cash, cash equivalents and restricted cash, beginning of period						74,319						88,494
Cash, cash equivalents and restricted cash, end of period						$	166,238					$	89,338

See accompanying condensed notes to consolidated financial statements.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(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.

Subject to certain restrictions and limitations, the business of the Company is externally managed by Pacific Oak Advisors, LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement (the “Advisory Agreement”) which is currently effective through November 1, 2022; 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.

On January 8, 2009, the Company filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.

The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of September 30, 2021, the Company had sold 6,851,969 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $76.5 million. Also, as of September 30, 2021, the Company had redeemed 27,247,458 shares for $317.3 million. As of September 30, 2021, the Company had issued 25,976,746 shares of common stock in connection with special dividends. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933. On March 27, 2020, the Company issued 3,411,737 restricted shares of its common stock (the “Restricted Stock”) to its former external advisor, KBS Capital Advisors LLC (“KBS Capital Advisors”) pursuant to a Restricted Stock Agreement, dated as of March 27, 2020 (the “Restricted Stock Agreement”). On September 1, 2021, the Company repurchased 584,267 shares of the Restricted Stock for $5.7 million and 2,254,289 shares of Restricted Stock were transferred to GKP Holding LLC (“GKP”), a company owned by Keith D. Hall and Peter McMillan III. See Note 10 for further details.

On March 2, 2016, Pacific Oak SOR BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Series A Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, Pacific Oak SOR BVI commenced the institutional tender of the Series A Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, Pacific Oak SOR BVI commenced the public tender of the Series A Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, Pacific Oak SOR BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%. Pacific Oak SOR BVI issued the Series A Debentures on March 8, 2016.

In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to Pacific Oak SOR BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments. The Operating Partnership owns all of the issued and outstanding equity of Pacific Oak SOR BVI. As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through Pacific Oak SOR BVI.

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 (the “Series B Debentures”) to Israeli investors pursuant to a public offering registered with the Israel Securities Authority. The Series B Debentures bears 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 January 22, 2020, the Company filed a registration statement on Form S-11 with the SEC to offer up to $1 billion in additional shares of its common stock. This new registration statement contemplates a proposed conversion of the Company to a perpetual-life net asset value or “NAV” REIT that offers and sells shares of its common stock continuously through a number of distribution channels in ongoing public offerings, and seeks to provide increased liquidity to current and future stockholders through an expansion of the Company’s current share redemption program. On December 18, 2020, the Company filed Amendment No. 1 to the registration statement on Form S-11 with the SEC.

On February 19, 2020, the Company, Pacific Oak SOR II, LLC, an indirect subsidiary of the Company’s (“Merger Sub”), and Pacific Oak Strategic Opportunity REIT II, Inc. (“POSOR II”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). On October 5, 2020, pursuant to the Merger Agreement, POSOR II merged with and into Merger Sub, with Merger Sub surviving as an indirect subsidiary of the Company’s (the “Merger”). At such time, in accordance with the applicable provisions of the Maryland General Corporation Law and the Maryland Limited Liability Company Act, the separate existence of POSOR II ceased. At the effective time of the Merger, each issued and outstanding share of POSOR II’s common stock (or a fraction thereof), $0.01 par value per share, converted into 0.9643 shares of the Company’s common stock, $0.01 par value per share, or 28,973,905 shares of the Company’s common stock. The combined company after the Merger retained the name “Pacific Oak Strategic Opportunity REIT, Inc.” The Merger was intended to qualify as a “reorganization” under, and within the meaning of, Section 368(a) of the Internal Revenue Code of 1986, as amended. As a result of the Merger, the Company acquired two hotel properties, three office properties, one apartment building, one consolidated joint venture to develop one office/retail property, two real estate equity securities and two investments in unconsolidated entities. Additionally, the Company assumed $331.8 million of loans related to the acquired properties.

On March 4, 2021, Pacific Oak SOR BVI issued additional Series A Debentures in the amount of 250.0 million Israeli new Shekels par value through a private placement. The additional Series A Debentures were issued at a 1.9% discount resulting in total consideration of 245.3 million Israeli new Shekels ($74.2 million as of March 4, 2021). The additional Series A Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series A Debentures, which were initially issued, without any right of precedence or preference between any of them.

