8-K
Pacific Oak Strategic Opportunity REIT, Inc. (PCOK)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 8-K
__________________
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 10, 2024
PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC.
(Exact name of registrant specified in its charter)
______________________________________________________
| Maryland | 000-54382 | 26-3842535 |
|---|---|---|
| (State or other jurisdiction of<br>incorporation or organization) | (Commission File Number) | (IRS Employer<br>Identification No.) |
11766 Wilshire Blvd., Suite 1670
Los Angeles, California 90025
(Address of principal executive offices)
Registrant’s telephone number, including area code: (866) 722-6257
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredNoneN/AN/A
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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. o
ITEM 7.01 REGULATION FD DISCLOSURE
Information for Pacific Oak Strategic Opportunity REIT, Inc.'s (the “Company”) stockholders regarding its estimated value per share and other distribution information is attached as Exhibit 99.4 to this Current Report on Form 8-K.
The information in this Item 7.01 of Form 8-K and the attached Exhibit 99.4 are furnished to the Securities and Exchange Commission (“SEC”), and shall not be deemed to be “filed” with the SEC for any purpose, including for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act regardless of any general incorporation language in such filing.
ITEM 8.01 OTHER EVENTS
Determination of Estimated Value Per Share
On December 10, 2024, the Company’s board of directors approved an estimated value per share of the Company’s common stock of $5.72 based on the estimated value of the Company’s assets less the estimated value of the Company’s liabilities, or net asset value, divided by the number of shares outstanding, all as of September 30, 2024. There have been no material changes between September 30, 2024 and the date of this filing to the net values of the Company’s assets and liabilities that materially impacted the overall estimated value per share. The Company is providing this estimated value per share to assist broker-dealers that participated in the Company’s initial public offering in meeting their customer account statement reporting obligations under National Association of Securities Dealers Conduct Rule 2340 as required by the Financial Industry Regulatory Authority (“FINRA”). This valuation was performed in accordance with the provisions of and also to comply with Practice Guideline 2013–01, Valuations of Publicly Registered Non-Listed REITs, issued by the Institute for Portfolio Alternatives (“IPA”) in April 2013.
The Company’s conflicts committee of the board of directors, composed of all of the Company’s independent directors, is responsible for the oversight of the valuation process, including the review and approval of the valuation process and methodologies used to determine the Company’s estimated value per share, the consistency of the valuation and appraisal methodologies with real estate industry standards and practices and the reasonableness of the assumptions used in the valuations and appraisals. The estimated value per share was based upon the recommendation and valuation prepared by Pacific Oak Capital Advisors, LLC (the “Advisor”), the Company’s external advisor. The Advisor’s valuation of the Company’s consolidated real estate properties and 110 William Street, a property the Company owns via an unconsolidated entity, was based on valuations performed by third-party valuation firms. The valuation of the Company’s two other unconsolidated entity investments and certain other assets and liabilities were based on the Advisor’s estimates. The aforementioned third-party valuations represent appraisals for 110 William Street and the Company’s consolidated real estate properties, except for the Company’s consolidated residential home portfolio consisting of 2,145 homes, which was valued at the total of the individual home values generated by the third-party valuation firm’s proprietary automated valuation models. The appraisals were performed by Kroll, LLC (“Kroll”), except for the undeveloped land which was appraised by Colliers International Valuation & Advisory Services, LLC (“Colliers”). Valuation of the residential home portfolio was performed by HouseCanary, Inc. (“HouseCanary”). Kroll, Colliers, and HouseCanary, each an independent third-party valuation firm, also prepared appraisal/valuation reports, summarizing key inputs and assumptions, for each of the real estate properties they respectively valued. In arriving at its recommendation, the conflicts committee of the board of directors relied in part on valuation and appraisal methodologies that the independent third-party valuation firms and the Advisor believe are standard and acceptable in the real estate and non-listed REIT industries for the types of assets and liabilities held by the Company. The methodologies and assumptions used to determine the estimated value of the Company’s assets and liabilities are described further below.
The Advisor used the valuations from the third-party valuation firms, and the Advisor’s estimated values for other assets and liabilities to calculate and recommend an estimated value per share of the Company’s common stock. Upon (i) the conflicts committee’s receipt and review of the Advisor’s valuation report, including the Advisor’s summary of the appraisal/valuation reports prepared by Kroll, Colliers, and HouseCanary, and (ii) the conflicts committee’s review of the reasonableness of the Company’s estimated value per share resulting from the Advisor’s valuation process, and (iii) in light of other factors considered by the conflicts committee and the conflicts committee’s own extensive knowledge of the Company’s assets and liabilities, the conflicts committee concluded that the estimated value per share proposed by the Advisor was reasonable and recommended to the board of directors that it adopt $5.72 as the estimated value per share of the Company’s common stock. At the special meeting of the board of directors, the board of directors unanimously approved the recommendation of the conflicts committee and approved $5.72 as the estimated value of the Company’s common stock, which determination is ultimately and solely the responsibility of the board of directors.
The table below sets forth the calculation of the Company’s estimated value per share as of December 10, 2024, as well as the calculation of the Company’s prior estimated value per share as of November 30, 2023:
| December 10, 2024<br><br>Estimated Value per Share | November 30, 2023<br><br>Estimated Value per Share(1) | Change in Estimated Value per Share | ||||
|---|---|---|---|---|---|---|
| Real estate properties (2) | $ | 13.15 | $ | 15.66 | $ | (2.51) |
| Real estate equity securities (3) | 0.17 | 0.26 | (0.09) | |||
| Cash | 0.18 | 0.75 | (0.57) | |||
| Investments in unconsolidated entities (4) | 1.71 | 1.44 | 0.27 | |||
| Other assets (5) | 0.33 | 0.61 | (0.28) | |||
| Mortgage debt (6) | (5.41) | (6.19) | 0.78 | |||
| Series B, C and D bonds (7) | (3.65) | (3.54) | (0.11) | |||
| Pacific Oak Residential Advisors participation fee liability (8) | (0.07) | (0.07) | — | |||
| Other liabilities | (0.64) | (0.78) | 0.14 | |||
| Non-controlling interests (9) | (0.05) | (0.11) | 0.06 | |||
| Estimated value per share | $ | 5.72 | $ | 8.03 | $ | (2.31) |
| Estimated enterprise value premium | None assumed | None assumed | None assumed | |||
| Total estimated value per share | $ | 5.72 | $ | 8.03 | $ | (2.31) |
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(1) The November 30, 2023 estimated value per share was approved by the board of directors; for more information, see the Company’s Current Report on Form 8-K filed with the SEC on December 7, 2023.
(2) The decrease in real estate properties was primarily due to decreases in property fair values and property dispositions.
(3) The decrease in real estate equity securities was primarily due to decreases in securities values and securities dispositions.
(4) The increase in investments in unconsolidated entities was primarily due to additional contributions made.
(5) The decrease in other assets was primarily due to restricted cash used for repayments on the Series B bonds.
(6) The decrease in mortgage debt was primarily due to repayments including those upon asset sales.
(7) The increase in bonds was primarily due to the issuance of Series D bonds and partially offset by repayments on the Series B bonds.
(8) Represents the potential participation fee payable to Pacific Oak Residential Advisors as it relates to the operations or assets of the Company’s subsidiary, Pacific Oak Residential Trust, Inc.
(9) The decrease in non-controlling interests was primarily due to non-controlling interest distributions and a decline in non-controlling interest values related to property value declines.
The change in the Company’s estimated value per share from the previous estimate was primarily due to the items listed below. The changes are not equal to the change in values of each asset and liability group presented in the table above due to real estate property acquisitions, dispositions, debt financings and other factors, which caused the value of certain asset or liability groups to change with no impact to the Company’s fair value of equity or the overall estimated value per share.
| Change in Estimated Value per Share | ||
|---|---|---|
| November 30, 2023 estimated value per share | $ | 8.03 |
| Changes to estimated value per share | ||
| Investments | ||
| Real estate | (0.79) | |
| Investments in unconsolidated entities | (0.07) | |
| Investments in equity securities | 0.07 | |
| Leasing costs & capital expenditures on real estate | (0.25) | |
| Total change related to investments | (1.04) | |
| Operating cash flows (1) | (0.69) | |
| Foreign currency loss | (0.07) | |
| Property selling and financing costs (2) | (0.19) | |
| Advisor disposition fees (3) | (0.01) | |
| Mortgage debt | (0.10) | |
| Series B, C and D bonds | (0.18) | |
| Other | (0.03) | |
| Total change in estimated value per share | $ | (2.31) |
| December 10, 2024 estimated value per share | $ | 5.72 |
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(1) Operating cash flow reflects modified funds from operations (“MFFO”) attributable to common stockholders, adjusted for the Company’s share of (i) deductions for capitalized interest expense, real estate taxes and insurance and (ii) add backs for deferred financing cost amortization. The Company computes MFFO in accordance with the definition included in the practice guideline issued by the IPA in November 2010.
