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 2, 2021
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: (424) 208-8100
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
Estimated Value Per Share
On December 2, 2021, the Company’s board of directors approved an estimated value per share of the Company’s common stock of $10.68 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, 2021. There have been no material changes between September 30, 2021 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, 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 investments in real estate properties and two of its unconsolidated joint venture investments in real estate properties was based on valuations performed by third-party valuation firms. The Advisor’s valuation of its other two unconsolidated joint venture investments was equal to its equity capital contributions of $33.2 million or $0.35 per share. The aforementioned third-party valuations represented appraisals for the Company’s consolidated investments in real estate properties and two of its unconsolidated joint ventures, except for the Company’s consolidated single-family rental home portfolio (“SFR portfolio”) consisting of 1,806 homes and which was valued at the total of individual home values generated by the third-party valuation firm’s proprietary computer 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 SFR 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. The Advisor performed valuations with respect to the Company’s real estate-related investments, two of its unconsolidated joint venture investments, cash, other assets, mortgage debt and other liabilities. The methodologies and assumptions used to determine the estimated value of the Company’s assets and the estimated value of the Company’s liabilities are described further below.
The Advisor used the valuations from the third-party valuation firms together with the Advisor’s estimated values 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 the Advisor’s estimated value of each of the Company’s other assets and the Company’s liabilities, (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 $10.68 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 agreed to accept the recommendation of the conflicts committee and approved $10.68 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 2, 2021, as well as the calculation of the Company’s prior estimated value per share as of December 4, 2020:
| December 2, 2021<br>Estimated Value per Share | December 4, 2020<br><br>Estimated Value per Share (1) | Change in Estimated Value per Share | ||||
|---|---|---|---|---|---|---|
| Real estate properties (2) | $ | 17.51 | $ | 17.44 | $ | 0.07 |
| Real estate equity securities | 1.02 | 0.92 | 0.10 | |||
| Cash | 1.46 | 0.89 | 0.57 | |||
| Investments in unconsolidated entities | 2.16 | 2.12 | 0.04 | |||
| Other assets | 0.50 | 0.28 | 0.22 | |||
| Mortgage debt (3) | (7.98) | (8.68) | 0.70 | |||
| Series A Debentures (4) | (2.09) | (1.62) | (0.47) | |||
| Series B Debentures (5) | (0.82) | (0.61) | (0.21) | |||
| Pacific Oak Capital Advisors participation fee potential liability | — | — | — | |||
| Merger-related liabilities (6) | — | (0.06) | 0.06 | |||
| Other liabilities | (0.52) | (0.50) | (0.02) | |||
| Noncontrolling Series A Preferred Stock (7) | (0.16) | (0.16) | — | |||
| Non-controlling interest (8) | (0.40) | (0.34) | (0.06) | |||
| Estimated value per share | $ | 10.68 | $ | 9.68 | $ | 1.00 |
| Estimated enterprise value premium | None assumed | None assumed | None assumed | |||
| Total estimated value per share | $ | 10.68 | $ | 9.68 | $ | 1.00 |
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(1) The December 4, 2020 estimated value per share was based upon the recommendation and valuation of the Advisor. The Company engaged Kroll, Colliers, and ClearCapital.com, Inc. to provide valuations of the Company’s real estate properties, investments in undeveloped land and two of its unconsolidated investments in real estate properties and the Advisor performed valuations of the Company’s two other unconsolidated investments, real estate-related investments, cash, other assets, mortgage debt and other liabilities. For more information relating to the December 4, 2020 estimated value per share and the assumptions and methodologies used by Kroll (f/k/a Duff & Phelps, LLC), Colliers, and ClearCapital.com, Inc. and the Advisor, see the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2020.
(2) The increase in the estimated value of real estate properties was primarily due to increases in property fair values, partially offset by declines from property dispositions.
(3) The decrease in mortgage debt was primarily due to repayments upon asset sales.
(4) Amount relates to Series A debentures issued in Israel on March 8, 2016 and March 4, 2021. The increase is primarily due to issuance of additional debentures and an increase in the quoted bond price on the Tel Aviv Stock Exchange, partially offset by a principal payment which was due March 1, 2021.
(5) Amount relates to Series B debentures issued in Israel on February 16, 2020. The increase is due to an increase in the quoted bond price on the Tel Aviv Stock Exchange.
(6) Represents the fees payable to the Company’s third-party financial advisors related to the merger (“Merger”) of Pacific Oak Strategic Opportunity REIT II (“POSOR II”) with a subsidiary of the Company and estimated property transfer tax liabilities, all incurred upon closing of the Merger on October 5, 2020.
(7) Represents the par value plus accrued unpaid dividends on the Series A cumulative convertible redeemable preferred stock issued by Pacific Oak Residential Trust, Inc. on November 6, 2019.
(8) The increase in non-controlling interests was primarily due to increases in consolidated entities property fair values.
The increase in the Company’s estimated value per share from the previous estimate was primarily due to the items noted below, which reflect the significant contributors to the increase in the estimated value per share from $9.68 to $10.68. The changes are not equal to the change in values of each real 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 | ||
|---|---|---|
| December 4, 2020 estimated value per share | $ | 9.68 |
| Changes to estimated value per share | ||
| Investments | ||
| Real estate | 1.41 | |
| Investments in unconsolidated entities | (0.21) | |
| Investments in equity securities | 0.21 | |
| Capital expenditures on real estate | (0.23) | |
| Total change related to investments | 1.18 | |
| Operating cash flows in excess of distributions declared (1) | 0.24 | |
| Foreign currency loss | (0.16) | |
| Property selling, acquisition and financing costs (2) | (0.05) | |
| Advisor disposition and acquisition fees (3) | (0.01) | |
| Mortgage debt | 0.04 | |
| Series A debentures and Series B debentures | (0.26) | |
| Other | 0.02 | |
| Total change in estimated value per share | $ | 1.00 |
| December 2, 2021 estimated value per share | $ | 10.68 |
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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) deducts 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, acquisition and financing costs include approximately (i) $2.8 million, or $0.03 per share, for financing costs including the issuance costs related to the Company’s Series A debentures issued in March 2021 and (ii) $2.3 million, or $0.02 per share, for acquisition and selling costs.
(3) Advisor fees were $1.2 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 for real estate properties that are not under contract to sell, 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 swap breakage fees that may be incurred upon the termination of certain of the Company’s swaps prior to expiration.
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 Firm
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, 110 William Street, and 353 Sacramento, but excluding the Company’s investments in undeveloped land and the single-family rental 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 single-family rental 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, 110 William Street and 353 Sacramento, but excluding the Company’s investments in undeveloped land and the single-family rental 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 six 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 single-family rental 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’ and Colliers’ control and the Company’s control.