As of September 30, 2021, the Company 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, and owned four investments in unconsolidated entities and three investments in real estate equity securities. Additionally, as of September 30, 2021, the Company had entered into a consolidated joint venture to develop one office/retail property.

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, 2020. 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, 2020 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, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

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.

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 7, the Company has $518.0 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 paydowns 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. Refer to Note 7 for further discussion.

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 lender impound reserve accounts on the Company’s borrowings for security deposits, property taxes, insurance, debt service obligations and capital improvements and replacements.

Redeemable Common Stock

The Company limits the dollar value of shares that may be redeemed under the share redemption program. During the nine months ended September 30, 2021, the Company had redeemed $29.6 million of common stock under the share redemption program. The Company processed all redemption requests received in good order and eligible for redemption through the September 2021 redemption date, except for 13,913,664 shares totaling $128.0 million due to the limitations under the share redemption program. The Company recorded $3.4 million and $0.9 million of redeemable common stock payable on the Company’s balance sheet as of September 30, 2021 and December 31, 2020, respectively, related to unfulfilled redemption requests received in good order under the share redemption program. Based on the twelfth amended and restated share redemption program, the Company has $3.2 million available for redemptions in the remainder of 2021, including shares that are redeemed in connection with a stockholders’ death, “qualifying disability” or “determination of incompetence,” subject to the limitations under the share redemption program.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period. During the nine months ended September 30, 2021, the Company sold one office property. As a result, certain assets and liabilities were reclassified as held for sale on the consolidated balance sheets for the prior period.

Segments

The Company operates in three reportable business segments: opportunistic real estate and real estate-related investments, single-family homes, and hotels, which is how the Company's management manages the business. In general, the Company intends to hold its investments in opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views opportunistic real estate and other real estate-related assets as similar investments and aggregated into one reportable business segment. The Company owns single-family homes in 17 markets and are all aggregated into one reportable business segment due to the homes being stabilized, having high occupancy rates and have similar economic characteristics. Additionally, the Company owns two hotels and are aggregated into one reportable business segment due to the nature of the hotel business with short-term stays.

Per Share Data

The Company applies the two-class method when computing its earnings per share. Net income per share for each class of stock is calculated by assuming all of the Company’s net income (loss) is distributed to each class of stock based on their contractual rights.

Unvested restricted stock that contains non-forfeitable rights to distributions (whether paid or unpaid) are considered participating securities and are included in the computation of earnings per share.

Basic earnings (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted earnings (loss) per share of common stock is computed based on the weighted-average number of shares of common stock outstanding during each period, plus potential common shares considered outstanding during the period, as long as the inclusion of such awards is not anti-dilutive. Potential common shares consist of unvested restricted stock, using the more dilutive of either the two-class method or the treasury stock method.

The noncontrolling Pacific Oak Residential Trust, Inc. (“PORT”) Series A convertible redeemable preferred shares are not included as the preferred shares are convertible contingent on the common stock of PORT being publicly traded. If PORT common stock becomes publicly traded, the per-share earnings of PORT will be included in the Company’s EPS computations based on the consolidated holdings of PORT.

The Company’s unvested Restricted Stock have been included in the calculation of basic and diluted earnings per share for both of the three and nine months ended September 30, 2021 and 2020, as the restriction is not contingent on any conditions except the passage of time.

There were no distributions declared for both of the three and nine months ended September 30, 2021 and 2020, with the exception of distributions declared per share of $0.0086 during the three months ended March 31, 2020.

Square Footage, Occupancy and Other Measures

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

Recently Issued Accounting Standards Updates

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU No. 2020-04”) contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU No. 2020-04 is optional and may be elected over time as reference rate reform activities occur. During the nine months ended September 30, 2021, the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. For the period from January 1, 2020 (the earliest date the Company may elect to apply ASU No. 2020-04) through September 30, 2021, the Company did not have any contract modifications that meet the criteria described above, specifically contract modifications that have been modified from LIBOR to an alternative reference rate. The Company’s loan agreements, derivative instruments, and certain lease agreements use LIBOR as the current reference rate. For eligible contract modifications, the Company expects to adopt the temporary optional expedients described in ASU No. 2020-04. The optional expedients for hedging relationships described in ASU No. 2020-04 are not expected to have an impact to the Company, as the Company has elected to not designate its derivative instruments as a hedge.