(2) Property selling and financing costs include approximately (i) $8.9 million, or $0.09 per share, for selling costs, (ii) $6.8 million, or $0.07 per share, for financing costs including the issuance costs related to the Company’s Series D bonds issued in April 2024, and (iii) $2.9 million, or $0.03 per share, for income tax payable related to the Company’s land sales out of a taxable REIT subsidiary in the year ending September 30, 2024.
(3) Advisor disposition fees were $1.3 million or $0.01 per share.
As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The estimated value per share is not audited and does not represent the fair value of the Company’s assets less the fair value of the Company’s liabilities according to U.S. generally accepted accounting principles (“GAAP”), nor does it represent a liquidation value of the Company’s assets and liabilities or the price at which the Company’s shares of common stock would trade at on a national securities exchange. The estimated value per share does not reflect a discount for the fact that the Company is externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share also does not take into account estimated disposition costs and fees, debt prepayment penalties that could apply upon the prepayment of certain of the Company’s debt obligations, the impact of restrictions on the assumption of debt or hedging costs which may be incurred upon the termination of certain of the Company’s hedges prior to expiration. The estimated value per share also does not consider characteristics of the Company’s working capital, leverage and other financial structures where some buyers may ascribe different values.
Methodology
The Company’s goal for the valuation was to arrive at a reasonable and supportable estimated value per share, using a process that was designed to be in compliance with the IPA Valuation Guidelines and using what the Company and the Advisor deemed to be appropriate valuation methodologies and assumptions. The following is a summary of the real estate valuation engagements as well as the methodologies, assumptions and estimates used to value the Company’s assets and liabilities:
Real Estate
Independent Valuation Firms
Kroll(1) was selected by the Advisor and approved by the Company’s conflicts committee to appraise all of the Company’s consolidated real estate properties and 110 William Street, but excluding the Company’s investments in undeveloped land and the residential home portfolio. Colliers(2) was selected by the Advisor and approved by the Company’s conflicts committee to appraise the Company’s investments in undeveloped land (hereinafter the properties appraised by Kroll and Colliers are the “Appraised Properties”). HouseCanary(3) was selected by the Advisor and approved by the Company’s conflicts committee to provide a value for the Company’s residential home portfolio using its proprietary automated valuation models. HouseCanary’s values were not appraisals and should not be construed as appraisals. Kroll and Colliers are engaged in the business of appraising commercial real estate properties, and HouseCanary is engaged in the business of real estate valuations, data, and analytics and none are affiliated with the Company or the Advisor. The compensation the Company pays to Kroll, Colliers, and HouseCanary is based on the scope of work and not on the values of the Company’s real estate properties. In preparing their valuation reports, Kroll, Colliers, and HouseCanary did not, and were not requested to, inspect or otherwise evaluate the physical conditions of the Company’s properties or solicit third-party indications of interest for the Company’s properties or common stock in connection with possible purchases thereof or the acquisition of all or any part of the Company.
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(1) Kroll is actively engaged in the business of appraising commercial real estate properties similar to those owned by the Company in connection with public securities offerings, private placements, business combinations and similar transactions. The Company engaged Kroll to deliver appraisal reports for all of the Company’s consolidated investments in real estate properties and 110 William Street, but excluding the Company’s investments in undeveloped land and the residential home portfolio, and Kroll received fees upon the delivery of such reports. In addition, the Company has agreed to indemnify Kroll against certain liabilities arising out of this engagement. In the seven years prior to the date of this filing, Kroll and its affiliates have provided a number of commercial real estate, appraisal and valuation services for the Company and/or its affiliates and have received fees in connection with such services. Kroll and its affiliates may from time to time in the future perform other commercial real estate, appraisal and valuation services for the Company and its affiliates in transactions related to the properties that are the subjects of the appraisals, so long as such other services do not adversely affect the independence of the applicable Kroll appraiser as certified in the applicable appraisal reports.
(2) Colliers is actively engaged in the business of appraising commercial real estate properties similar to those owned by the Company in connection with public securities offerings, private placements, business combinations and similar transactions. The Company engaged Colliers to deliver appraisal reports for certain of the Company’s investments in undeveloped land and Colliers received fees upon the delivery of such reports. In addition, the Company has agreed to indemnify Colliers against certain liabilities arising out of this engagement. Colliers and its affiliates are engaged in the ordinary course of business in many areas related to commercial real estate and related services. Colliers and its affiliates may from time to time in the future perform other commercial real estate, appraisal, valuation and financial advisory services for the Company and its affiliates in transactions related to the properties that are the subjects of the appraisals, so long as such other services do not adversely affect the independence of the applicable Colliers appraiser as certified in the applicable appraisal reports.
(3) HouseCanary is actively engaged in the business of real estate valuation, data, and analytics related to homes similar to those owned by the Company. The Company engaged HouseCanary to provide a valuation for each of the residential homes in its portfolio, and HouseCanary received fees upon the delivery of its valuation report. HouseCanary’s proprietary automated valuation models generate value estimates based on multiple factors, but are not guarantees of property value, characteristics or condition. HouseCanary’s valuations were provided to assist the Advisor in calculating the estimated value per share of the Company’s common stock. HouseCanary did not make an independent determination as to whether its valuation methodology was suitable for such purpose or calculate or participate in the calculation of the estimated value per share. In addition, the Company has agreed to indemnify HouseCanary against certain liabilities arising out of this engagement. HouseCanary is engaged in the ordinary course of business in many areas related to real estate and related services. HouseCanary and its affiliates may from time to time in the future perform other valuation and advisory services for the Company related to the properties that are the subjects of the valuation report, so long as such other services do not adversely affect the independence of HouseCanary.
Kroll, Colliers, and HouseCanary collected all reasonably available material information that each deemed relevant and took into account customary real estate valuation and financial considerations and procedures as each deemed relevant in valuing the Company’s real estate properties. Kroll relied in part on property-level information provided by the Advisor, including (i) property historical and projected operating revenues and expenses; (ii) property lease agreements; and (iii) information regarding recent or planned capital expenditures. Colliers was provided with land surveys and development plans and relied in part on such information. HouseCanary was provided with property addresses, purchase prices and dates, and certain characteristics for each of the Company’s homes and relied in part on such information. Kroll, Colliers, and HouseCanary relied on the information supplied or otherwise made available by the Company and the Advisor to be accurate and complete, prepared in good faith, and to reflect the best currently available estimates and judgments of the Company and the Advisor, and did not independently verify any such information. In addition, Kroll, Colliers, and HouseCanary relied on the Company or the Advisor to inform them if any information previously provided became inaccurate or needed updating during the course of their engagements or if there were any exceptions to the typical assumptions that the Company has clear and marketable title to each real estate property, that no title defects exist, that any improvements were made in accordance with law, that no hazardous materials are present or were present previously, that no deed restrictions exist, and that no changes to zoning ordinances or regulations governing use, density or shape are pending or being considered. Kroll, Colliers, and HouseCanary did not independently verify any such information.
For the appraisals, Kroll and Colliers performed the appraisals in accordance with the Code of Ethics and the Uniform Standards of Professional Appraisal Practice, or USPAP, the real estate appraisal industry standards created by The Appraisal Foundation, as well as the requirements of the state where each real property is located. Each appraisal was reviewed, approved and signed by an individual with the professional designation of MAI (Member of the Appraisal Institute). The use of the appraisal reports is subject to the requirements of the Appraisal Institute relating to review by its duly authorized representatives. In the appraisals, and as outlined in the appraisal reports, Kroll and Colliers necessarily made numerous assumptions as of various points in time and with respect to general business, economic, and regulatory conditions, industry performance, and other matters, many of which are beyond Kroll’s and Colliers’ control and the Company’s control.
For the residential home portfolio valuation, HouseCanary generated an estimated value for each individual home using its proprietary automated valuation models built to leverage machine learning algorithms and an extensive database that may include MLS information, county assessor records, mortgage and other public records, sales history for a subject property and its surrounding neighborhood, real estate market trends, and macro and local economic and housing data. Each individual home was assigned the HouseCanary value, an estimated value generated by HouseCanary’s proprietary automated valuation model, unless the dataset available did not meet specified criteria. In those cases, the individual home was assigned an indexed value, an estimated value calculated by multiplying a property's last third-party valuation by a price change factor from HouseCanary’s Home Price Index. For the Company’s residential home portfolio valuation by HouseCanary, approximately 80% of the individual homes were assigned the automated valuation model value and 20% were assigned the indexed value as of September 30, 2024. HouseCanary’s valuations were not appraisals and should not be construed as appraisals, and were based on computer models developed by HouseCanary which utilize data believed to be reliable but there can be no guarantee that the data is reliable, accurate, or complete.