For the single-family rental home valuations, 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 single-family rental home portfolio, approximately 80% of the individual homes were assigned the automated valuation model value and 20% were assigned the indexed value. 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. 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
The Company had 20 consolidated real estate properties (consisting of eight office properties, one office portfolio consisting of four office buildings, two apartment properties, a portfolio of 1,806 single-family rental homes, two hotel properties, one office/retail development property, two investments in 14 acres of undeveloped land, and three investments in undeveloped land with approximately 800 developable acres). The Company’s consolidated real estate properties had a total estimated value of $1,650.7 million. These properties had a total cost basis of $1,384.8 million as of September 30, 2021, which is the total of acquisition prices of $1,251.2 million, $14.6 million for the acquisition of minority interests in joint ventures, $105.7 million in capital expenditures, leasing commissions and tenant improvements since inception and $13.3 million of acquisition fees and expenses including foreclosure costs and certain costs related to the Merger. The Company’s consolidated real estate value compared to this cost basis represents an increase of approximately 19.2%.
The Company obtained appraisals for each of the consolidated real estate properties except for the single-family rental home portfolio which was valued as described above. The Company’s consolidated Appraised Properties had a total appraised value of $1,397.8 million, and the Company’s consolidated single-family rental home portfolio had a total estimated value of $252.9 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 single-family rental home portfolio, HouseCanary calculated the total of the estimated value of each individual home using its proprietary automated valuation models.
The following table summarizes the key assumptions that were used to value the consolidated Appraised Properties and single-family homes:
| Range in Values | Weighted-Average Basis | |
|---|---|---|
| Consolidated Appraised Properties (Excluding Undeveloped Land and Office/Retail Development Property) | ||
| Terminal capitalization rate | 4.00% to 7.75% | 6.19% |
| Discount rate | 6.00% to 9.75% | 7.31% |
| Net operating income compounded annual growth rate (1) | 2.07% to 25.62% | 6.54% |
| Undeveloped Land | ||
| Price per acre (2) | $358,000 to $973,000 | $372,000 |
| Office/Retail Development Property | ||
| Price per FAR (Floor area ratio) (3) | $625 to $800 | $800 |
| Single-Family Homes | ||
| Price per square foot | $18.33 to $232.86 | $101.31 |
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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 three investments in undeveloped land with approximately 800 developable acres located in North Las Vegas, Nevada. The weighted-average price per acre for these three investments in undeveloped land was approximately $358,000.
(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, 2021, 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). 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 | $ | 0.31 | $ | (0.28) | $ | 0.43 | $ | (0.38) |
| Discount rates | 0.20 | (0.20) | 0.33 | (0.31) |
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 | $ | (0.15) | $ | 0.15 |
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 | $ | (0.02) | $ | 0.02 |
The table below illustrates the impact on the estimated value per share if the price per square foot of the single-family rental 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 | $ | (0.13) | $ | 0.13 |
Investments in Unconsolidated Entities
As of September 30, 2021, the Company held four investments in unconsolidated entities including: 110 William Street, 353 Sacramento, Pacific Oak Opportunity Zone Fund I, and Pacific Oak Residential Trust II.
110 William Street is an office property containing 928,157 rentable square feet located in New York, New York and the Company holds a 60% interest in a joint venture that owns 110 William Street. The appraised value of 110 William Street as provided by Kroll was $460.7 million. The Advisor relied on the appraised value provided by Kroll along with the fair value of other assets and liabilities as determined by the Advisor, and then calculated the amount that the Company would receive in a hypothetical liquidation of the real estate at the appraised value and the other assets and liabilities at their fair values based on the profit participation thresholds contained in the joint venture agreement. The resulting amount was the fair value assigned to the Company’s 60% interest in this unconsolidated joint venture. As of September 30, 2021, the carrying value and estimated fair value of the Company’s investment in this unconsolidated joint venture were $0 and $84.5 million, respectively. The Company’s carrying value for this investment is $0 due to a $7.8 million distribution from the 110 William Street Joint Venture during the first quarter of 2019 and this distribution exceeded the book value for this investment.
Kroll relied on a 10-year discounted cash flow analyses 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%, 8.00% and 15.26%, respectively.
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 appraised value of 353 Sacramento as provided by Kroll was $252.5 million. The Advisor relied on the appraised value provided by Kroll along with the fair value of other assets and liabilities as determined by the Advisor, and then calculated the amount that the Company would receive in a hypothetical liquidation of the real estate at the appraised value and the other assets and liabilities at their fair values 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, 2021, the carrying value and estimated fair value of the Company’s investment in this unconsolidated joint venture were $50.8 million and $85.6 million, respectively.
Kroll relied on a 10-year discounted cash flow analyses for the final valuation of 353 Sacramento. The terminal capitalization rate, discount rate and CAGR used in the discounted cash flow model to arrive at the appraised value were 5.25%, 7.25% and 4.14%, 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 and 353 Sacramento. 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 and 353 Sacramento 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 | $ | 0.14 | $ | (0.12) | $ | 0.15 | $ | (0.13) |
| Discount rates | 0.08 | (0.08) | 0.13 | (0.12) |
The Company also holds 124 Class A Units of Pacific Oak Opportunity Zone Fund I, LLC and the units were valued by the Advisor at the purchase price since the units were acquired recently via several investments from June 2019 to June 2021, the fund’s properties are still under construction, and the Advisor does not believe there has been any material changes in the unit value since the Company’s purchases. As of September 30, 2021, the carrying value and estimated fair value of the Company’s investment in this unconsolidated entity were $27.6 million and $28.2 million, respectively, with the latter equal to $0.30 per share. If the per-unit price were adjusted by 5%, it would impact the estimated value per share value by $0.02.
The Company’s other investment in an unconsolidated entity was valued at the amount of equity capital contributed by the Company as of September 30, 2021. The carrying value and estimated fair value of the Company’s investment was $5.4 million and $5.0 million, respectfully, which is $0.05 per share. If the estimated fair value were adjusted by 5%, it would have no impact on the estimated value per share.
Real Estate Equity Securities
As of September 30, 2021, the Company owned investments in three real estate equity securities: 64,165,352 shares of common units of Keppel Pacific Oak US REIT, 6,915,089 shares of Franklin Street Properties Corp, and 613,085 shares of Plymouth Industrial REIT, Inc. The fair values of these real estate equity securities were 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 $96.4 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 $752.4 million and $751.1 million, respectively. The weighted-average discount rate applied to the future estimated debt payments, which have a weighted-average remaining term of 1.4 years, was approximately 3.80%. 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 | $ | (0.02) | $ | 0.02 | $ | (0.02) | $ | 0.02 |
Series A & B Debentures
The Company’s Series A & B debentures are publicly traded on the Tel-Aviv Stock Exchange. The estimated value of the Company’s Series A & B debentures is based on the quoted bond price as of September 30, 2021 on the Tel-Aviv Stock Exchange of 100.1% and 98.3% of face value (including accrued interest expense), respectively, and foreign currency exchange rates as of September 30, 2021. As of September 30, 2021, the fair value and GAAP carrying value of the Company’s Series A & B debentures were $274.3 million and $272.7 million, respectively.
