Resource Real Estate Opportunity REIT, Inc. - FORM 10-Q - May 15, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
Commission File Number 000-54369
Resource Real Estate Opportunity REIT, Inc.
(Exact name of registrant as specified in its charter)
Maryland
 
27-0331816
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
1845 Walnut Street, 18th Floor, Philadelphia, PA 19103
(Address of principal executive offices) (Zip code)
(215) 231-7050
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of May 6, 2015, there were 70,103,604 outstanding shares of common stock of Resource Real Estate Opportunity REIT, Inc.



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
INDEX TO ANNUAL REPORT
ON FORM 10-Q

 
 
PAGE
PART 1
FINANCIAL INFORMATION
 
 
 
 
  Item 1.
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Item 2.
 
 
 
  Item 3.
 
 
 
  Item 4.
 
 
 
PART II
 
 
 
 
 
  Item 2.
 
 
 
  Item 3.
 
 
 
  Item 6.
 
 
 







Forward-Looking Statements
Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements.  Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.  Actual results may differ materially from those contemplated by such forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  We undertake no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this report, except as may be required under applicable law.



PART 1.     FINANCIAL INFORMATION
ITEM 1.    FINANCIAL STATEMENTS
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED BALANCE SHEETS (in thousands)
 
March 31,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments:
 
 
 
Rental properties, net
$
831,032

 
$
775,254

Loans held for investment and preferred equity investments, net
4,989

 
4,985

Identified intangible assets, net
2,172

 
2,081

Assets held for sale - rental properties, net
—

 
36,764

 
838,193

 
819,084

 
 
 
 
Cash
135,034

 
140,129

Restricted cash
6,304

 
6,930

Due from related parties
729

 
1,148

Tenant receivables, net
274

 
527

Deposits
986

 
666

Accounts receivable - other
24,149

 
—

Prepaid expenses and other assets
1,079

 
2,302

Deferred financing costs, net
6,611

 
6,392

Goodwill
1,231

 
1,231

Total assets
$
1,014,590

 
$
978,409

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Mortgage notes payable
$
481,674

 
$
444,168

Credit facilities
35,500

 
45,586

Accounts payable
1,620

 
2,689

Accrued expenses and other liabilities
6,086

 
6,473

Accrued real estate taxes
3,816

 
5,689

Due to related parties
1,750

 
1,630

Tenant prepayments
1,177

 
1,383

Security deposits
2,307

 
2,437

Distribution payable
10,516

 
—

Total liabilities
544,446

 
510,055

 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock (par value $.01; 10,000,000 shares authorized, none issued)
—

 
—

Common stock (par value $.01; 1,000,000,000 shares authorized; 70,225,096 and 69,469,001 shares issued, respectively; and 69,852,090 and 69,254,165 shares outstanding, respectively)
699

 
693

Convertible stock (“promote shares”; par value $.01; 50,000 shares authorized, issued and outstanding)
1

 
1

Additional paid-in capital
619,671

 
614,024

Accumulated other comprehensive loss
(350
)
 
(266
)
Accumulated deficit
(158,178
)
 
(154,319
)
Total stockholders’ equity
461,843

 
460,133

Noncontrolling interests
8,301

 
8,221

Total equity
470,144

 
468,354

Total liabilities and stockholders’ equity
$
1,014,590

 
$
978,409


The accompanying notes are an integral part of these consolidated statements.
3

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
 
 
(Remeasured)
Revenues:
 
 
 
Rental income
$
27,571

 
$
20,669

Interest and dividend income
163

 
163

Total revenues
27,734

 
20,832

 
 
 
 
Expenses:
 

 
 

Rental operating
14,632

 
12,027

Acquisition costs
1,701

 
2,500

Management fees
3,461

 
2,109

General and administrative
4,050

 
2,294

Loss on disposal of assets
1,109

 
1,627

Depreciation and amortization expense
10,297

 
11,946

Total expenses
35,250

 
32,503

Loss before other expenses
(7,516
)
 
(11,671
)
 
 
 
 
Other (expense) income:
 
 
 
 Net gains on dispositions
29,175

 
—

Interest expense
(4,867
)

(2,387
)
Insurance proceeds in excess of cost basis
247


—

Income (loss) from continuing operations
17,039

 
(14,058
)
 
 
 
 
Discontinued operations:
 
 
 
Income from discontinued operations
—

 
2

Income from discontinued operations, net
—

 
2

Net income (loss)
17,039

 
(14,056
)
Net income attributable to noncontrolling interests
(11
)
 