Although Kroll, Colliers, and HouseCanary considered any comments received from the Company or the Advisor to their valuations, ultimately the valuations were determined by Kroll, Colliers, and HouseCanary, except as described above. The valuations were necessarily estimates, and the price at which the Company’s properties may actually be sold could differ materially from the valuations. The valuations were necessarily based on assumptions, analyses, opinions, and conclusions reflecting the general business, economic, financial and other circumstances and conditions, and data in existence as of or prior to the date of the valuations. Material change in assumptions, circumstances, conditions, matters, or data after the date of the valuations, or discovery after the date of the valuations that data which had been considered reliable and which had been utilized was in fact unreliable, inaccurate, or incomplete, may affect such valuations. The Kroll, Colliers, and HouseCanary engagement letters and the valuation reports contain qualifications and limitations that qualify the analyses, opinions, and conclusions reflected in the valuations. The valuations are addressed solely to the Company to assist the Advisor in calculating and recommending an updated estimated value per share of the Company’s common stock, and Kroll, Colliers, and HouseCanary have not made independent determinations as to whether the valuations are suitable for such a purpose. The valuations are not addressed to the public and may not be relied upon by any other person to establish an estimated value per share of the Company’s common stock and do not constitute a recommendation to any person to purchase or sell any shares of the Company’s common stock. Kroll, Colliers, and HouseCanary were responsible only for the valuation services outlined in their engagement letters, and were not responsible for, did not calculate, and did not participate in the determination of the estimated value per share of the Company’s common stock.
The foregoing is a summary description of the engagements, standard assumptions, qualifications and limitations that generally apply to the Kroll, Colliers, and HouseCanary valuations.
Real Estate Valuation
As of September 30, 2024, the Company owned nine office properties, encompassing, in the aggregate, approximately 3.2 million rentable square feet and these properties were 66% occupied. In addition, the Company owned one residential home portfolio consisting of 2,145 residential homes and one apartment property, containing 317 units, which were 94% and 95% occupied, respectively. The Company also owned one hotel property with 196 rooms, four investments in undeveloped land with approximately 581 developable acres and one office/retail development property. The Company’s consolidated real estate properties had a total estimated value of $1.4 billion as of September 30, 2024. These properties had a total cost basis of $1.3 billion as of September 30, 2024, which is the total of acquisition prices of $1.1 billion, $13.4 million for the acquisition of minority interests in entities, $144.7 million in capital expenditures, leasing commissions and tenant improvements since inception and $10.8 million of acquisition fees and expenses. The Company’s consolidated real estate value compared to this cost basis represents an increase of approximately 5.6%.
The Company obtained appraisals for each of the consolidated real estate properties except for the residential home portfolio which was valued as described above. The Company’s consolidated Appraised Properties had a total appraised value of $946.9 million, and the Company’s consolidated residential home portfolio had a total estimated value of $406.4 million.
For the appraisals, Kroll and Colliers used various methodologies, as appropriate, such as the direct capitalization approach, discounted cash flow analyses and sales comparison approach. Kroll relied primarily on 10-year discounted cash flow analyses for the final valuations of each of the real estate properties (which exclude undeveloped land) and Colliers relied primarily on the sales comparison approach for the final valuations of the undeveloped land that it appraised. Kroll calculated the discounted cash flow value of the Company’s real estate properties (which exclude undeveloped land) using property-level cash flow estimates, terminal capitalization rates and discount rates that fall within ranges they believe would be used by similar investors to value the properties the Company owns based on recent comparable market transactions adjusted for unique property and market-specific factors. Colliers relied primarily on the sales comparison approach and estimated the value of the undeveloped land based on the most applicable recent comparable market transactions. For the valuation of the residential home portfolio as described above, the HouseCanary valuations were the individual home values using its proprietary automated valuation models.
The following table summarizes the key assumptions that were used to value the consolidated Appraised Properties and residential homes:
| Range in Values | Weighted-Average Basis | |
|---|---|---|
| Consolidated Appraised Properties (Excluding Undeveloped Land and Office/Retail Development Property) | ||
| Terminal capitalization rate | 5.50% to 9.00% | 8.00% |
| Discount rate | 6.75% to 10.32% | 9.33% |
| Net operating income compounded annual (decline) growth rate (1) | (0.70%) to 13.84% | 7.34% |
| Undeveloped Land | ||
| Price per acre (2) | $493,000 to $1,016,000 | $510,000 |
| Office/Retail Development Property | ||
| Price per FAR (Floor area ratio) (3) | $575 to $600 | $600 |
| Residential Homes | ||
| Price per square foot | $22 to $318 | $131 |
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(1) The net operating income compounded annual growth rates (“CAGRs”) reflect both the contractual and market rents and reimbursements (in cases where the contractual lease period is less than the valuation period) net of expenses over the valuation period. The range of CAGRs shown is the constant annual rate at which the net operating income is projected to grow to reach the net operating income in the final year of the hold period for each of the properties.
(2) The weighted-average price per acre was primarily driven by the Company’s investments in undeveloped land with approximately 581 developable acres located in North Las Vegas, Nevada.
(3) Price per FAR is before deducting for the ground lease liability and estimated demolition costs, and the range in values reflects different development scenarios.
While the Company believes that Kroll’s, Colliers’, and HouseCanary’s assumptions and inputs are reasonable, a change in these assumptions and inputs would significantly impact the estimated values of the Company’s real estate properties and, thus, its estimated value per share. As of September 30, 2024, certain of the Company’s real estate assets have non-stabilized occupancies. Appraisals may provide a sense of the value of the investment, but any appraisal of the property will be based on numerous estimates, judgments and assumptions that significantly affect the appraised value of the underlying property. An appraisal of a non-stabilized property, in particular, involves a high degree of subjectivity due to high vacancy levels and uncertainties with respect to future market rental rates and timing of lease-up and stabilization. Accordingly, different assumptions may materially change the appraised value of the property. The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to the consolidated Appraised Properties referenced in the table above (excluding undeveloped land and the office/retail development property). Additionally, the table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates for these properties were adjusted by 5% in accordance with the IPA guidance:
| Increase (Decrease) on the Estimated Value per Share due to | ||||||||
|---|---|---|---|---|---|---|---|---|
| Decrease of 25 basis points | Increase of 25 basis points | Decrease of 5% | Increase of 5% | |||||
| Terminal capitalization rates | $ | 0.12 | $ | (0.11) | $ | 0.22 | $ | (0.20) |
| Discount rates | 0.19 | (0.12) | 0.21 | (0.20) |
The table below illustrates the impact on the estimated value per share if the price per acre of the investments in undeveloped land was adjusted by 5%:
| Increase (Decrease) on the Estimated Value per Share due to | ||||
|---|---|---|---|---|
| Decrease of 5% | Increase of 5% | |||
| Price per acre | $ | (0.13) | $ | 0.13 |
The table below illustrates the impact on the estimated value per share if the price per FAR of the investment in the office/retail development property was adjusted by 5%:
| Increase (Decrease) on the Estimated Value per Share due to | ||||
|---|---|---|---|---|
| Decrease of 5% | Increase of 5% | |||
| Price per FAR | $ | (0.01) | $ | 0.01 |
The table below illustrates the impact on the estimated value per share if the price per square foot of the residential home portfolio was adjusted by 5%:
| Increase (Decrease) on the Estimated Value per Share due to | ||||
|---|---|---|---|---|
| Decrease of 5% | Increase of 5% | |||
| Price per square foot | $ | (0.20) | $ | 0.20 |
Investments in Unconsolidated Entities
As of September 30, 2024, the Company held three investments in unconsolidated entities including: 110 William Street, 353 Sacramento, and Pacific Oak Opportunity Zone Fund I.
110 William Street is an office property containing 928,157 rentable square feet located in New York, New York and the Company holds a 77.5% preferred equity interest and a 100% common equity interest in a joint venture that owns 110 William Street. The appraised value of 110 William Street as provided by Kroll was $403.6 million. The Advisor used the appraised value provided by Kroll and the Advisor’s estimated fair values of other assets and liabilities, to calculate the amount that the Company would receive in a hypothetical liquidation of the real estate and the other assets and liabilities based on the profit participation thresholds contained in the joint venture agreement. The resulting amount was the fair value assigned to the Company’s interests in this unconsolidated joint venture. As of September 30, 2024, the carrying value and estimated fair value of the Company’s investment in this unconsolidated joint venture were $60.3 million and $140.6 million, respectively.
Kroll relied on a 10-year discounted cash flow analysis for the final valuation of 110 William Street. The terminal capitalization rate, discount rate and CAGR used in the discounted cash flow model to arrive at the appraised value were 5.50%, 6.50% and 15.12%, respectively.