Non-controlling Interests
The Company has an ownership interest in eight consolidated entities as of September 30, 2021. As the Company consolidates these joint ventures, 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, 2021 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, 2021. 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, Colliers and HouseCanary 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 announced on December 8, 2021. The Advisor is entitled to receive an incentive fee equal to (A) 15.0% of the Company’s net cash flows, whether from continuing operations, net sale proceeds or otherwise, 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, less (B) $36.3 million which is the grant date value of the restricted stock 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 Advisor estimated the fair value of this liability to be $0 as of the valuation date, and reflected this in its calculation of the Company’s estimated value per share.
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, 2021 customer account statements that will be mailed in January 2022. 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.
•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 2, 2021 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, 2021. As of September 30, 2021, there were 94,264,402 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. 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 for real estate properties that are not held for sale or under contract for sale, 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 2022.
Dividend Reinvestment Plan
In accordance with its dividend reinvestment plan, at such time as the Company announces an updated estimated value per share, participants in the dividend reinvestment plan will acquire shares of common stock under the plan at a price equal to the updated estimated value per share of the Company’s common stock. The updated estimated value per share of the Company’s common stock is $10.68 and commencing on the next purchase date, which the Company expects to be during the first quarter of 2021, participants will acquire shares under the dividend reinvestment plan at $10.68 per share.
If a participant wishes to terminate participation in the dividend reinvestment plan effective as of the next purchase date, participants must notify the Company in writing of such decision, and the Company must receive the notice at least four business days prior to the last business day prior to the next purchase date.
Notice of termination should be sent by facsimile to (833) 258-6305 or by mail to:
| Regular Mail<br><br><br><br>Pacific Oak Strategic Opportunity REIT, Inc.<br><br>c/o DST Systems, Inc.<br><br>PO Box 219183<br><br>Kansas City, MO 64121-9183 | Overnight Address<br><br><br><br>Pacific Oak Strategic Opportunity REIT, Inc.<br><br>c/o DST Systems, Inc.<br><br>430 W. 7th Street<br><br>Kansas City, MO 64105-1407 |
|---|
Share Redemption Program
In accordance with the Company’s share redemption program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program), the price at which the Company will redeem shares is 95% of the Company’s most recent estimated value per share as of the applicable redemption date. Upon the death, “qualifying disability” or “determination of incompetence” of a stockholder, the redemption price will continue to be equal to the Company’s most recent estimated value per share.
Generally, the Company redeems all shares in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” on the last business day of each month and redeems all other shares on the last business day of the quarter.
On December 2, 2021, the Company’s board of directors approved an estimated value per share of the Company’s common stock of $10.68. The redemption prices based on the estimated value per share of $10.68 will be effective for the December 2021 redemption date, which is December 31, 2021. Excluding redemption requests made upon a stockholder’s death, “qualifying disability” or “determination of incompetence,” the redemption price is $10.15 per share. For a stockholder’s shares to be eligible for redemption in a given month or to withdraw a redemption request, the Company must receive a written notice from the stockholder or from an authorized representative of the stockholder in good order and on a form approved by the Company at least five business days before the redemption date, or by December 23, 2021 in the case of the December 31, 2021 redemption date.
In addition, pursuant to the share redemption program, on December 7, 2021, the board of directors of the Company approved an additional $1.0 million of funds available for redemptions in connection with a stockholder's death, “qualifying disability”, or “determination of incompetence” which will carry forward until depleted.
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 |
|---|---|---|
| $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 2, 2021, 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, 2020 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 8, 2021 | 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 8, 2021 | /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 8, 2021 | /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 8, 2021 | /s/ HouseCanary, Inc. |
|---|---|
| HouseCanary, Inc. |
sordec2021navbrokerprese
PAC I F I C O AK S T R AT E G I C O P P O R T U N I T Y R E I T 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 8, 2021 Exhibit 99.4
2 FORWARD-LOOKING STATEMENTS I M P O R T A 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, 2020 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 29, 2021 (the “Annual Report”) and the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2021 (the “Quarterly Report”) filed with the SEC on November 15, 2021, 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 8, 2021. F O R W A R D L O O K I N G S T AT 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, 2021, and/or the Company’s and Pacific Oak Capital Advisors LLC’s (“the Advisor”) best estimates as of December 8, 2021, 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, 2020, 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 value per share calculated using information as of September 30, 2021. • The Company followed the Institute for Portfolio Alternatives Valuation Guidelines, which included third-party valuations for all of its consolidated properties and properties owned via two of its unconsolidated entities. The valuations represented appraisals for these properties, with the exception of the Company’s consolidated single-family rental home portfolio (“SFR portfolio”) of 1,806 homes which was valued at the total of the individual home values estimated by a third-party valuation firm. The appraisals were performed by Kroll, except for the undeveloped land which was appraised by Colliers. Valuation of the SFR portfolio was performed by HouseCanary. • 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 Company’s Advisor valued the two other investments in unconsolidated entities at $33.2 million or $0.35 per share3, as well as the Company’s real estate- related investments, cash, other assets, mortgage debt, and other 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 different 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 8, 2021. 2 The Company’s potential incentive fee payable to its current advisor, Pacific Oak Capital Advisors, is estimated to be $0 in the estimated share value announced on December 8, 2021. Pacific Oak Capital Advisors is entitled to receive an incentive fee equal to (A) 15.0% of the Company’s net cash flows, whether from continuing operations, net sale proceeds or otherwise, 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 Pacific Oak Strategic Opportunity REIT II, Inc. (“POSOR II”) in connection with the merger of POSOR II into a Company subsidiary (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, less (B) $36.3 million which is the grant date value of the restricted stock issued to the Company’s former advisor, KBS Capital Advisors, in connection with its termination effective October 31, 2019. 3 The two investments in unconsolidated entities which are referenced and which were valued by the Company’s Advisor are the investments in (i) Pacific Oak Opportunity Zone Fund I, LLC and (ii) Pacific Oak Residential Trust II, 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 a 7.0% per year cumulative, non-compounded return on invested capital2.