(555
)
Net income (loss) attributable to stockholders
$
17,028

 
$
(14,611
)
 
 
 
 
Amounts attributable to stockholders
 
 
 
Income (loss) from continuing operations
$
17,028

 
$
(14,613
)
Discontinued operations
—

 
2

Net income (loss) attributable to stockholders
$
17,028

 
$
(14,611
)
 
 
 
 
 
 
 
 
Net income (loss)
$
17,039

 
$
(14,056
)
Other comprehensive income (loss):
 
 
 
Designated derivatives, fair value adjustments
(84
)
 
(58
)
Comprehensive income (loss)
16,955

 
(14,114
)
Comprehensive income attributable to noncontrolling interests
(11
)
 
(555
)
Total comprehensive income (loss) attributable to stockholders
$
16,944

 
$
(14,669
)
 
 
 
 
Weighted average common shares outstanding (1)
69,485

 
67,364

 
 
 
 
Basic and diluted income (loss) per common share (1):
 
 
 
Continuing operations
$
0.25

 
$
(0.22
)
Discontinued operations
—

 
—

Net income (loss)
$
0.25

 
$
(0.22
)
 
(1)    Excludes any dilution from the potential conversion of convertible stock, as the actual number of shares of common stock, if any, that will be issuable upon conversion of convertible stock is indeterminable at March 31, 2015.

The accompanying notes are an integral part of these consolidated statements.
4



RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2015
(in thousands)
(unaudited)

 
Common Stock
 
Convertible Stock
 
Additional
Paid-in Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated Deficit
 
Total
Stockholders’
Equity
 
Noncontrolling
interests
 
Total Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at
January 1, 2015
69,254

 
$
693

 
50

 
$
1

 
$
614,024

 
$
(266
)
 
$
(154,319
)
 
$
460,133

 
$
8,221

 
$
468,354

Common stock issued through distribution reinvestment plan
756

 
8

 
—

 
—

 
7,175

 
—

 
—

 
7,183

 
—

 
7,183

Distributions on common stock
—

 
—

 
—

 
—

 
—

 
—

 
(20,930
)
 
(20,930
)
 
—

 
(20,930
)
Share redemptions
(158
)
 
(2
)
 
—

 
—

 
(1,528
)
 
—

 
43

 
(1,487
)
 
—

 
(1,487
)
Other comprehensive loss
—

 
—

 
—

 
—

 
—

 
(84
)
 
—

 
(84
)
 
—

 
(84
)
Contributions of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
69

 
69

Net income
—

 
—

 
—

 
—

 
—

 
—

 
17,028

 
17,028

 
11

 
17,039

Balance at
March 31, 2015
69,852

 
$
699

 
50

 
$
1

 
$
619,671

 
$
(350
)
 
$
(158,178
)
 
$
461,843

 
$
8,301

 
$
470,144




The accompanying notes are an integral part of these consolidated statements.
5

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Three Months Ended
 
March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
(Remeasured)
Net income (loss)
$
17,039

 
$
(14,056
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 

 
 

Income from discontinued operations
—

 
(2
)
     Loss on disposal of assets
1,109

 
1,627

Net gains on dispositions
(29,175
)
 
—

Depreciation and amortization
10,297

 
11,946

Amortization of deferred financing costs
413

 
188

Amortization of fair value adjustment of debt
(190
)
 
(352
)
Accretion of discount and direct loan fees and costs
(13
)
 
—

Changes in operating assets and liabilities, net of acquisitions:
 

 
 

Restricted cash
626

 
2,214

Tenant receivables, net
252

 
213

Deposits
(753
)
 
(69
)
Prepaid expenses and other assets
1,034

 
114

Due to related parties, net
538

 
108

Accounts payable and accrued expenses
(3,279
)
 
1,179

Tenant prepayments
(149
)
 
(9
)
Security deposits
56

 
53

Net cash (used in) provided by operating activities of continuing operations
(2,195
)
 
3,154

Cash flows from investing activities:
 

 
 

Proceeds from disposal of properties, net of closing costs
41,911

 
—

Property acquisitions
(46,715
)
 
(70,164
)
Ownership acquisitions, net of cash received
—

 
(56,720
)
Capital expenditures
(7,709
)
 
(4,712
)
Principal payments received on loans
9

 
(22
)
Net cash used in investing activities of continuing operations
(12,504
)
 
(131,618
)
Cash flows from financing activities:
 

 
 

Redemptions of common stock
(1,487
)
 