The table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to 110 William Street. Additionally, the table below illustrates the impact on the estimated value per share if the terminal capitalization rates or discount rates for 110 William Street were adjusted by 5% in accordance with the IPA guidance:
| Increase (Decrease) on the Estimated Value per Share due to | ||||||||
|---|---|---|---|---|---|---|---|---|
| Decrease of 25 basis points | Increase of 25 basis points | Decrease of 5% | Increase of 5% | |||||
| Terminal capitalization rates | $ | 0.13 | $ | (0.12) | $ | 0.27 | $ | (0.22) |
| Discount rates | 0.10 | (0.10) | 0.21 | (0.20) |
The Company also holds 124 Class A Units of Pacific Oak Opportunity Zone Fund I, LLC, approximately 47%, and the units were valued by the Advisor based on the Advisor’s estimated unit value for the fund. As of September 30, 2024, the carrying value and estimated fair value of the Company’s investment in this unconsolidated entity were $20.6 million and $35.2 million, respectively, with the latter equal to $0.34 per share. If the per-unit price were adjusted by 5%, it would impact the estimated value per share value by $0.02.
353 Sacramento is an office building containing 284,751 rentable square feet located in San Francisco, California and the Company holds a 55% interest in a joint venture that owns 353 Sacramento. The estimated fair values of 353 Sacramento and related other assets and liabilities were valued by the Advisor and used to calculate the amount that the Company would receive in a hypothetical liquidation of the real estate and the other assets and liabilities based on the profit participation thresholds contained in the joint venture agreement. The resulting amount was the fair value assigned to the Company’s 55% interest in this unconsolidated joint venture. As of September 30, 2024, the carrying value and estimated fair value of the Company’s investment in this unconsolidated joint venture were $0 and $1.4 million, respectively. The carrying value is $0 due to the Company suspending the equity method of accounting for this unconsolidated joint venture.
Real Estate Equity Securities
As of September 30, 2024, the Company owned an investment in one real estate equity security: 64,165,352 shares of common units of Keppel Pacific Oak US REIT. The fair value of these real estate equity securities was based on quoted prices in an active market on a major stock exchange. The fair value and carrying value of the Company’s real estate equity securities was $17.3 million.
Notes Payable
The estimated values of the Company’s notes payable are equal to the GAAP fair values calculated using a discounted cash flow analysis, but they do not equal the book value in accordance with GAAP. For the discounted cash flow analysis, the contractual cash flows were discounted by estimated market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio and type of collateral.
The GAAP fair value and carrying value of the Company’s notes payable were $557.6 million and $561.1 million, respectively. The weighted-average discount rate applied to the future estimated debt payments, which have a weighted-average remaining term of 1.27 years, was approximately 6.52%. The table below illustrates the impact on the Company’s estimated value per share if the discount rates were adjusted by 25 basis points, and assuming all other factors remain unchanged, with respect to the Company’s notes payable. Additionally, the table below illustrates the impact on the estimated value per share if the discount rates were adjusted by 5% in accordance with the IPA guidance:
| Increase (Decrease) on the Estimated Value per Share due to | ||||||||
|---|---|---|---|---|---|---|---|---|
| Decrease of 25 basis points | Increase of 25 basis points | Decrease of 5% | Increase of 5% | |||||
| Discount rates | $ | (0.01) | $ | 0.01 | $ | (0.02) | $ | 0.02 |
Series B, C and D Bonds
The Company’s Series B, C and D bonds are publicly traded on the Tel-Aviv Stock Exchange. The estimated values of the Company’s Series B, C and D bonds are based on the quoted bond prices, as a percentage of face value as of September 30, 2024 on the Tel-Aviv Stock Exchange of 96.46% for Series B, 105.21% for Series C and 100.91% for Series D, and foreign currency exchange rates as of September 30, 2024. As of September 30, 2024, the fair value and GAAP carrying value of the Company’s Series B, C and D bonds were $376.1 million and $365.8 million, respectively.
Non-controlling Interests
The Company has ownership interests in three consolidated entities as of September 30, 2024. As the Company consolidates these entities, the entire amount of the underlying assets and liabilities are reflected at their fair values in the corresponding line items of the estimated value per share calculation. Given this and the September 30, 2024 appraisal date for
the real estate properties, the Company also must consider the fair value of any non-controlling interest liability as of September 30, 2024. In determining this fair value, the Company considered the various profit participation thresholds in each of the entities that must be measured in determining the fair value of the Company’s non-controlling interest liability. The Company used the real estate valuations provided by Kroll and calculated the amount that the non-controlling interests would receive in a hypothetical liquidation of the underlying real estate properties (including all current assets and liabilities) at their current estimated values and the payoff of any related debt at its fair value, based on agreements. The estimated payment to the non-controlling interests were then reflected as the non-controlling interest liability in the Company’s calculation of its estimated value per share.
Participation Fee Potential Liability Calculation
The Company’s potential incentive fee payable to the Advisor is estimated to be $0 in the estimated share value as of December 10, 2024. The Advisor is entitled to receive an incentive fee in an amount equal to the amount by which (A) 15.0% of the Company’s net cash flows, whether from continuing operations, net sale proceeds or otherwise, which remain after the Company’s stockholders have received, together as a collective group, aggregate distributions (including distributions that may constitute a return of capital for federal income tax purposes) sufficient to provide (i) a return of their net invested capital, or the amount calculated by multiplying the total number of shares purchased by stockholders by the issue price (except that all shares issued to stockholders of POSOR II in connection with the Merger are deemed to have been purchased by such stockholders at the effective time of the Merger and at a price of $10.63 per share), reduced by any amounts to repurchase shares pursuant to the Company’s share redemption program, and (ii) a 7.0% per year cumulative, non-compounded return on such net invested capital from Company inception, exceeds (B) $33.8 million which equals (i) the estimated share value effective November 12, 2018 and used in the determination of the number of restricted stock units originally issued, times (ii) the number of restricted stock units originally issued, to the Company's former advisor, KBS Capital Advisors LLC, in connection with its termination on October 31, 2019. Net sales proceeds means the net cash proceeds realized by the Company after deduction of all expenses incurred in connection with a sale, including disposition fees paid to the Advisor. The 7.0% per year cumulative, noncompounded return on net invested capital from Company inception is calculated on a daily basis. In making this calculation, the net invested capital is reduced to the extent distributions in excess of a cumulative, noncompounded, annual return of 7.0% are paid (from whatever source), except to the extent such distributions would be required to supplement prior distributions paid in order to achieve a cumulative, noncompounded, annual return of 7.0% (invested capital is only reduced as described in this sentence; it is not reduced simply because a distribution constitutes a return of capital for federal income tax purposes). The 7.0% per year cumulative, noncompounded return is not based on the return provided to any individual stockholder. Accordingly, it is not necessary for each of the Company’s stockholders to have received any minimum return in order for the Advisor to participate in the Company’s net cash flows. In fact, if the Advisor is entitled to participate in the Company’s net cash flows, the returns of the Company’s stockholders will differ, and some may be less than a 7.0% per year cumulative, noncompounded return. This fee is payable only if the Company is not listed on an exchange. For purposes of determining the estimated value per share, the Advisor calculated the potential liability related to this incentive fee based on a hypothetical liquidation of the assets and liabilities at their estimated fair values, after considering the impact of any potential closing costs and fees related to the disposition of real estate properties.
The Company’s potential incentive fee payable to Pacific Oak Residential Advisors (“PORA”) as it relates to the operations or assets of the Company’s subsidiary, Pacific Oak Residential Trust, Inc. (“PORT”) is estimated to be $7.0 million in the estimated share value as of December 10, 2024. If a triggering event occurs, the incentive fee due to PORA is based on the Company’s invested capital, which is measured from the Company’s initial investment in PORT in November 2019. If the total return on the Company’s invested capital in PORT exceeds a 5% cumulative, non-compounded, annual return on invested capital (the “Legacy Hurdle Amount”), then the incentive fee equals 48% of the following: (i) the amount by which the total return on the Company’s invested capital exceeds the Legacy Hurdle Amount (any such excess, the “Legacy Excess Profits”) until the total amount allocated to PORA hereunder equals 12.5% of the sum of (x) the Legacy Hurdle Amount and (y) any amount due to PORA pursuant to this clause and (ii) to the extent there are remaining Legacy Excess Profits, 12.5% of such remaining Legacy Excess Profits.