4 1 Based on data as of September 30, 2021. For further information, see the Company’s Current Report on Form 8-K filed with the SEC on December 8, 2021. 2 Based on data as of September 30, 2020, with the exception of adjustments to give effect to the Merger which closed on October 5, 2020 and Merger-related expenses incurred upon the closing. For further information, see the Company’s Current Report on Form 8-K filed with the SEC on December 10, 2020. 3 Includes restricted cash, rents and other receivables, deposits, prepaid expenses and other assets as applicable. 4 The Company’s potential incentive fee payable to Pacific Oak Capital Advisors was estimated to be $0 for the estimated share value announcements on December 8, 2021 and December 10, 2020. 5 Includes accounts payable, accrued liabilities, security deposits, contingent liabilities, prepaid rent and other liabilities. 6 Represents the par value plus accrued dividends on the Series A cumulative convertible redeemable preferred stock issued by the Company’s subsidiary, Pacific Oak Residential Trust, Inc. (“PORT”). 7 Pro forma adjustment calculated as (i) 3,934,519 shares redeemed for the specified time period, including the redemption of 584,267 shares originally granted to KBS Capital Advisors as summarized in Form 10-Q for the period ended September 30, 2021, times (ii) the $9.68 estimated share value announced on December 10, 2020. After adding the pro forma adjustment, the pro forma stockholder equity as of December 2021 provides a basis for a direct comparison to the stockholder equity as of December 2020 to show the change in stockholder equity value which resulted in the change in estimated share value. As of December 20211 As of December 20202 ASSETS: $2.135 Billion $2.126 Billion Real Estate Investments in Unconsolidated Entities Investments in Real Estate Equity Securities Cash and Cash Equivalents Other Assets3 $1.651 Billion (77%) $203.2 Million (10%) $ 96.4 Million (5%) $138.0 Million (6%) $ 46.8 Million (2%) $1.712 Billion (81%) $208.6 Million (10%) $ 90.6 Million (4%) $ 87.4 Million (4%) $ 27.5 Million (1%) LIABILITIES: $1.075 Billion $1.127 Billion Mortgage and Other Debt Advisor Incentive Fee4 Other Liabilities5 $1.027 Billion $ - $ 48.7 Million $1.071 Billion $ - $ 55.7 Million PORT Preferred Stock 6 Minority Interests in Consolidated Entities $ 15.4 Million $ 37.5 Million $ 15.2 Million $ 33.7 Million Stockholder Equity $1.007 Billion $950.1 Million Pro Forma Adjustment for Stockholder Redemptions, Oct. 1, 2020 to Sept. 30, 2021 7 $ 38.1 Million Pro Forma Stockholder Equity7 $1.045 Billion VALUATION1
5 1 Based on data as of September 30, 2021. For further information, see the Company’s Current Report on Form 8-K filed with the SEC on December 8, 2021. 2 Includes the related change in minority 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, 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. 4 Includes (i) selling, acquisition, and financing costs excluding sponsor fees of $0.05 per share and (ii) disposition and acquisition fees to the sponsor of $0.01 per share. On December 2, 2021, the Company’s Board approved an estimated value per share of $10.68. The following summarizes the change in estimated value per share from December 2020 to December 2021: Investments Real estate2 Investments in unconsolidated entities Investments in real estate equity securities Leasing costs & capital expenditures Investment Performance Operating cash flows in excess of distributions declared3 Foreign currency loss Property selling, acquisition, & financing costs4 Mortgage debt Series A & B debentures Advisor incentive fee potential liability Other changes, net Total Change Dec. 2021 estimated share value December 2020 estimated share value $ 9.68 1.41 (0.21) 0.21 (0.23) 1.18 0.24 (0.16) (0.06) 0.04 (0.26) - 0.02 1.00 $ 10.68 VALUATION1
6 The Company is providing this estimated value per share to assist broker dealers 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 8, 2021 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, 2021. 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
7 $0.44 $0.62 $0.98 $1.36 $1.73 $1.78 $1.81 $1.82 $1.82 $0.72 $1.47 $1.49 $1.49 $1.49 $2.89 $5.44 $5.83 $5.31 $5.86 $10.00 $11.27 $12.24 $13.44 $14.81 $11.50 $9.91 $10.63 $9.68 $10.68 $10.00 $11.71 $12.86 $14.42 $16.17 $16.84 $18.60 $19.76 $18.30 $19.85 Offering Price Mar-14 Dec-14 Dec-15 Dec-16 Dec-17 Nov-18 Dec-19 Dec-20 Dec-21 STOCKHOLDER PERFORMANCE Hypothet ica l Performance o f F i rs t and Last Investors at $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) Estimated Value Per Share Cumulative Stock Dividend Value Dec. 2017 & Nov. 2018 Special Dividends (Cash Portion) Cumulative Cash Dividends (Excluding Dec. 2017 & Nov. 2018 Special Dividends) ”Valuation Information” for a first cash investor assumes all distributions are received in cash (except for stock portion of special distributions) and no share redemptions for a hypothetical investor who invested on or before escrow break and consequently has received all distributions paid by the Company. “Cumulative distributions” for a first cash investor and a last cash investor assumes all distributions are received in cash (except for stock portion of special distributions) and no share redemptions for a hypothetical investor who invested on April 19, 2010, and November 14, 2012, respectively. The “offering price” of $10.00 reflects the maximum per share purchase price in the primary initial public offering. Estimated Value Per Share Cumulative Stock Dividend Value Dec. 2017 & Nov. 2018 Special Dividends (Cash Portion) Cumulative Cash Dividends (Excluding Dec. 2017 & Nov. 2018 Special Dividends) D istrib u tio n s $ 9 .8 7 D istrib u tio n s $ 9 .1 7
8 STOCKHOLDER PERFORMANCE ILLUSTRATION Since special dividends were declared on December 7, 2017 and November 12, 2018, a comparison of the estimated value per share over time is no longer a fair reflection of stockholder performance. The following illustration shows the performance of the first cash investor who bought 1 share, to focus on the performance of both the share and account value. Estimated Value Per Share Total Shares Total Share Value Cash Dividends Total Account Value Offering Price $10.00 1.0000 $10.00 $10.00 Estimated Value Per Share Increase $5.11 $5.11 $5.11 Cash Dividends to December 7, 2017 $2.43 $2.43 December 7, 2017 Before Special Dividend $15.11 1.0000 $15.11 $2.43 $17.54 December 2017 Special Dividend (1) Cash Dividend ($0.72) ($0.72) $0.72 $0.00 Stock Dividend Value (2) ($2.89) 0.2509 $0.00 $0.00 December 7, 2017 After Special Dividend $11.50 1.2509 $14.39 $3.15 $17.54 Estimated Value Per Share Increase $1.36 $1.71 $1.71 Cash Dividends to November 12, 2018 $0.05 $0.05 November 12, 2018 Special Dividend (1) Cash Dividend ($0.59) ($0.75) $0.75 $0.00 Stock Dividend Value (2) ($2.36) 0.2979 $0.00 $0.00 November 12, 2018 After Special Dividend (2) $9.91 1.5488 $15.35 $3.95 $19.30 Estimated Value Per Share Increase $0.72 $1.11 $1.11 Cash Dividends to December 17, 2019 $0.05 $0.05 December 17, 2019 After Special Dividend (2) $10.63 1.5488 $16.46 $4.00 $20.46 Estimated Value Per Share Decrease ($0.95) -$1.47 ($1.47) Cash Dividends to December 4, 2020 $0.01 $0.01 December 4, 2020 After Special Dividend (2) $9.68 1.5488 $14.99 $4.01 $19.00 Estimated Value Per Share Decrease $1.00 $1.55 $1.55 Cash Dividends to December 2, 2021 $0.00 $0.00 December 2, 2021 After Special Dividend (2) $10.68 1.5488 $16.54 $4.01 $20.55 1 Assumes the shareholder receives 20% of the special dividend in cash and 80% in stock. If a significant number of investors elected all stock, a cash electing investor would’ve received more than 20% of the special dividend in cash. 2 Assumes a stock dividend rate of 0.2509 and 0.2381 shares per share of common stock outstanding, for the December 7, 2017 and November 12, 2018 special dividends, respectively, for a cumulative of 0.5488 additional shares after compounding as of November 12, 2018.