3. REAL ESTATE HELD FOR INVESTMENT

As of September 30, 2021, the Company owned eight office properties, one office portfolio consisting of four office buildings and 14 acres of undeveloped land, encompassing, in the aggregate, approximately 3.3 million rentable square feet. As of September 30, 2021, these properties were 73% occupied. In addition, the Company owned one residential home portfolio consisting of 1,806 single-family homes and encompassing approximately 2.5 million rental square feet and two apartment properties, containing 609 units and encompassing approximately 0.5 million rentable square feet, which was 94% and 96% occupied, respectively as of September 30, 2021. As of September 30, 2021, the Company also owned two hotel properties with an aggregate of 649 rooms and three investments in undeveloped land with approximately 800 developable acres. Additionally, as of September 30, 2021, the Company had entered into a consolidated joint venture to develop one office/retail property. The following table summarizes the Company’s real estate held for investment as of September 30, 2021 and December 31, 2020, respectively (in thousands):

						September 30, 2021						December 31, 2020
Land						$	275,419					$	288,514
Buildings and improvements						1,018,850						1,019,329
Tenant origination and absorption costs						44,527						50,881
Total real estate, cost						1,338,796						1,358,724
Accumulated depreciation and amortization						(119,265)						(85,940)
Total real estate, net						$	1,219,531					$	1,272,784

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, 2021, the leases, excluding options to extend and apartment leases and single-family homes, which have terms that are generally one year or less, had remaining terms of up to 15.5 years with a weighted-average remaining term of 4.5 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 and $5.7 million as of September 30, 2021 and December 31, 2020, respectively.

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. During the three and nine months ended September 30, 2020, the Company recognized deferred rent from tenants of $0.9 million and $2.6 million, respectively, net of lease incentive amortization. As of September 30, 2021 and December 31, 2020, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, were $15.7 million and $15.5 million, respectively and is included in rents and other receivables on the accompanying consolidated balance sheets. The cumulative deferred rent balance included $3.1 million and $4.2 million of unamortized lease incentives as of September 30, 2021 and December 31, 2020, respectively.

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, 2021

(unaudited)

As of September 30, 2021, the future minimum rental income from the Company’s properties, excluding apartment leases and single-family homes, under non-cancelable operating leases was as follows (in thousands):

October 1, 2021 through December 31, 2021			$	16,095
2022			61,448
2023			53,140
2024			45,750
2025			35,726
Thereafter			86,512
			$	298,671

As of September 30, 2021, 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
Computer Systems Design						30						$	7,080					10.9		%
Professional, Scientific, and Technical Services						42						7,078						10.9		%
Public Administration						11						6,959						10.7		%
Insurance Carriers and Related Activities						16						6,801						10.5		%
Health Care and Social Assistance						25						6,799						10.5		%
												$	34,717					53.5		%

_____________________

(1) Annualized base rent represents annualized contractual base rental income as of September 30, 2021, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time. During the three and nine months ended September 30, 2021, the Company recorded adjustments to rental income of $0.8 million and $2.5 million, respectively, for lease payments, including apartments and single-family homes that were deemed not probable of collection. During the three and nine months ended September 30, 2020, the Company recorded adjustments to rental income of $0.4 million and $1.1 million, respectively, for lease payments that were deemed not probable of collection.

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, 2021

(unaudited)

Hotel Properties

The following table provides detailed information regarding the Company’s hotel revenues and expenses for its two hotel properties during the three and nine months ended September 30, 2021 (in thousands):

						Three Months Ended September 30, 2021						Nine Months Ended September 30, 2021
Hotel revenues:
Room						$	9,396					$	18,508
Food, beverage and convention services						1,452						2,830
Campground						280						792
Other						1,025						2,448
Hotel revenues						$	12,153					$	24,578
Hotel expenses:
Room						$	1,681					$	3,992
Food, beverage and convention services						946						2,063
General and administrative						752						1,955
Sales and marketing						1,018						2,230
Repairs and maintenance						557						1,551
Utilities						333						824
Property taxes and insurance						566						1,600
Other						630						1,500
Hotel expenses						$	6,483					$	15,715

Geographic Concentration Risk

As of September 30, 2021, the Company’s real estate investments in California represented 21.9% 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 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.