Other Assets and Liabilities
The carrying values of a majority of the Company’s other assets and liabilities are considered to equal their fair value due to their short maturities or liquid nature. Certain balances, such as straight-line rent receivables, lease intangible assets and liabilities, accrued capital expenditures, deferred financing costs, unamortized lease commissions and unamortized lease incentives, have been eliminated for the purpose of the valuation due to the fact that the value of those balances were already considered in the valuation of the related asset or liability. The Advisor has also excluded redeemable common stock as temporary equity does not represent a true liability to the Company and the shares that this amount represents are included in the Company’s total outstanding shares of common stock for purposes of calculating the estimated value per share of the Company’s common stock.
Different parties using different assumptions and estimates could derive a different estimated value per share, and these differences could be significant. The value of the Company’s shares will fluctuate over time in response to developments related to individual assets in the Company’s portfolio and the management of those assets and in response to the real estate and finance markets.
Limitations of Estimated Value Per Share
As mentioned above, the Company is providing this estimated value per share to assist broker dealers that participated in the Company’s initial public offering in meeting their customer account statement reporting obligations. This valuation was performed in accordance with the provisions of and also to comply with IPA valuation guidelines. The estimated value per share set forth above will first appear on the December 31, 2024 customer account statements that will be mailed in January 2025. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share. The estimated value per share is not audited and does not represent the fair value of the Company’s assets less the fair value of the Company’s liabilities according to GAAP. There can be no assurances that:
•a stockholder would be able to resell his or her shares at this estimated value per share;
•a stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation of the Company’s assets and settlement of its liabilities or a sale of the Company;
•the Company’s shares of common stock would trade at the estimated value per share on a national securities exchange;
•an independent third-party appraiser or other third-party valuation firm would agree with the Company’s estimated value per share; or
•the methodology used to calculate the Company’s estimated value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements.
Further, the estimated value per share as of December 10, 2024 is based on the estimated value of the Company’s assets less the estimated value of the Company’s liabilities divided by the number of shares outstanding, all as of September 30, 2024. As of September 30, 2024, there were 102,951,395 shares issued and outstanding. The value of the Company’s shares will fluctuate over time in response to developments related to individual assets in the Company’s portfolio and the management of those assets and in response to the real estate and finance markets. Currently, U.S. commercial real estate values are impacted by a lack of transaction volume and general uncertainty in the real estate capital markets, increasing the uncertainty of current valuations. The estimated value per share does not reflect a discount for the fact that the Company is externally managed, nor does it reflect a real estate portfolio premium/discount versus the sum of the individual property values. The estimated value per share does not take into account estimated disposition costs and fees, debt prepayment penalties that could apply upon the prepayment of certain of the Company’s debt obligations or the impact of restrictions on the assumption of debt. The estimated value per share does consider any participation or incentive fees that would be due to the Advisor based on the aggregate net asset value of the Company which would be payable in a hypothetical liquidation of the Company as of the valuation date in accordance with the terms of the Company’s advisory agreement. The Company currently expects to utilize the Advisor and/or an independent valuation firm to update the estimated value per share no later than December 2025 and that such value will be included in a report filed with the Securities and Exchange Commission.
Share Redemption Program
On July 16, 2024, the Company’s board of directors indefinitely suspended our share redemption program, effective July 30, 2024. The Company’s board of directors may reinstate the program, although there is no assurance as to if or when this will happen.
Historical Estimated Values per Share
The historical reported estimated values per share of the Company’s common stock approved by the board of directors are set forth below:
| Estimated Value per Share | Effective Date of Valuation | Filing with the Securities and Exchange Commission |
|---|---|---|
| $8.03 | November 30, 2023 | Current Report on Form 8-K, filed December 7, 2023 |
| $10.50 | December 2, 2022 | Current Report on Form 8-K, filed December 8, 2022 |
| $10.68 | December 2, 2021 | Current Report on Form 8-K, filed December 8, 2021 |
| $9.68 | December 4, 2020 | Current Report on Form 8-K, filed December 10, 2020 |
| $10.63 | December 17, 2019 | Current Report on Form 8-K, filed December 19, 2019 |
| $9.91 | November 12, 2018 | Current Report on Form 8-K, filed November 15, 2018 |
| $11.50 | December 7, 2017 | Current Report on Form 8-K, filed December 13, 2017 |
| $14.81 | December 8, 2016 | Current Report on Form 8-K, filed December 15, 2016 |
| $13.44 | December 8, 2015 | Current Report on Form 8-K, filed December 10, 2015 |
| $12.24 | December 9, 2014 | Current Report on Form 8-K, filed December 11, 2014 |
| $11.27 | March 25, 2014 | Current Report on Form 8-K, filed March 27, 2014 |
Forward-Looking Statements
The foregoing includes forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its 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. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes 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. Actual results may differ materially from those contemplated by such forward-looking statements. The valuation methodology for the Company’s real estate properties assumes the properties realize the projected cash flows and expected exit cap rates and that investors would be willing to invest in such properties at yields equal to the expected discount rates. Though the valuation estimates used in calculating the estimated value per share are Kroll’s, Colliers’, HouseCanary’s or the Company’s and/or the Advisor’s best estimates as of December 10, 2024, the Company can give no assurance in this regard. These statements also depend on factors such as: future economic, competitive and market conditions; the Company’s ability to maintain occupancy levels and rental rates at its real estate properties; the borrowers under the Company’s real estate debt securities investment continuing to make required payments; and other risks identified in Part I, Item IA of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and subsequent periodic reports, as filed with the SEC. Actual events may cause the value and returns on the Company’s investments to be less than that used for purposes of the Company’s estimated value per share.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
| (d) | Exhibits |
|---|---|
| Ex. | Description |
| 99.1 | Consent of Kroll, LLC |
| 99.2 | Consent of Colliers International Valuation & Advisory Services, LLC |
| 99.3 | Consent of HouseCanary, Inc. |
| 99.4 | Presentation to Stockholders |
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 hereunto duly authorized.
| PACIFIC OAK STRATEGIC OPPORTUNITY REIT, INC. | ||
|---|---|---|
| Dated: December 13, 2024 | BY: | /s/ Michael A. Bender |
| Michael A. Bender | ||
| Chief Financial Officer, Treasurer and Secretary |
Document
Exhibit 99.1
CONSENT OF INDEPENDENT VALUATION EXPERT
We hereby consent to the reference to our name and description of our role in the valuation process of certain commercial real estate assets of Pacific Oak Strategic Opportunity REIT, Inc. (the “Company”) being included or incorporated by reference into the Company’s Registration Statement on Form S-3 (File No. 333-156633) and the related prospectus, included therein, by being filed on a Current Report on Form 8-K, to be filed on the date hereof. In giving this limited consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended; nor do we consent to, adopt or otherwise express any views as to the accuracy or completeness of any other representations in the referenced documents.
| December 13, 2024 | /s/ Kroll, LLC |
|---|---|
| Kroll, LLC |
Document
Exhibit 99.2
CONSENT OF INDEPENDENT VALUATION EXPERT
We hereby consent to the reference to our name and description of our role in the valuation process of certain commercial real estate assets of Pacific Oak Strategic Opportunity REIT, Inc. (the “Company”) being included or incorporated by reference into the Company’s Registration Statement on Form S-3 (File No. 333-156633) and the related prospectus, included therein, by being filed on a Current Report on Form 8-K, to be filed on the date hereof. In giving this limited consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended; nor do we consent to, adopt or otherwise express any views as to the accuracy or completeness of any other representations in the referenced documents.
| December 13, 2024 | /s/ Colliers International Valuation & Advisory Services, LLC |
|---|---|
| Colliers International Valuation & Advisory Services, LLC |
Document
Exhibit 99.3
CONSENT OF INDEPENDENT VALUATION EXPERT
We hereby consent to the reference to our name and description of our role in the valuation process of certain residential real estate assets of Pacific Oak Strategic Opportunity REIT, Inc. (the “Company”) being included or incorporated by reference into the Company’s Registration Statement on Form S-3 (File No. 333-156633) and the related prospectus, included therein, by being filed on a Current Report on Form 8-K, to be filed on the date hereof. In giving this limited consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act of 1933, as amended; nor do we consent to, adopt or otherwise express any views as to the accuracy or completeness of any other representations in the referenced documents.