9 PORTFOLIO OVERVIEW & HIGHLIGHTS
10 P O RT F O L I O O V E RV I EW Investment Type Dec. 2021 NAV Value1 % of Total6 Occupancy/ Hotel RevPAR 9/30/213 Occupancy/ Hotel RevPAR 9/30/193 Rent Collections Sept. 20217 Office $1,454,300,000 54.0% 72.4% 79.6% 95.8% Land $331,500,000 15.7% N/A N/A N/A SFR $257,851,000 11.1% 93.8% N/A 96.2% Apartment $203,550,000 9.2% 95.5% 94.9% 89.5% Hotel $149,800,000 5.4% $88.53 $99.54 N/A Equity Securities $96,403,000 4.6% N/A N/A N/A Total $2,493,404,000 Less: Minority Interests6 $(406,057,000) Total (Net of Minority Interests) $2,087,347,000 Portfolio Estimated Value1 …………………………………………… $2,087,347,000 Portfolio Cost Basis2 …………………………………………….…… $1,754,747,000 Rentable Square Feet …………………………………………………....… 7,700,219 Occupancy at 9/30/213……………………………...…………………………….81.2% Leverage, net4……………………………………………………………………....47% Weighted-Avg. Interest Rate at 9/30/21…….………………………………… 3.39% 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, 2021, which are reflected in the December 2021 NAV. Values are adjusted for the Company’s share of consolidated and unconsolidated joint entities. The total value would be $2,493,404,000 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, 2021, 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, SFR, 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 ending September 30, 2021 and 2019 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 2021 NAV. 5 Represents the weighted-average interest rate on consolidated mortgages and debentures as of September 30, 2021. 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. 7 Percentage of total rent charges for September 2021 which were collected as of October 2021. Investment Types1 By value in December 2021 NAV Geographic Allocation1 By value in December 2021 NAV
11 P R O P E RT I E S Property Name City, State Property Type/ No. of Buildings Date Acquired Size (SF) Occupancy % Ownership % CONSOLIDATED PROPERTIES: OFFICES Oakland City Center Oakland, CA Office 2 Buildings 10/5/2020 368,043 79.5% 100% The Marq Minneapolis, MN Office 1 Building 3/1/2018 522,656 81.1% 100% Crown Pointe Dunwoody, GA Office 2 Buildings 2/14/2017 508,297 71.3% 100% Georgia 400 Center Alpharetta, GA Office 3 Buildings 5/23/19 420,512 84.2% 100% Eight & Nine Corporate Centre Franklin, TN Office 2 Buildings 6/8/2018 313,916 82.3% 100% Richardson Portfolio (JV) Richardson, TX Office 4 Buildings & 14 Acres of Land 11/23/2011 569,980 70.1% 90% Lincoln Court Campbell, CA Office 1 Building 10/5/2020 123,529 83.7% 100% Park Centre Austin, TX Office 3 Buildings 3/28/2013 205,095 79.8% 100% Madison Square (JV) Phoenix, AZ Office 3 Buildings 10/5/2020 313,991 43.8% 90% Subtotal: 3,346,019 74.6% (1) 1 On October 18, 2021, the Company purchased the 10% minority interest held by the partner in the Richardson joint venture, for $4.0 million. Subsequent to the purchase, the Company owned 100% of the Richardson portfolio, though the entity which originally sold the portfolio is still entitled to a promote payment pursuant to the joint venture agreement. The promote payment will be determined and paid upon the joint venture liquidation, with the payment amount based on the investment return realized.
12 P R O P E RT I E S Property Name City, State Property Type/ No. of Buildings Date Acquired Size (SF) Occupancy % Ownership % CONSOLIDATED PROPERTIES: APARTMENTS & SINGLE-FAMILY RENTALS (SFR) 1180 Raymond Newark, NJ 317 Unit Apartment Building 8/20/2013 268,648 96.9% 100% Lofts at NoHo Commons (JV) N. Hollywood, CA 292 Unit Apartment Building 10/5/2020 224,755 94.0% 90% Pacific Oak Residential Trust 1,806 Single Family Homes Multiple 2,495,870 93.6% 96% Subtotal: 2,989,273 93.9% CONSOLIDATED PROPERTIES: HOTELS Springmaid Beach Resort (JV) Myrtle Beach, SC Resort/Hospitality 2 Buildings 10/5/2020 N/A N/A 90% Q&C Hotel (JV) New Orleans, LA Hospitality 2 Buildings 10/5/2020 N/A N/A 90% CONSOLIDATED PROPERTIES: LAND Tule Springs North Las Vegas, NV 800 Acres of Developable Land 12/30/2011, 12/10/2013 N/A N/A 100% Richardson Land (JV) Richardson, TX 14 Acres of Undeveloped Land 9/4/2014 N/A N/A 90% 210 West 31st Street (JV) New York, NY Office/Retail Development 10/5/2020 N/A N/A 80%
13 P R O P E RT I E S Property Name City, State Property Type/ No. of Buildings Date Acquired Size (SF) Occupancy % Ownership % UNCONSOLIDATED PROPERTIES 353 Sacramento (JV) San Francisco, CA Office 1 Building 7/11/2016 284,751 86.9% 55% 110 William Street (JV) New York, NY Office 1 Building 5/2/2014 928,157 60.0% 60% Pacific Oak Opportunity Zone Fund I N/A 2019 N/A N/A N/A Pacific Oak Residential Trust, II 117 Single Family Homes Multiple 152,019 96.7% 100% Subtotal: 1,364,927 69.7% Total: 7,700,219 81.2%