Impairment of Real Estate

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, a development property located in New York, New York 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.

Recent Real Estate Land Sale

On June 3, 2021, the Company sold approximately 193 developable acres of Park Highlands undeveloped land for an aggregate sales price, net of closing credits, of $50.4 million, excluding closing costs. The purchaser is not affiliated with the Company or the Advisor. The Company recognized a gain on sale of $31.1 million related to the land sale, which is net of deferred profit of $2.6 million related to proceeds received from the purchaser for the value of land that was contributed to a master association which is consolidated by the Company.

Recent Real Estate Sale

On July 27, 2021, the Company, through an indirect wholly owned subsidiary, sold an office building containing 435,177 rentable square feet located on approximately 4.92 acres of land in Orange, California (“City Tower”) to a purchaser unaffiliated with the Company or the Advisor, for $150.5 million, before closing costs and credits. The carrying value of City Tower as of the disposition date was $145.1 million, which was net of $20.5 million of accumulated depreciation and amortization. In connection with the sale of City Tower, the Company repaid $98.1 million of the outstanding principal balance due under the mortgage loan secured by City Tower. The Company recognized a gain on sale of $0.1 million related to the disposition of City Tower.

Recent Real Estate Asset Acquisitions

On March 17, 2021, the Company, through a wholly owned subsidiary of PORT OP, LP (“PORT OP”), acquired a single-family home portfolio consisting of 21 homes in Chicago, Illinois for $2.1 million.

On April 6, 2021, the Company, through a wholly owned subsidiary of PORT OP, acquired a single-family home portfolio consisting of 23 homes in multiple states for $2.0 million. The portfolio was purchased from DayMark Master Trust, an entity affiliated with the Advisor.

4. TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of September 30, 2021 and December 31, 2020, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):

						Tenant Origination and Absorption Costs												Above-Market Lease Assets												Below-Market Lease Liabilities
						September 30, 2021						December 31, 2020						September 30, 2021						December 31, 2020						September 30, 2021						December 31, 2020
Cost						$	44,527					$	50,881					$	4,138					$	4,159					$	(6,718)					$	(7,679)
Accumulated Amortization						(19,107)						(13,491)						(1,403)						(1,002)						2,282						1,882
Net Amount						$	25,420					$	37,390					$	2,735					$	3,157					$	(4,436)					$	(5,797)

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, 2021

(unaudited)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):

						Tenant Origination and Absorption Costs												Above-Market Lease Assets												Below-Market Lease Liabilities
						For the Three Months Ended September 30,												For the Three Months Ended September 30,												For the Three Months Ended September 30,
						2021						2020						2021						2020						2021						2020
Amortization						$	(3,253)					$	(1,625)					$	(94)					$	(74)					$	388					$	194

						Tenant Origination and Absorption Costs												Above-Market Lease Assets												Below-Market Lease Liabilities
						For the Nine Months Ended September 30,												For the Nine Months Ended September 30,												For the Nine Months Ended September 30,
						2021						2020						2021						2020						2021						2020
Amortization						$	(12,397)					$	(4,965)					$	(421)					$	(241)					$	1,436					$	676

As of September 30, 2021 and December 31, 2020, the Company had recorded a housing subsidy intangible asset, net of amortization, which is included in prepaid expenses and other assets in the accompanying consolidated balance sheets, of $1.9 million and $2.0 million, respectively. As of September 30, 2021, the housing subsidy intangible asset has a remaining amortization period of 27.1 years. During the three and nine months ended September 30, 2021, the Company recorded amortization expense of $18,000 and $54,000, respectively, related to the housing subsidy intangible asset.

Additionally, as of September 30, 2021 and December 31, 2020, the Company had recorded tax abatement intangible assets, net of amortization, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $0.8 million and $1.6 million, respectively. During the three and nine months ended September 30, 2021, the Company recorded amortization expense of $0.2 million and $0.8 million, respectively, related to tax abatement intangible assets. During the three and nine months ended September 30, 2020, the Company recorded amortization expense of $0.1 million and $0.5 million, respectively, related to tax abatement intangible assets. As of September 30, 2021, the tax abatement intangible assets had a remaining amortization period of 1.6 years.