| December 13, 2024 | /s/ HouseCanary, Inc. |
|---|---|
| HouseCanary, Inc. |
sorrevalcalldec2024fapre
PA C I F I C O A K S T R AT E G I C O P P O R T U N I T Y R E I T, I N C . Va l u a t i o n a n d P o r t f o l i o U p d a t e DECEMBER 13, 2024 Exhibit 99.4 2 FORWARD-LOOKING STATEMENTS I M P O R TA N T D I S C L O S U R E S - The information contained herein should be read in conjunction with, and is qualified by, the information in the Pacific Oak Strategic Opportunity REIT, Inc. (“Pacific Oak Strategic Opportunity REIT” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on April 1, 2024 (the “Annual Report”) and the Company’s subsequent Quarterly Reports on Form 10-Q through and including the Form 10-Q for the quarter ended September 30, 2024 (the “Quarterly Report”) filed with the SEC on November 14, 2024, including the “Risk Factors” contained therein. For a full description of the limitations, methodologies and assumptions used to value the Company’s assets and liabilities in connection with the calculation of the Company’s estimated value per share, see the Company’s Current Report on Form 8-K, filed with the SEC on December 13, 2024. F O R W A R D L O O K I N G S TAT E M E N T S - Certain statements contained herein may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. The Company intends that such forward-looking statements be subject to the safe harbors created by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its 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. Further, forward-looking statements speak only as of the date they are made, and the Company undertakes 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. Actual results may differ materially from those contemplated by such forward-looking statements. The valuation methodology for certain of the Company’s real estate investments assumes that its properties realize the projected cash flows and exit cap rates and that investors would be willing to invest in such properties at cap rates equal to the cap rates used in the valuation. Though the appraisals and valuation estimates used in calculating the estimated value per share are Kroll, LLC (“Kroll”), Colliers International Valuation & Advisory Services, LLC (“Colliers”), and HouseCanary, Inc. (“HouseCanary”) best estimates as of September 30, 2024, and/or the Company’s and Pacific Oak Capital Advisors LLC’s (“the Advisor”) best estimates as of December 10, 2024, the Company can give no assurance that these estimated values will be realized by the Company. These statements also depend on factors such as future economic, competitive and market conditions, the Company’s ability to maintain occupancy levels and rental rates at its properties, and other risks identified in Part I, Item IA of the Company’s Annual Report on form 10-K for the year ended December 31, 2023, and its subsequent quarterly reports. Actual events may cause the value and returns on the Company’s investments to be less than that used for purposes of the Company’s estimated value per share. 3 VALUATION1 • Estimated share value of $5.72, using information as of September 30, 2024. • The Company followed the Institute for Portfolio Alternatives Valuation Guidelines, which included third-party valuations for all of its consolidated properties and one property owned via an unconsolidated entity, except as described below. The valuations represented appraisals for these properties, with the exception of the Company’s residential home portfolio of 2,145 homes. The residential home portfolio was valued by HouseCanary. The appraisals were performed by Kroll, except for the undeveloped land which was appraised by Colliers. • The appraisals were performed in accordance with the Code of Professional Ethics and Standards of Profession Practice set forth by the Appraisal Institute and the Uniform Standards of Professional Appraisal Practice (USPAP). • The Advisor valued two investments in an unconsolidated entities at $35.8 million or $0.36 per share3, as well as the Company’s other assets and liabilities. • Non-controlling interest liability due to equity interests in certain consolidated entities was calculated by assuming a hypothetical liquidation of the underlying real estate properties at their current values and the payoff of any related debt at its fair value, and then valuing the equity interests based on their contractual rights. Reflected the advisor incentive fee payable to the Company’s Advisors for shareholder returns in excess of a 7.0% per year cumulative, non-compounded return on invested capital2. Net asset value; no enterprise (portfolio) premium or discount applied 1. For more information, see the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2024. 2. The Company has a potential incentive fee payable to (i) Pacific Oak Capital Advisors as the Company’s Advisor and (ii) Pacific Oak Residential Advisors as it relates to the operations or assets of the Company’s subsidiary, Pacific Oak Residential Trust, Inc. (“PORT”). The potential incentive fee payable to Pacific Oak Capital Advisors is not reduced by the potential incentive fee payable to Pacific Oak Residential Advisors. The potential incentive fee payables to Pacific Oak Capital Advisors and Pacific Oak Residential Advisors were estimated to be $0 and $7.1 million, respectively, for the estimated share value announced on December 13, 2024. For further information on the advisory agreements with Pacific Oak Capital Advisors and Pacific Oak Residential Advisors, see the advisory agreements included as exhibits to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2024, filed with the SEC on November 14, 2024, and the Company’s current report on Form 8-K filed on January 16, 2024. 3. The investment in unconsolidated entities which was valued by the Company’s Advisor are Pacific Oak Opportunity Zone Fund I, LLC and Pacific Oak SOR 353 Sacramento Street, LLC. Net asset value; no enterprise (portfolio) premium or discount applied Reflected the advisor incentive fees to the Company’s Advisors for shareholder returns in excess of specified cumulative, non-compounded returns on invested capital2. 4 1 Based on data as of September 30, 2024. For further information, see the Company’s Current Report on Form 8-K filed with the SEC on December 13, 2024. 2 Includes the related change in non-controlling interests in consolidated entities. 3 Operating cash flow reflects modified funds from operations (“MFFO”) attributable to common stockholders, adjusted for the Company’s share of (i) deducts for capitalized interest expense, property taxes, and insurance and (ii) add backs for deferred financing cost amortization. The Company computes MFFO in accordance with the definition included in the practice guideline issued by the Institute for Portfolio Alternatives (“IPA”) in November 2010. 4 Includes (i) selling and financing costs excluding sponsor fees of $0.19 per share and (ii) disposition fees to the sponsor of $0.01 per share. On December 10, 2024, the Company’s Board approved an estimated share value of $5.72. The following summarizes the change in estimated share value from December 2023 to December 2024: Investments Real estate2 Investments in unconsolidated entities Leasing costs & capital expenditures Investments in real estate equity securities Investment Performance Operating cash flows3 Foreign currency loss Property selling & financing costs4 Mortgage debt Series B, C & D bonds Other changes Total Change December 2024 estimated share value December 2023 estimated share value $ 8.03 (0.79) (0.07) (0.25) 0.07 (1.04) (0.69) (0.07) (0.20) (0.10) (0.18) (0.03) (2.31) $ 5.72 VALUATION1 Consolidated per share breakdown Decreases in fair value and capex Strategic Opportunistic – Office (0.70) Leasing costs & capital expenditures – Office (0.25) Strategic Opportunistic – Hotel (0.06) Strategic Opportunistic – Multifamily 0.05 Total Decreases in fair value and capex (0.96) Impacts related to disposition Strategic Opportunistic - Land (0.04) Residential (0.04) Strategic Opportunistic - Multifamily (0.11) Total Impacts related to disposition (0.19) Non-controlling interest 0.04 Total (1.11) (1.11)