(342
)
Payment of deferred financing costs
(403
)
 
(1,192
)
Increase in borrowings on mortgages
26,280

 
—

Principal payments on mortgages
(1,446
)
 
(445
)
Payments on credit facilities
(10,086
)
 
—

Distributions paid on common stock
(3,231
)
 
(1,989
)
Contributions of noncontrolling interests
69

 
—

Purchase of interest rate caps
(92
)
 
—

Syndication costs
—

 
3

Net cash provided by (used in) financing activities of continuing operations
9,604

 
(3,965
)
Net cash used in continuing operations
(5,095
)
 
(132,429
)
Cash flows from discontinued operations:
 
 
 
Net cash provided by operating activities
—

 
90

Net cash provided by discontinued operations
—

 
90

Net decrease in cash
(5,095
)
 
(132,339
)
Cash at beginning of period
140,129

 
270,323

Cash at end of period
$
135,034

 
$
137,984


The accompanying notes are an integral part of these consolidated statements.
6
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(unaudited)


NOTE 1 - NATURE OF BUSINESS AND OPERATIONS
Resource Real Estate Opportunity REIT, Inc. (the “Company”) was organized in Maryland on June 3, 2009 to purchase a diversified portfolio of discounted U.S. commercial real estate and real estate-related assets in order to generate gains to stockholders from the potential appreciation in the value of the assets and to generate current income for stockholders by distributing cash flow from the Company’s investments. Resource Real Estate Opportunity Advisor, LLC (the “Advisor”), an indirect wholly-owned subsidiary of Resource America, Inc. (“RAI”), a publicly traded company (NASDAQ: REXI) operating in the real estate, financial fund management and commercial finance sectors, manages the day-to-day operations of the Company. 
Through its private and public offerings, which concluded on December 13, 2013, the Company raised aggregate gross offering proceeds of $645.8 million from the issuance of 64,926,311 shares of common stock, including 276,056 shares purchased by the Advisor and 1,161,623 shares sold in the distribution reinvestment plan. During 2014, the Company sold 2,410,424 shares for $22.9 million pursuant to its distribution reinvestment plan. During the three months ended March 31, 2015, the Company additionally sold 756,095 shares for $7.2 million pursuant to its distribution reinvestment plan. The Company's distribution reinvestment plan offering is ongoing.
The Company has acquired, and intends to continue to acquire, real estate-related debt and equity that has been discounted due to the effects of economic events and high levels of leverage, as well as stabilized properties that may benefit from extensive renovations that may increase their long-term values.  The Company has a particular focus on acquiring and operating multifamily assets, and it has targeted, and intends to continue to target, this asset class while also acquiring interests in other types of commercial property assets consistent with its investment objectives.  The Company’s targeted portfolio consists of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate that was foreclosed upon and sold by financial institutions and (ii) multifamily rental properties to which the Company can add value with a capital infusion (referred to as “value add properties”).  However, the Company is not limited in the types of real estate assets in which it may invest and, accordingly, it may invest in other real estate-related assets either directly or together with a co-investor or joint venture partner.
The Company is organized and conducts its operations in a manner intended to allow it to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under Subchapter M of the Internal Revenue Code of 1986, as amended.  The Company also operates its business in a manner intended to maintain its exemption from registration under the Investment Company Act of 1940, as amended.
The consolidated financial statements and the information and tables contained in the notes to the consolidated financial statements are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, in the opinion of management, these interim financial statements include all the necessary adjustments to fairly present the results of the interim periods presented. The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results of operations for the three months ended March 31, 2015 may not necessarily be indicative of the results of operations for the full year ending December 31, 2015.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries as follows:
Subsidiary

Apartment Complex

Number
of Units

Property Location
RRE Opportunity Holdings, LLC

N/A

N/A

N/A
Resource Real Estate Opportunity OP, LP

N/A

N/A

N/A
RRE Charlemagne Holdings, LLC
 
N/A
 
N/A
 
N/A
RRE 107th Avenue Holdings, LLC (“107th Avenue”)

107th Avenue (c)

N/A

Omaha, NE

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


RRE Westhollow Holdings, LLC (“Westhollow”)

Arcadia (b)

N/A

Houston, TX
RRE Crestwood Holdings, LLC (“Crestwood”)

Town Park (a)(b)

N/A

Birmingham, AL
RRE Iroquois, LP (“Vista”)

Vista Apartment Homes

133

Philadelphia, PA
RRE Iroquois Holdings, LLC

N/A

N/A

N/A
RRE Campus Club Holdings, LLC (“Campus Club”)