14 DISPOSIT IONS HISTORY (1) T H E C O M PAN Y H AS A T R AC K R E C O R D O F S T R O N G P E R F O R M AN C E O N D I S P O S I T I O N S T O D AT E , AS S E E N B E L O W : 1 Equals the sale price, net of seller concessions, without adjustment for joint venture partners’ share of share of consolidated joint ventures. Excludes selling costs and fees. 2 Equals the acquisition price (excluding acquisition costs and fees) plus capital expenditures and allocated cost for acquisitions of minority interests in joint ventures, without adjustment for joint venture partners’ share of consolidated joint ventures. 3 Reflects the sale of 11 properties to subsidiaries of Keppel-KBS US REIT, a then newly formed Singapore real estate investment trust (the “SREIT”) which was listed on the Singapore Stock Exchange. The SREIT has since been renamed Keppel Pacific Oak US REIT. For further information on the property sale, please see the Company’s Form 8-K filed with the SEC on November 9, 2017. PROPERTY ACQUISITION DATE DISPOSITION DATE SQ. FT. SALE PRICE(1) COST BASIS AT SALE(2) SALE PRICE VS COST BASIS Roseville Jun-11 Multiple 113,341 $ 7,989,000 $6,022,930 $1,966,070 Richardson (Office & Land) (JV) Multiple Multiple 151,937 27,848,197 13,252,350 14,595,846 Powers Ferry (6151 & 6201 Bldgs) Sep-12 Oct-13 246,475 18,540,128 11,856,283 6,683,845 Village Overlook Aug-10 Aug-14 34,830 1,485,000 2,536,236 (1,051,236) 1635 N. Cahuenga (JV) Aug-11 Mar-15 34,666 16,389,000 8,857,643 7,531,357 Academy Point Nov-10 Sep-15 92,099 3,500,000 4,599,826 (1,099,826) Park Highlands Multiple Multiple N/A 96,770,382 35,988,152 60,782,229 50 Congress Street Jul-13 May-17 179,872 78,784,521 55,181,314 23,603,206 SREIT (11 Properties) (3) Multiple Nov-17 3,103,313 795,385,695 670,876,898 124,508,797 Central Building Jul-13 Jul-18 193,968 67,351,484 39,873,064 27,478,420 Westpark Portfolio May-16 Nov-18 782,035 166,424,343 144,668,958 21,755,386 Bedford (JV) Jan-14 Jan-19 49,220 43,786,766 41,415,046 2,371,720 Burbank (JV) Dec-12 Jul-19 39,035 25,900,000 18,806,736 7,093,264 125 John Carpenter Sep-17 Nov-19 445,317 99,760,199 89,336,717 10,423,482 City Tower Mar-12 Jul-21 435,177 146,889,055 163,657,096 (16,768,041) TOTAL 5,901,285 $1,596,600,809 $1,306,493,457 $290,107,352
15 PACIF IC OAK RESIDENT IAL T RUST (PORT ) 1 SUMMARY & H IGHLIGHT S 1,806 Single-Family Rental (SFR) home portfolio 6.50% cash-on-cash yield2 30.7% home value appreciation3 1. Pacific Oak Residential Trust is a consolidated subsidiary of the Company focused on single-family rental homes, of which the Company owns a 96.1% economic interest as of September 30, 2021. The Company has also invested $5.0 million in Pacific Oak Residential Trust II (“PORT II”), an unconsolidated entity, as of September 30, 2021. Information herein relates only to PORT and excludes the single-family rental homes owned by PORT II. 2. Calculated as (i) net operating income minus interest expense, preferred stock dividends, and maintenance and turnover cap ex, divided by (ii) common stock basis. 3. Represents the increase in home values vs. cost basis, measured as of September 30, 2021. S E C T O R P E R F O R M A N C E I S S T R O N G S TA B L E & G R O W I N G D E M A N D F O R A F F O R D A B L E R E N TA L H O U S I N G • Home pr ices have cons is ten t ly inc reased over the las t 5 years • Lower-cos t home rent g rowth has ou tpaced h igher-cos t homes over f iv e and ten year hor izons • COVID-19 has d r iv en inc reased demand, part icu la r ly in to homes with in our s t ra tegy • Ins t i tu t iona l investor in teres t cont inues to inc rease • RENTER BY NECESSITY – 84% of ren ters v iew rent ing as more a ffordab le , and rea l househo ld income is f la t ov er las t 15 years • Midd le income earners represent the larges t poo l o f renta l marke t demand • Target cus tomers cont inue to have l im ited access to mortgage c red it , extend ing lease durat ion. D I S C I P L I N E D G R O W T H • Large addressab le market with l im ited ins t i tu t iona l compet it ion for a ffordab le SFR • Focus on inc reas ing sca le in core markets through fu l ly-occupied port fo l io acqu is it ions • In te rna l g rowth through rent inc reases and cos t sav ing in it ia t iv es • Purchas ing exis t ing and loca l- deve loper bu ild -to -ren t homes S T R O N G I N S T I T U T I O N A L M A N A G E M E N T • Management team has ov er 50 years o f commerc ia l and res ident ia l rea l es ta te inv es tment and opera t ions experience • Hybrid model combines fu l l- serv ice proper ty and asset management team with a se lec t group o f loca l partners , as appropr ia te
16 NOI BY MARKET DIVERSIFIED ACROSS ATTRACTIVE MARKETS AL IL FL GA OK TN TX Other 30.4% 6.9% 13.2% 12.6% 2.5% 7.7% 12.1% 14.7% PACIF IC OAK RESIDENT IAL T RUST (PORT ) 1 SUMMARY & H IGHLIGHT S 1. Pacific Oak Residential Trust is a consolidated subsidiary of the Company focused on single-family rental homes, of which the Company owns a 96.1% economic interest as of September 30, 2021. The Company has also invested $5.0 million in Pacific Oak Residential Trust II (“PORT II”), an unconsolidated entity, as of September 30, 2021. Information herein relates only to PORT and excludes the single-family rental homes owned by PORT II.
17 PACIF IC OAK OPPORT UNITY ZONE FUND I (1 ) SUMMARY & H IGHLIGHTS $150 million fund, with seed capital from the Company ($28.2 million) and Pacific Oak principals ($2.0 million). Underwriting is a top priority; deals must be investable even before considering the tax incentives from the 2017 Tax Cuts & Jobs Act. Wood Village near Portland, OR: • 173 apartments, $45.9 million construction cost • Construction completed in October 2021 • 81% leased, expecting 90+% by Dec. 31, 2021 Imperial Apartments, Phoenix, AZ: • 140 apartments, $15.4 million construction cost • Construction completed in Q2 2021 • 100% leased St. Ambrose Apartments, Phoenix, AZ: • 241 apartments, $29.1 million construction cost • Estimated completion in Q3 2022 1. The Company has invested $28.2 million to acquire 124 Class A units of Pacific Oak Opportunity Zone Fund I, an unconsolidated entity, as of September 30, 2021.