5 The Company is providing this estimated value per share to assist broker-dealers, custodians, and other financial institutions that participated in its initial public offering in meeting their customer account statement reporting obligations. As with any valuation methodology, the methodologies used are based upon a number of estimates and assumptions that may not be accurate or complete. Different parties with different assumptions and estimates could derive a different estimated value per share. The Company can give no assurance that: Further, the estimated value per share announced on December 13, 2024 is based on the estimated value of the Company's assets less the estimated value of its liabilities, or net asset value, divided by the number of shares outstanding, all as of September 30, 2024. The methodology used to estimate the Company’s value per share would be acceptable to FINRA or for compliance with ERISA reporting requirements. The Company’s shares of common stock would trade at the estimated value per share on a national securities exchange; A stockholder would ultimately realize distributions per share equal to the Company’s estimated value per share upon liquidation or sale of the Company; A stockholder would be able to resell his or her shares at this estimated value per share; An independent third-party appraiser or other third- party valuation firm would agree with the Company's estimated value per share; or STOCKHOLDER PERFORMANCE 6 P O RT F O L I O U P D AT E Investment Type Dec. 2024 NAV Value1 % of Total6 Occupancy/ Hotel RevPAR 9/30/243 Occupancy/ Hotel RevPAR 9/30/233 Occupancy/ Hotel RevPAR 9/30/193 Office $1,038,520,000 49.6% 73.4% 74.5% 79.6% Residential Homes & Apartments $510,728,000 29.8% 94.3% 94.0% 94.9% Land $306,780,000 17.8% N/A N/A N/A Hotel $33,600,000 1.8% $106.05 $115.05 $124.49 Equity Securities $17,325,000 1.0% N/A N/A N/A Total $1,906,953,000 Less: Minority Interests6 $(194,263,000) Total (Net of Minority Interests) $1,712,690,000 Portfolio Estimated Value1 …………………………………………… $1,712,690,000 Portfolio Cost Basis2 …………………………………………….…… $1,677,972,000 Rentable Square Feet …………………………………………………....… 8,003,028 Occupancy at 9/30/243……………………………...…………………………….82.8% Leverage, net4…………………………………………………………….………....65% Weighted-Avg. Interest Rate at 9/30/245…….………………………………… 6.88% 1 Represents the values for real estate, including the properties owned via joint ventures, as well as real estate equity securities as of September 30, 2024, as reflected in the December 2024 NAV. Values are adjusted for the Company’s share of consolidated and unconsolidated entities. The total value would be $1,906,953,000 including the minority interests in consolidated and unconsolidated entities. 2 Represents cost basis, which is acquisition price (net of closing credits and excluding closing costs) plus capital expenditures and allocated cost for acquisitions of minority interests in joint ventures, for the real estate and equity securities in the portfolio as of September 30, 2024, adjusted for the Company’s share of consolidated and unconsolidated entities. 3 Occupancy refers to leased occupancy, which includes leases signed but future commencing, for the consolidated and unconsolidated offices, residential homes, and apartments in the portfolio. Hotel RevPAR refers to revenue per available room, a commonly cited measure of operating performance in the hotel industry. The Hotel RevPAR referenced is actually for the year then ending because the hotels are seasonal such that a full year is a better indicator of performance than one quarter. Lastly, occupancy and Hotel RevPAR are referenced for the indicated periods in 2019 to provide a comparison of current operating performance vs. the period(s) prior to the COVID-19 pandemic. 4 Calculated as (i) consolidated debt net of cash, restricted cash, and real estate equity securities divided by (ii) consolidated real estate value, as reflected in the December 2024 NAV. 5 Represents the weighted-average interest rate on consolidated debt as of September 30, 2024. 6 Minority interests represent the share of consolidated and unconsolidated entities held by the Company’s partners. The percentages presented are net of minority interests. Investment Types1 By value in December 2024 NAV Geographic Allocation1 By value in December 2024 NAV 49.6% 29.8% 17.8% 1.0% 1.8% Invest ent Types Based on Decemb r 2024 NAV Values1 Geographic Allocation Based on December 2024 NAV Values1 7.5% 1.0% 20.1% 14.9% 8.5% 5.2% 5.2% 4.1% 4.1%1.9% 25.7% 1.8% 7 $1.14 $1.32 $1.68 $2.06 $2.43 $2.48 $2.51 $2.52 $2.52 $2.52 $2.52 $2.52 $0.72 $1.47 $1.49 $1.49 $1.49 $1.67 $1.67 $1.67 $2.89 $5.44 $5.83 $5.31 $5.86 $7.56 $5.78 $4.12 $10.00 $11.27 $12.24 $13.44 $14.81 $11.50 $9.91 $10.63 $9.68 $10.68 $10.50 $8.03 $5.72 $10.00 $12.41 $13.56 $15.12 $16.87 $17.54 $19.30 $20.46 $19.00 $20.55 $22.25 $18.00 $14.03 Offering PriceMar-14 Dec-14 Dec-15 Dec-16 Dec-17 Nov-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 $0.44 $0.62 $0.98 $1.36 $1.73 $1.78 $1.81 $1.82 $1.82 $1.82 $1.82 $1.82 $0.72 $1.47 $1.49 $1.49 $1.49 $1.67 $1.67 $1.67 $2.89 $5.44 $5.83 $5.31 $5.86 $7.56 $5.78 $4.12 $10.00 $11.27 $12.24 $13.44 $14.81 $11.50 $9.91 $10.63 $9.68 $10.68 $10.50 $8.03 $5.72 $10.00 $11.71 $12.86 $14.42 $16.17 $16.84 $18.60 $19.76 $18.30 $19.85 $21.55 $17.30 $13.33 Offering Price Mar-14 Dec-14 Dec-15 Dec-16 Dec-17 Nov-18 Dec-19 Dec-20 Dec-21 Dec-22 Dec-23 Dec-24 STOCKHOLDER PERFORMANCE Hypothet ica l Per formance of F i rs t and Last Investors a t $10 .00 Of fer ing Pr ice Value Breakdown for First Cash Investor (at Escrow Break April 19, 2010) Value Breakdown for Last Cash Investor (at Offering Close Nov. 14, 2012) Information is presented for a hypothetical first cash investor and a last cash investor who invested on April 19, 2010 and November 14, 2012, respectively. Information assumes all distributions are received in cash (except for the stock portion of special distributions) and there are no share redemptions. The “offering price” of $10.00 reflects the maximum per share purchase price in the primary initial public offering. Special Distributions (Cash Portion) Cumulative Cash Distributions (Excluding Special Distributions) D istributions $8.31 D istributions $7.61 Estimated Value Per Share Cumulative Stock Distribution Value 8 PORTFOLIO & MARKET UPDATES
9 DEBT RESTRUCTURED, TO LOWER LEVERAGE AND INTEREST RATE, EXTEND THE MATURITY UP TO 5 YEARS, & PROVIDE FUTURE FUNDING Former mezzanine loan, which had a balance of $89.0 million and interest rate of 1-month SOFR + 9.50% as of June 30, 2023, was converted to a 22.5% preferred equity interest in the joint venture owning the property. Senior loans, which had a balance of $248.7 million and interest rate of 1-month SOFR + 4.00% as of June 30, 2023, had their maturity dates extended by up to 5 years. The new senior loans have a 3-year initial term and grant two 1-year extension options subject to meeting certain conditions. The new weighted-average interest rate is initially 1-month SOFR + 2.04% (such spread increasing up to 3.50% during the loan term and any extension period). Senior loans will provide up to $57 million of future funding, which it is currently funding. EQUITY RESTRUCTURED, WITH THE COMPANY ACQUIRING THE INTEREST OF ITS FORMER PARTNER The Company acquired the former partner’s 40% interest in the joint venture for (i) the purchase price of $1.00 and (ii) contingent consideration of 10% of the net cash received by the Company from distributions and/or from the sale of interests to a third-party after such time that the Company has achieved certain returns on its future contributions to the joint venture. Following the deal, the Company owns 100% of the common equity of the joint venture. The Company also committed to contribute capital of up to $105.0 million to the joint venture, in exchange for a 77.5% preferred equity interest in the joint venture, which capital shall be used toward the leasing and base building capital costs associated with the 640,000 SF new lease as well as interest and carrying cost shortfalls until rent payments begin on the 640,000 SF new lease. The Company has completed its funding obligation of $105.0 million. The Company’s preferred equity interest will receive a disproportionately larger share of joint venture distributions until certain return thresholds are achieved, according to the joint venture’s revised waterfall calculation. 110 Wi l l i am Debt & Equ i ty Res t ruc tu r ing , and 640,000 SF Lease S ign ing , as Announced in Ju ly 2023 10 640,000 SF LEASE SIGNED FOR 20 YEAR TERM WITH AA CREDIT-RATED TENANT (JUNE 2023), DEBT & EQUITY RESTRUCTURED (JULY 2023) 110 Will iam Update Lease brings the building occupancy up to essentially 100%. Lease was the largest office lease signed, year-to-date, as of lease signing on June 27, 2023. Tenant to take occupancy gradually (in tranches of approximately 200,000 SF each), as tenant improvements are completed. CONSTRUCTION IS ON SCHEDULE EQUITY COMMITMENT REMAINING: $13.3 million as of Sept. 30, 2024 and subsequently funded in full. Tranche A is expected to be delivered in January 2025, Tranche B in February 2025, and Tranche C in July 2025 (marking “substantial completion of the work”) Full occupancy of the space is expected in the second half of 2025, in line with the original schedule. 11 PARK HIGHLANDS LAND SALES 12 Park Highlands Land Sales1 The Company has all of the Park Highlands land under sales contract as of Sept. 30, 2024. In accordance with the sales contracts, specific land parcels closed on October 3, 2024 and December 3, 2024 and the remainder is currently expected to close in December 2026 and December 2027. 1. The approximately 395 developable acres (454 gross acres) is under a sale contract executed March 10, 2024 and subsequently amended; currently, according to the contract, closings are expected to occur in December 2026 and December 2027 and the buyer has waived its contingencies. The anticipated closing dates may be changed in certain circumstances. SOLD SOLD SOLD SOLD SOLD SOLD SOLD First takedown completed December 3, 2024 Second and Third takedowns in December 2026 and 2027