5. REAL ESTATE EQUITY SECURITIES

As of September 30, 2021, the Company owned three investments in real estate equity securities. The following table sets forth the number of shares owned by the Company and the related carrying value of the shares as of September 30, 2021 and December 31, 2020 (dollars in thousands):

						September 30, 2021												December 31, 2020
Real Estate Equity Security						Number of Shares Owned						Total Carrying Value						Number of Shares Owned						Total Carrying Value
Keppel Pacific Oak US REIT						64,165,352						$	50,370					64,165,352						$	44,274
Franklin Street Properties Corp.						6,915,089						32,086						6,915,089						30,219
Plymouth Industrial REIT, Inc.						613,085						13,947						1,560,660						23,410
						71,693,526						$	96,403					72,641,101						$	97,903

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, 2021

(unaudited)

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, 2021 and 2020 (in thousands):

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
Net (loss) gain recognized during the period on real estate equity securities						$	(2,614)					$	(6,527)					$	12,939					$	(21,620)
Less net gain recognized during the period on real estate equity securities sold during the period						—						—						(225)						(711)
Unrealized (loss) gain recognized during the reporting period on real estate equity securities held at the end of the period						$	(2,614)					$	(6,527)					$	12,714					$	(22,331)

During the three and nine months ended September 30, 2021, the Company recognized $3.2 million and $6.7 million, respectively, of dividend income from real estate equity securities. During the three and nine months ended September 30, 2020, the Company recognized $2.8 million and $4.4 million, respectively, of dividend income from real estate equity securities.

6. REAL ESTATE HELD FOR SALE

During the nine months ended September 30, 2021, the Company disposed of one office property. There were no material dispositions during the year ended December 31, 2020.

On July 27, 2021, the Company, through an indirect wholly owned subsidiary, sold an office building containing 435,177 rentable square feet located on approximately 4.92 acres of land in Orange, California (“City Tower”) to a purchaser unaffiliated with the Company or the Advisor, for $150.5 million, before closing costs and credits. The carrying value of City Tower as of the disposition date was $145.1 million, which was net of $20.5 million of accumulated depreciation and amortization. In connection with the sale of City Tower, the Company repaid $98.1 million of the outstanding principal balance due under the mortgage loan secured by City Tower. The Company recognized a gain on sale of $0.1 million related to disposition of City Tower.

The following summary presents the major components of assets and liabilities related to real estate held for sale as of September 30, 2021 and December 31, 2020 (in thousands):

			September 30, 2021						December 31, 2020
Assets related to real estate held for sale
Real estate, cost			$	—					$	158,711
Accumulated depreciation and amortization			—						(18,472)
Real estate, net			—						140,239
Other assets			—						5,680
Total assets related to real estate held for sale			$	—					$	145,919
Liabilities related to real estate held for sale
Note payable, net			—						94,097
Other liabilities			—						669
Total liabilities related to real estate held for sale			$	—					$	94,766

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, 2021

(unaudited)

The operations and gain on sale of City Tower is included in continuing operations on the accompanying statements of operations. The following table summarizes certain revenue and expenses related to these properties for the three and nine months ended September 30, 2021 and 2020 (in thousands):

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
Revenues
Rental income						$	1,085					$	3,318					$	8,660					$	9,998
Other operating income						51						265						520						792
Total revenues						$	1,136					$	3,583					$	9,180					$	10,790
Expenses
Operating, maintenance, and management						$	363					$	1,004					$	2,096					$	2,855
Real estate taxes and insurance						95						389						979						1,258
Asset management fees to affiliate						194						305						807						907
Depreciation and amortization						14						1,769						2,436						5,342
Interest expense						152						518						1,146						1,953
Total expenses						$	818					$	3,985					$	7,464					$	12,315

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, 2021

(unaudited)