18 GENERAL MARKET UPDATE
19 $10.63 Property Type Index Value Change in Commercial Property Values Past 12 months From Pre-COVID All Property 146.4 20% 8% Core Sector 150.1 21% 11% Apartment 183.3 28% 18% Industrial 234.0 39% 41% Mall 83.9 9% -13% Office 111.4 4% -6% Strip Retail 119.3 25% 6% Healthcare 145.9 10% 2% Lodging 104.4 28% -4% Manufactured Housing 317.4 28% 31% Net Lease 115.2 25% 16% Self-storage 260.0 47% 40% Student Housing 168.7 22% 9% US STOCK MARKET SETS RECORDS1 Index 1 Year Since 12/31/192 S&P 500 28.1% 33.3% Dow 21.8% 18.6% Russell 2000 46.2% 32.1% NAREIT Equity Index 27.7% 9.0% GREEN STREET CPPI3 1. As of 9/30/21 2. Selected for measuring returns against pre-COVID levels 3. Green Street Advisors, Commercial Property Price Index (CPPI), October 6 ,2021. 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. P R I C E R E C O V E RY I S N O W A F U L L- O N B U L L MA R K E T 3 Green Street CPPI History3 US TREASURY RATES REMAIN HISTORICALLY LOW Date 1 Year 10 Years 30 Years Sept. 30, 2021 0.09 1.52 2.08 Sept. 30, 2020 0.12 0.69 1.46 Historical Avg. 2001-2007 3.10 4.52 5.06
20 U.S . ECONOMY U.S. GDP growth was 6.7% for 2021 Q2 and 2.0% preliminarily for 2021 Q3(1). The acceleration in growth in 2021 Q2, which resulted in overall output reaching 100% of its “normal” pre-COVID level according to the Jefferies’ U.S. Economic Activity Index on July 26, 2021(2), gave way to a deceleration in 2021 Q3. The deceleration was attributed to a resurgence in COVID-19 cases which led to some restrictions and reopening delays and also a deceleration in the personal consumption expenditures which was mostly due to lower spending on motor vehicles and parts, accommodations, and food services.(1) U.S. GDP growth is forecast to be 5.0% for 2021 Q4, resulting in growth of 5.5% for 2021. Growth is forecast to be 3.5% for 2022 and 2.9% for 2023(3). U.S. stock market, which, among other things, reflects investor expectations for the future, continued to set new records through late-November 2021. The S&P 500 closed at 4,307.54 on September 30, 2021 and 4,567.00 on November 30, 2021, representing increases of 33.3% and 41.4%, respectively, vs. the pre-pandemic 3,230.78 close on Dec. 31, 2019. 1. U.S. Bureau of Economic Analysis, October 28, 2021 2. CNBC, July 26, 2021 3. The Conference Board Economic Forecast for the US Economy, Nov. 10, 2021
21 OFFICE SECTOR The Company collected 95.8% of September 2021 rent charges. An insignificant number of office tenants have requested rent relief or deferral, and the Company has carefully managed the requests on a case-by-case basis, granting deferrals to only a small number of tenants to date. The Company is careful to reject the requests of tenants looking to take advantage of the situation. The Company remains optimistic about the long-term value in the office sector, despite the pandemic and expectations for some continued pressure on leasing, rent, and occupancy in the near-term. The Company’s reasons, amongst many, include: FU L L - O N L • U.S. economic forecasts are positive, interest rates remain historically low, and significant capital is on the sidelines. Green Street’s Commercial Property Price Index report from October 6, 2021 just stated, about commercial real estate in general, “We’ve gone from a recovery in property pricing to a full-on bull market”. (1) • U.S. is forecast to create 5 million office-using jobs in the next decade, up from the 4.6 million in the last decade.(2) • Office fundamentals currently continue to show signs of stabilization(3),(4) • Most tenants plan to return to the office according to surveys, despite the repeated delays and most recently a delay due to the surge in the highly contagious Delta variant in Q3 2021. The office market once expected a majority of workers to return to the office following Labor Day, but now that expectation has been pushed out to Q1 2022. A Cushman & Wakefield report recently predicted a widespread return-to-office in early 2022. According to David Smith, a co-author of the report, “Most businesses are hoping to get back as soon as possible. Based on surging tour activity, we know demand is there – so it’s not a matter of if office buildings will re-populate, but when. The leading data is pointing to Q1 2022.” (5) Office fundamentals in Q3 2021 continued to show signs of stabilization and trend positively. The office market has seen tenants begin to firm their longer-term utilization plans. Gross leasing increased by a further 7.8% and approached 40 million square feet for the first time since the pandemic began, secondary growth markets outperformed in terms of quarterly leasing relative to pre-pandemic levels, touring activity was up, average lease term increased, and sublease space available declined for the first since the pandemic began.(4) Despite the data and trends, net absorption remained negative and net effective rents remained under pressure. Vacancy finished at 17.4% as of September 30, 2021, vs. 15.5% as of Dec. 31, 2020 and 13.0% at Dec. 31, 2019 (pre-pandemic).(3) 1. Green Street Advisors, Commercial Property Price Index (CPPI), October 6 ,2021. 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. 2. Cushman & Wakefield’s Office Outlook published Feb. 18, 2021. 3. Cushman & Wakefield’s U.S. Office MarketBeat Reports published October 14, 2021, February 2021 and February 2020. 4. Jones Lang LaSalle United States Office Outlook published October 21, 2021. 5. Cushman & Wakefield report titled “Predicting the Return to the Office”, published September 2021.
22 SINGLE-FAMILY RENTAL (SFR) SECTOR The Company collected 96.2% of September 2021 rent charges. SFR sector continues to perform strongly, with the drivers of fundamentals matching the trends in demographics, economics, and migration that emerged from the pandemic and lifestyle change.(1) SFR sector performance has attracted the interest and capital of institutional investors, meaning the sector is no longer the primary domain of small “mom and pop” owner-operators, and suggesting that investors expect the sector to continue its strong performance. In announcing the JLL Income Property Trust’s $560 million equity investment in a portfolio of more than 4,000 SFR’s in August 2021, the CEO said “our research projects long-term expected rent and (net operating income) growth above all other institutional property type averages”.(3) SFR rent growth accelerated in 2021 and the 10.2% year-over-year growth in September 2021 was the highest in over 16 years.(2) Rent on lower priced rentals, which the Company’s SFR investments can be categorized as generally, increased 8.3% year-over-year in September 2021.(2) Lower priced rents began growing slower than higher priced rents in late-2020, after growing faster from 2014 to late-2020.(2) (1) CBRE report “Single-Family Rental Housing’s Phenomenal Year” published Dec. 23, 2020 (2) CoreLogic’s Single-Family Rent Index, as reported for September 2021 and December 2020 (3) CoStar report titled “JLL REIT Invests $560 Million in Single-Family Rentals, Showing Institutional Confidence in Fast-Growing Housing Type”, published August 11, 2021