13 Park Highlands Land Sales Under Contract1 The Company has all of the Park Highlands land under sales contract as of August 2024. The sales recently closed in October 2024 to DR Horton, and in December 2024 to KB Homes. Final contracted sales with KB Homes are scheduled for December 2026 and December 2027. These current and future sales generate proceeds of $141.3 million after selling costs & fees and the Israeli Series C bond paydown. The sales would close out an incredibly profitable and timely investment by the Company, which had acquired the large acreage via joint venture deals in 2011 and 2013 at the depths of the housing bust and then subsequently bought out its joint venture partners. At the time of the partner buyouts in 2016, the Company’s acquisition basis was just $68.4 million or $55K per estimated developable acre. 3 Following is a history of the Park Highlands land sales, which are expected to total $492.3 million upon the final closing: 1. The approximately 395 developable acres (454 gross acres) is under a sale contract executed March 10, 2024 and subsequently amended; currently, according to the contract, closings are expected to occur in December 2026 and December 2027 and the buyer has waived its contingencies. The anticipated closing dates may be changed in certain circumstances. 2. Equals (i) the Company’s share of the joint venture purchase prices plus (ii) the joint venture partner buyout prices. Excludes acquisition costs and fees, land development and carrying costs, and other costs incurred since acquisition. 3. Equals the sale price, net of seller concessions including those related to infrastructure costs which can vary significantly by land parcel. Excludes selling costs and fees, and Israeli Series C bond paydowns. Disposition Sale Sale Price Parcels Date Acres Price (3) Per Acre (3) Sales Closed: Park Highlands Village 3 May-17 101.62 17,415,876 171,382 Park Highlands Village 3 South Feb-18 25.52 2,506,563 98,220 Park Highlands Village 4 Jul-18 82.97 19,268,850 232,239 Park Highlands West Oct-18 15.27 3,500,000 229,208 Park Highlands Village 1 PH 1 & 2 Jun-21 192.74 54,079,093 280,581 Park Highlands Casino Site Nov-22 66.86 52,086,511 779,038 Park Highlands Village 1 PH 3 First Closing Feb-23 71.43 36,655,303 513,164 Park Highlands Village 1 PH 3 Second Closing Oct-23 114.73 49,609,906 432,406 Park Highlands Village 1 PH 4 Oct-24 122.13 62,117,226 508,616 Park Highlands Village 2 First Closing (1) Dec-24 184.66 91,055,227 493,084 Total - Sales Closed as of Dec. 5, 2024 977.93 388,294,555 397,056 Sales Under Contract: Park Highlands Village 2 Second Closing (1) Dec-26 113.83 52,290,546 459,361 Park Highlands Village 2 Third Closing (1) Dec-27 96.97 51,654,227 532,671 Total - Sales Under Contract 210.81 103,944,773 493,084 Total - Sales Closed & Under Contract 1,188.74 492,239,328 414,085 14 MARKET UPDATE 15 $10.63 Property Type Index Value Change in Commercial Property Values (Unlevered) Past 12 months From Recent Peak All Property 125.5 -3% -19% Core Sector 125.9 -3% -21% Apartment 152.3 2% -20% Industrial 213.7 -9% -16% Mall 85.3 5% -13% Office 71.6 -8% -37% Strip Retail 114.3 3% -13% Healthcare 123.6 -5% -18% Lodging 103.0 -4% -9% Manufactured Housing 278.5 -3% -14% Net Lease 94.3 -3% -19% Self-storage 246.8 -8% -21% US STOCK MARKET INDICES AS OF 9/30/24 Index 1 Year Since 12/31/19 (1) S&P 500 34.4% 78.4% Dow 26.3% 48.3% Russell 2000 24.9% 33.7% GREEN STREET CPPI3 1. Selected for measuring returns against pre-COVID levels. Percentages are cumulative since 12/31/19, not annualized. 2. Selected, for comparison purposes, as a relatively recent, multi-year average prior to the low-rate environment which began with the Great Recession of 2008. 3. Green Street Advisors, Commercial Property Price Index (CPPI), October 4, 2024. Green Street’s CPPI is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted. Features that differentiate this index are its timeliness, its emphasis on high-quality properties, and its ability to capture changes in the aggregate value of the commercial property sector. Green Street CPPI History, Past Seven Years(3) US TREASURY RATES RESET Date 1 Year 10 Years 30 Years Sept. 30, 2024 3.98 3.81 4.14 Sept. 30, 2023 5.47 4.57 4.71 Sept. 30, 2022 4.05 3.83 3.79 Sept. 30, 2021 0.09 1.52 2.08 Historical Avg. 2001-2007(2) 3.10 4.52 5.06 NAREIT Equity Index 29.5% 8.1% NAREIT Equity Office Index 51.1% -22.5% 16 Office market remains challenged, though conditions differ depending on market, location, asset quality, and other property-specific factors. Challenges include: Tenants continue to rethink their use of office space, as they navigate a “new normal” with hybrid work arrangements A “tenant market” in which tenants have the negotiating power to seek higher buildout allowances and rent concessions Cap and discount rates remain elevated, along with interest rates, at least relative to the low-rate environment from 2008 to 2022 Office investors need (i) transactions to provide price discovery and (ii) improved clarity and confidence in the sector’s outlook, financing conditions and the outcome of potential loan defaults. Prime offices continue to outperform non-prime offices, a “flight to quality”. The next tiers down would be expected to benefit as tenant demand trickles-down.1 Prime office vacancy rate was 15.5% in Q3 20241 Prime office had 49 million sq. ft. of positive net absorption from Q1 2020 to Q1 2024 (170 million sq. ft. negative for non-prime) 1 Prime vs. non-prime rent premiums increased to 84% in Q1 2024 from 60% in Q2 2018 1 Signs of a possible recovery emerged in the market in Q3 2024; though the path and duration of a continued recovery, if any, would remain to be seen 2 Net absorption was positive in Q3 2024, totaling 4.3 million sq. ft., an increase of 2.4.1 million sq. ft. in Q2 2024. 2 Average size of leases for at least 10,000 sq ft. increased for the second consecutive quarter to 29,875 sq. ft. 2 Sublease availability fell to 4.1% of total inventory in Q3 2024, down from 4.6% a year ago 2 Average asking rent ticked up $0.25 year-over-year to $36.23 per sq. ft. in Q3 2024 2 1. Prime offices as defined by CBRE, which includes subjectivity and local relativity. CBRE defines prime offices as best in class in terms of design and offerings, with an emphasis on occupant productivity and well-being. They are typically newly constructed or extensively renovated and amenitized. They are well-located in desirable areas and often near public transport or major thoroughfares to support shorter commutes, at least in urban settings. The CBRE Research and CBRE Economic Advisors dataset of highly desired prime office buildings represent approximately 8% of total U.S. office space by square footage and 2% by building count. Source: CBRE Research report titled “U.S. Office Market Recovery Continues”, published in October 2024. 2. CBRE report titled “U.S. Office Market Recovery Continues”, published for Q3 2024.
17 RECOVERY IN INTEREST RATES WILL DRIVE LENDERS BACK SOURCE: Bloomberg Short-term rates dropped from about 5.3% to 4.53% while the 10-Year Treasury dropped from 4.57 to 4.17% between September 30, 2023 and December 2024 Source: Bloomberg, Newmark Research Note: CMBS, Corporate and REIT bond data lagged one trading day 18 OPPORTUNITIES & GOALS 19 COMPANY’S CONSOLIDATED OFFICES HAVE THE OPPORTUNITY TO GROW OCCUPANCY & NET OPERATING INCOME2 Consolidated offices represent 34.3% of the consolidated real estate value Consolidated offices have an occupancy of only 66.1% as of September 30, 2024 Company will continue to explore strategies to grow occupancy and add value at each office, as well as optimize the office portfolio COMPANY’S RESIDENTIAL RENTAL HOME PLATFORM Company’s Advisor believes the SFR sector is still in an early stage, could potentially turn into the “new multifamily” sector, and continues to offer an attractive total return. Company’s investment target is moderately priced homes in less competitive sub-markets to be leased to middle-income tenants who are renters- by-necessity. This is expected to result in less competition and lower tenant turnover. Company has a Sub-Advisor who has pursued this same strategy and continuously built out an operating platform as far back as 2013. 110 WILLIAM RESTRUCTURING & BUILD-OUT FOR NEW 640,000 SF TENANT Company committed to contribute capital of up to $105.0 million to the restructured joint venture owning 110 William, of which $13.3 million remains as of September 30, 2024 Company expects to generate a mid-teens to high-teens IRR on its capital contributions1 Company anticipates the joint venture could explore a property sale, which could generate significant liquidity for the Company, once the property is stabilized and the pricing and timing in the property sales market is appropriate(1) Largest Value-Add Opportunit ies Right Now 1. There is no guarantee that the Company’s objectives will be met. 2. Pro forma analysis of only the consolidated offices, which excludes 110 William and 353 Sacramento, is considered meaningful and presented here because (i) 110 William leased occupancy is approximately 100% counting the 640,000 SF tenant whose lease is signed but future commencing and (ii) 353 Sacramento is currently expected to be lost to foreclosure at the loan’s initial maturity on December 1, 2024. 20 2025 GOALS & OBJECTIVES1 SELL PROPERTIES TO INCREASE THE COMPANY’S LIQUIDITY MAXIMIZE TOTAL RETURN ON THE PORTFOLIO 1 There is no guarantee that the Company’s objectives will be met. CONTINUE TO MONITOR MARKET CONDITIONS AND LOOK FOR MARKET IMPROVEMENTS WHICH COULD OFFER OPPORTUNITIES FOR THE COMPANY TO GENERATE THE LIQUIDITY THAT CAN BE PROVIDED TO STOCKHOLDERS WHO WANT IT
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