7. NOTES AND BONDS PAYABLE

As of September 30, 2021 and December 31, 2020, 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, 2021						Book Value as of December 31, 2020						Contractual Interest Rate as of September 30, 2021						Effective Interest Rate at September 30, 2021 (1)						Payment Type (2)						Maturity Date (3)
Richardson Portfolio Mortgage Loan			$	28,685					$	35,832					One-Month LIBOR + 2.50%						2.58%						Principal & Interest						11/01/2021 (4)
Park Centre Mortgage Loan			26,185						26,185						One-Month LIBOR + 1.75%						1.83%						Interest Only						06/27/2022
1180 Raymond Mortgage Loan (5)			29,548						29,848						One-Month LIBOR + 2.50% (6)						3.50%						Principal & Interest						12/01/2021
1180 Raymond Bond Payable			5,705						5,870						6.50%						6.50%						Principal & Interest						09/01/2036
Pacific Oak SOR (BVI) Holdings, Ltd. Series A Debentures (7)			197,901						181,198						4.25%						4.25%						(7)						03/01/2023
Pacific Oak SOR (BVI) Holdings, Ltd. Series B Debentures (7)			78,794						79,078						3.93%						3.93%						(7)						01/31/2026
Crown Pointe Mortgage Loan (5)			52,508						53,072						One-Month LIBOR + 2.60%						2.70%						Principal & Interest						02/13/2022
City Tower Mortgage Loan			—						94,167						(8)						(8)						(8)						(8)
The Marq Mortgage Loan			62,066						62,257						One-Month LIBOR + 1.55%						1.63%						Interest Only						06/06/2022
Eight & Nine Corporate Centre Mortgage Loan			48,695						47,066						One-Month LIBOR + 1.60%						1.68%						Principal & Interest						06/08/2022
Georgia 400 Center Mortgage Loan			61,154						59,690						One-Month LIBOR + 1.55%						1.63%						Interest Only						05/22/2023
PORT Mortgage Loan 1			51,302						51,362						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 Mortgage Loan 3 (9)			—						12,000						(9)						(8)						(8)						(8)
Battery Point Trust Mortgage Loan (9)			—						38,608						(8)						(8)						(8)						(8)
MetLife Loan (9)			60,000						—						3.90%						3.90%						Interest Only						04/10/2026
Springmaid Beach Resort Mortgage Loan			55,839						57,015						One-month LIBOR + 2.25% (10)						5.75%						Principal & Interest						08/12/2022
Q&C Hotel Mortgage Loan			25,000						25,000						One-month LIBOR + 2.50% (11)						4.50%						Principal & Interest						12/23/2022
Lincoln Court Mortgage Loan (5)			34,723						34,416						One-month LIBOR + 1.75%						1.83%						Principal & Interest						12/01/2021
Lofts at NoHo Commons Mortgage Loan			74,536						74,536						One-month LIBOR + 2.18% (12)						3.93%						Interest Only						09/09/2022
210 West 31st Street Mortgage Loan (5)			10,275						15,050						One-month LIBOR + 3.00%						3.08%						Principal & Interest						06/16/2022
Oakland City Center Mortgage Loan			96,404						96,782						One-month LIBOR + 1.75%						1.83%						Principal & Interest						09/01/2022
Madison Square Mortgage Loan (13)			20,891						16,822						One-month LIBOR + 4.05%						5.05%						Interest Only						10/09/2021
Total Notes and Bonds Payable principal outstanding			1,030,734						1,106,377
Discount on Notes and Bonds Payable, net (14)			(2,249)						(2,851)
Deferred financing costs, net			(4,707)						(4,458)
Total Notes and Bonds Payable, net			$	1,023,778					$	1,099,068

_____________________

(1) Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2021. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2021 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at September 30, 2021, where applicable.

(2) Represents the payment type required under the loan as of September 30, 2021. 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, 2021; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

(4) Subsequent to September 30, 2021, the Company extended the maturity of the Richardson Portfolio Mortgage Loan to November 1, 2022.

(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, 2021, the guaranteed amount in the aggregate was $39.5 million.

(6) This mortgage loan has a LIBOR floor of 1%.

(7) See “ – Israeli Bond Financings” below.

(8) On July 27, 2021, in connection with the disposition of City Tower, the Company repaid the $98.1 million outstanding principal balance due under the City Tower Mortgage Loan.

(9) On April 6, 2021, the Company refinanced the PORT Mortgage Loan 3 and the Battery Point Trust Mortgage Loan with a mortgage loan from MetLife for borrowings up to $60.0 million.