23 APART MENT SECTOR The Company collected 89.5% of September 2021 rent charges. The Company’s collections and performance during the pandemic has had some challenges, as has the entire apartment sector, due to job losses, income declines, and eviction moratoriums imposed by the national and local governments. This resulted in tenants falling behind on their rent, but also, and importantly, little incentive for tenants to pay rent even if they could afford it. The Company’s apartments have experienced challenges due mostly to their locations. • 1180 Raymond, Newark, NJ: This 317-unit, 35-story building is in New Jersey’s largest city, an area that is largely urban and mass transit dependent and just 10 miles from Manhattan’s financial district. The property’s occupancy took a hit in Spring 2020 when people migrated out of urban locations and when the nearby universities closed and went online. The universities have reopened for the 2021-22 school year, though. • Lofts at NoHo Commons, North Hollywood, CA: This 292-unit complex offering studios, one bedroom, and live-work lofts has been impacted by the pandemic’s toll on the entertainment industry and Hollywood’s live/work/play atmosphere, as well as government eviction moratoria. Apartment values began rapidly improving in Q3 2021, driven by operating fundamentals, accommodative capital markets, and investor demand. The $435 million deal for Denver’s Palomino Park Apartments, with 1,184 units, which closed in June 2021 illustrates the state of investor demand. According to Pamela Koster, managing director of capital markets for JLL Capital Markets who worked on the deal, “the first surprise is how much interest there was for a deal of this size in Denver…this was the first deal where we really saw pricing run...”(1) The long-term outlook remains bright for this sector. Renters represent approximately one-third of the population, and they’re expected to return to apartments close to jobs, retail, and entertainment options once the pandemic subsides. Urban apartments are expected to once again appeal to renters who want the live/work/play atmosphere they offer.(2) 1. “How a Deal in Denver Illustrates the Ongoing Strength in Multifamily Investment”, published July 26, 2021 at https://www.wealthmanagement.com/multifamily/how-deal-denver- illustrates-ongoing-strength-multifamily-investment 2. John Burns Real Estate Consulting report “Apartment Rent Forecasts”, published Feb. 5, 2021
24 HOT EL SECTOR The Company had both of its hotels closed temporarily on March 31, 2020 due to the pandemic. Springmaid Beach Resort reopened on May 1, 2020 and Q&C Hotel reopened on Sept. 1, 2020. The Company’s hotel reopenings were encouraging, and the hotels ended up flourishing as pent-up travel demand was released in Q2 and Q3 2021. • Springmaid Beach Resort posted its highest-ever average daily rate (ADR) in July 2021 and pushed up the ADR throughout Q3 2021. Factoring in occupancy for Q3 2021 which approached the pre-pandemic level of Q3 2019, RevPAR for Q3 2021 was actually 42% higher than the pre-pandemic level of Q3 2019. • Q&C Hotel posted occupancy for Q3 2021 which exceeded the pre-pandemic level of Q3 2019, which helped RevPAR come within 10% of the pre-pandemic level of Q3 2019. Overall, the hotel sector rebound is expected to continue in 2022, though expectations have become tempered relative to earlier in the year and expectations remain for the rebound to be uneven and vary across the segments. Leisure demand is expected to continue strengthening and boost the performance of properties in resort and even remote locations. Business travel is expected to remain subdued, given the likelihood that corporate travel budgets will remain constrained and business travelers will take fewer but longer trips. Convention travel is expected to resume first in markets with warm weather and low operating costs, like Dallas, New Orleans, San Antonio, Las Vegas, and Orlando among others. Convention and group demand are likely to lag in their recovery because of the group and advance-booking nature of the segment.(1) 1. CBRE U.S. Lodging Forecast published July 7, 2021 and October 15, 2021.
25 RESIDENT IAL LAND The Company is amongst the largest residential land owners in Las Vegas via its Park Highlands investment, owning approximately 800 acres as of Sept. 30, 2021. Park Highlands continues to generate exceptional returns, with the last year benefitting from (i) homebuilder demand, (ii) the housing market’s performance even during the pandemic, and (iii) historical demographic trends. • Homebuilder demand for land, at a national level, is “hot or on fire”.1 • Las Vegas new home sales and prices have been strong throughout the pandemic, even though local employment took a relatively larger hit at least in the beginning of the pandemic.3 • Las Vegas resale home prices were up 20.5% year-over-year in September 2021 and set a new record, after climbing to new all-time highs practically every month during 2021. The median resale price has now jumped over $100,000 or 33% since January 2020.4 • Mortgage rates and the resale market’s supply are near record lows.4 1. John Burns Real Estate Consulting report “The Great American Land Rush Accelerates”, published Nov. 20, 2020 2. SalesTraq Monthly Report for Dec. 2020 3. U.S. Bureau of Labor Statistics 4. According to a report from trade association Las Vegas Realtors, as published in the Las Vegas Review-Journal on Oct. 6, 2021
26 VALUE ADD OPPORTUNITIES CONTINUE
27 CONTINUED PRICE INCREASES, IN NEARLY ALL COMMERCIAL REAL ESTATE SECTORS, ARE EXPECTED(1) Green Street Advisors recently issued a strong “buy now” as cap rates continue to decline.(1) Green Street Advisors says there is a perfect storm of incredibly low bond yields, high volumes of capital flowing into real estate private equity, and debt markets are open and offering near unprecedented levels. Green Street Advisors’ Commercial Property Price Index report from October 6, 2021 just stated, about commercial real estate in general, “We’ve gone from a recovery in property pricing to a full-on bull market”.(2) COMPANY’S OFFICE INVESTMENTS CAN INCREASE OCCUPANCY, INCOME, & VALUE: Office represents 54.0% of the portfolio’s total value(3) Leased occupancy is only 72.4% at September 30, 2021(4) Office sector fundamentals currently continue to show signs of stabilization Strategies to reposition or otherwise add value can also be explored COMPANY HAS A SUB-ADVISOR AND OPERATING PLATFORM FOR ADDITIONAL SINGLE-FAMILY RENTAL INVESTMENTS: Company’s Advisor believes the SFR sector is still in an early stage, offering opportunity for attractive income, total return upside, and consolidation within the sector. The SFR sector could potentially turn into the “new multifamily” sector. Company’s investment target is moderately priced homes in less competitive sub-markets which can be leased to middle-income tenants who are renters-by-necessity. This is expected to result in less competition and lower tenant turnover. Company’s Sub-Advisor has pursued this same strategy and built out its operating platform since 2013. COMPANY HAS LAND DEVELOPMENT OPPORTUNITIES AT RICHARDSON & PARK HIGHLANDS 1. Green Street Advisors report titled “Green Street Issues Strong ‘Buy Now’ Signals as Cap Rates Continue to Decline, published October 14, 2021, at https://www.greenstreet.com/insights/blog 2. Green Street Advisors, Commercial Property Price Index (CPPI), October 6 ,2021. 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. 3. See page 10. 4. Weighted-average for consolidated and unconsolidated offices.
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32 2022 GOALS & OBJECT IVES FINALIZE PLAN FOR SHAREHOLDER LIQUIDITY, WITH GOALS OF… Providing liquidity for the shareholders who want it Providing an investment vehicle for shareholders who want to remain invested in the Company with its strong historical performance, a large existing portfolio, and a unique investment strategy of opportunistic, total-return real estate. MAXIMIZE TOTAL RETURNS ON THE CURRENT PORTFOLIO VIA: Lease up of properties, to drive income and value growth Pursuit of value-add opportunities Land sales and development SELL PROPERTIES OPPORTUNISTICALLY, TO GENERATE LIQUIDITY AND FUNDS FOR REINVESTMENT TO BENEFIT A PERPETUAL-LIFE INVESTMENT VEHICLE Future investments may be primarily in SFR, offices, and real estate-related debt and securities Selective investment opportunities may also exist in apartments, self-storage, and value-add hotels
33 PACIFIC OAK LOS ANGELES, CA PACIFIC OAK COSTA MESA, CA 3200 Park Center Drive, Suite 800 Costa Mesa, CA 92626 11766 Wilshire Blvd., Suite 1670 Los Angeles, CA 90025 1-866-PAC-OAK7 INFO@PACIFICOAKCAPITAL.COM PacificOakCapitalMarkets.com // PacificOakCapitalAdvisors.com THANK YOU!