(10) The interest rate is variable at the higher of one-month LIBOR + 2.25% or 5.77%.

(11) The interest rate is variable at the higher of one-month LIBOR + 2.5% or 4.5%. Principal payments will commence on January 1, 2022.

(12) The LIBOR rate is variable at the higher of one-month LIBOR or 1.75%.

(13) On October 7, 2021, the Company refinanced the Madison Square Mortgage Loan with a mortgage loan from an unaffiliated lender for borrowings up to $27.0 million. The new loan matures on October 7, 2024 and has a fixed interest rate of 4.625%. See Note 17, “Subsequent Events” for a further discussion.

(14) 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, 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.

During the three and nine months ended September 30, 2020, the Company incurred $6.3 million and $19.1 million, respectively, of interest expense. Included in interest expense for the three and nine months ended September 30, 2020 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, 2020 was $64,000 and $14,000, respectively, of amortization of discount on notes and bonds payable, net. Additionally, during the three and nine months ended September 30, 2020, the Company capitalized $0.7 million and $2.4 million, respectively of interest related to its investments in undeveloped land.

As of September 30, 2021 and December 31, 2020, the Company’s interest payable was $3.3 million and $6.2 million, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of September 30, 2021 (in thousands):

October 1, 2021 through December 31, 2021						$	116,538
2022						548,061
2023						160,359
2024						26,535
2025						77,858
Thereafter						101,383
						$	1,030,734

As of November 12, 2021, the Company had a total of $518.0 million of debt obligations scheduled to mature over the next 12 months. The Company has extension options with respect to $239.8 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 we 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 A Debentures and Series B Debentures. Subsequent to September 30, 2021, the Company issued additional Series B Debentures, with the intent of using the proceeds and available cash on hand to payoff the outstanding Series A Debentures. See Note 17, “Subsequent Events” for a further discussion on the Series B Debentures issuance. 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.

The Company’s notes payable contain financial debt covenants, including minimum equity requirements and liquidity ratios. As of September 30, 2021, the Company was in compliance with all of these debt covenants except that the Madison Square Mortgage Loan was not in compliance with the debt yield requirement. Such non-compliance does not constitute an event of default under the loan agreement. As a result of such non-compliance, the Company is required to maintain an interest shortfall reserve and provide cash sweeps. Additionally, the Company was not compliance with the debt service coverage requirement for the Richardson Portfolio Mortgage Loan and Georgia 400 Center Mortgage Loan. As a result of such non-compliance, the Company is required to partially paydown the loan in the case of the Richardson Portfolio Mortgage Loan and provide a cash sweep in the case of the Georgia 400 Center Mortgage Loan.

Israeli Bond Financings

On March 2, 2016, Pacific Oak SOR BVI, a wholly owned subsidiary of the Company, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of the Series A Debentures at an annual interest rate not to exceed 4.25%. On March 1, 2016, Pacific Oak SOR BVI commenced the institutional tender of the Series A Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, Pacific Oak SOR BVI commenced the public tender of the Series A Debentures and accepted 127.7 million Israeli new Shekels.  In the aggregate, Pacific Oak SOR BVI accepted 970.2 million Israeli new Shekels (approximately $249.2 million as of March 8, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%.  Pacific Oak SOR BVI issued the Debentures on March 8, 2016. The terms of the Series A Debentures require five equal annual installment principal payments on March 1st of each year from 2019 to 2023.

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 March 4, 2021, Pacific Oak SOR BVI issued additional Series A Debentures in the amount of 250.0 million Israeli new Shekels par value through a private placement. The additional Series A Debentures were issued at a 1.9% discount resulting in total consideration of 245.3 million Israeli new Shekels ($74.2 million as of March 4, 2021). The additional Series A Debentures have an equal level of security, pari passu, amongst themselves and between them and the initial Series A Debentures, which were initially issued, without any right of precedence or preference between any of them.

The deeds of trust that govern the Series A Debentures and Series B Debentures contain various financial covenants. As of September 30, 2021, the Company was in compliance with all of these financial debt covenants.

Subsequent to September 30, 2021, the Company issued additional Series B Debentures. See Note 17, “Subsequent Events” for a further discussion on the Series B Debentures issuance.

8. DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates and foreign currency exchange rate movements. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes.

The Company enters into foreign currency collars to mitigate its exposure to foreign currency exchange rate movements on its bonds payable outstanding denominated in Israeli new Shekels. A foreign currency collar consists of a purchased call option to buy and a sold put option to sell Israeli new Shekels. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices.

The following table summarizes the notional amount and other information related to the Company’s foreign currency collars as of September 30, 2021 and December 31, 2020. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):

September 30, 2021

December 31, 2020

Strike Price

Trade Date

Maturity Date

Derivative Instruments

Number of Instruments

Notional Amount

Number of Instruments

Notional Amount

Derivative instruments not designated as hedging instruments

Foreign currency collar

1

194,045 ILS

—

—

3.16 - 3.29 ILS - USD

06/14/2021

11/22/2021

The Company enters into interest rate caps to mitigate its exposure to rising interest rates on its variable rate notes payable. The values of interest rate caps are primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of interest rate caps. As the remaining life of an interest rate cap decreases, the value of the instrument will generally decrease towards zero.

As of September 30, 2021, the Company had entered into four interest rate caps, which were not designated as a hedging instruments. The following table summarizes the notional amounts and other information related to the Company’s derivative instruments as of September 30, 2021. The notional amount is an indication of the extent of the Company’s involvement in the instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):

Derivative Instrument

Effective Date

Maturity Date

Notional Value

Reference Rate

Interest rate cap

10/15/2020

10/15/2021

$

26,200

One-month LIBOR at 3.00%

Interest rate cap

02/12/2021

02/14/2022

$

47,715

One-month LIBOR at 3.00%

Interest rate cap

09/15/2021

09/15/2022

$

75,950

One-month LIBOR at 3.50%

Interest rate cap

06/21/2019

05/22/2023

$

51,252

One-month LIBOR at 4.00%

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, 2021

(unaudited)

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of September 30, 2021 and December 31, 2020 (dollars in thousands):

												September 30, 2021												December 31, 2020
Derivative Instruments						Balance Sheet Location						Number of Instruments						Fair Value						Number of Instruments						Fair Value
Derivative instruments not designated as hedging instruments
Interest rate caps						Prepaid expenses and other assets						4						$	2					7						$	1
Foreign currency collar						Other liabilities						1						$	(44)					—						$	—

The change in fair value of foreign currency collars that are not designated as cash flow hedges are recorded as foreign currency transaction gains or losses in the accompanying consolidated statements of operations. During the three months ended September 30, 2021, the Company recognized a $0.3 million gain related to the foreign currency collar, which is shown combined with $2.6 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss. During the nine months ended September 30, 2021, the Company recognized a $44,000 loss related to the foreign currency collar, which is shown combined with $0.6 million of foreign currency transaction gain in the accompanying consolidated statements of operations as foreign currency transaction gain, net.

During the three months ended September 30, 2020, the Company recognized a $2.2 million gain related to the foreign currency collars, which is shown combined with $2.6 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction loss, net. During the nine months ended September 30, 2020, the Company recognized a $14.3 million gain related to the foreign currency collars, which is shown combined with $2.0 million of foreign currency transaction loss in the accompanying consolidated statements of operations as foreign currency transaction gain, net. On July 29, 2020, the Company terminated the foreign currency collars and as a result received $14.1 million.

9. FAIR VALUE DISCLOSURES

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2021 and December 31, 2020, which carrying amounts do not approximate the fair values (in thousands):

						September 30, 2021																		December 31, 2020
						Face Value						Carrying Amount						Fair Value						Face Value						Carrying Amount						Fair Value
Financial liabilities (Level 3):
Notes and bond payable						$	754,039					$	751,064					$	752,417					$	846,101					$	842,112					$	846,608
Financial liabilities (Level 1):
Pacific Oak SOR (BVI) Holdings, Ltd. Series A Debentures						$	197,901					$	195,428					$	197,437					$	181,198					$	179,786					$	178,450
Pacific Oak SOR (BVI) Holdings, Ltd. Series B Debentures						$	78,794					$	77,286					$	76,899					$	79,078					$	77,170					$	69,433