Campus Club (b)

N/A

Tampa, FL
RRE Bristol Holdings, LLC (“Bristol”)

The Redford (c)

N/A

Houston, TX
RRE Cannery Holdings, LLC (“Cannery”)

Cannery Lofts

156

Dayton, OH
RRE Williamsburg Holdings, LLC (“Williamsburg”)

Williamsburg

976

Cincinnati, OH
WPL Holdings, LLC

N/A (d)

N/A

Cincinnati, OH
RRE Skyview Holdings, LLC ("Skyview")

Cityside Crossing (c)

N/A

Houston, TX
RRE Park Forest Holdings, LLC ("Park Forest")

Mosaic

216

Oklahoma City, OK
RRE Foxwood Holdings, LLC ("Foxwood")

The Reserve at Mt. Moriah

220

Memphis, TN
RRE Flagstone Holdings, LLC ("Flagstone")

The Alcove

292

Houston, TX
RRE Deerfield Holdings, LLC ("Deerfield")

Deerfield

166

Hermantown, MN
RRE Kenwick Canterbury Holdings, LLC ("Kenwick & Canterbury")

One Hundred Chevy Chase Apartments

244

Lexington, KY
RRE Armand Place Holdings, LLC ("Armand")

Ivy at Clear Creek

244

Houston, TX
RRE Autumn Wood Holdings, LLC ("Autumn Wood")

Retreat at Rocky Ridge

206

Hoover, AL
RRE Village Square Holdings, LLC ("Village Square")

Trailpoint at the Woodlands

271

Houston, TX
RRE Nob Hill Holdings, LLC ("Nob Hill")

Affinity at Winter Park

192

Winter Park, FL
RRE Brentdale Holdings, LLC ("Brentdale")

The Westside Apartments

412

Plano, TX
RRE Jefferson Point Holdings, LLC ("Jefferson Point")

Tech Center Square

208

Newport News, VA
RRE Centennial Holdings, LLC ("Centennial")

Verona Apartment Homes

276

Littleton, CO
RRE Pinnacle Holdings, LLC ("Pinnacle")

Skyview Apartment Homes

224

Westminster, CO
RRE Jasmine Holdings, LLC ("Jasmine")

The Nesbit Palisades

437

Alpharetta, GA
RRE River Oaks Holdings, LLC ("River Oaks")

Maxwell Townhomes

314

San Antonio, TX
RRE Nicollet Ridge Holdings, LLC ("Nicollet Ridge")

Meridian Pointe

339

Burnsville, MN
RRE Addison Place, LLC ("Addison Place")
 
The Estates at Johns Creek
 
403
 
Alpharetta, GA
PRIP Coursey, LLC ("Evergreen at Coursey Place")
 
Evergreen at Coursey Place (e)
 
352
 
Baton Rouge, LA
PRIP 3700, LLC ("Champion Farms")
 
N/A (e)
 
N/A
 
N/A
PRIP 10637, LLC ("Fieldstone")
 
N/A (e)
 
N/A
 
N/A
PRIP 500, LLC ("Pinehurst")
 
Pinehurst (e)
 
146
 
Kansas City, MO
PRIP 1102, LLC ("Pheasant Run")
 
Pheasant Run (e)
 
160
 
Lee's Summit, MO
PRIP 11128, LLC ("Retreat at Shawnee")
 
Retreat at Shawnee (e)
 
342
 
Shawnee, KS
PRIP 6700, LLC ("Hilltop Village")
 
N/A (b)
 
N/A
 
N/A
PRIP 3383, LLC ("Conifer Place")
 
N/A (e)
 
N/A
 
N/A
PRIP Stone Ridge, LLC ("Stone Ridge")
 
N/A (e)
 
N/A
 
N/A
PRIP Pines, LLC ("Pines of York")
 
Pines of York (e)
 
248
 
Yorktown, VA
PRIP 5060/6310, LLC ("Governor Park")
 
N/A (b)
 
N/A
 
N/A
RRE Chisholm Place Holdings LLC ("Chisholm Place")
 
Chisholm Place
 
142
 
Plano, TX
RRE Berkeley Run Holdings, LLC ("Berkley Run")
 
Perimeter Circle
 
194
 
Atlanta, GA
RRE Berkeley Trace Holdings LLC ("Berkley Trace")
 
Perimeter 5550
 
165
 
Atlanta, GA
RRE Merrywood LLC ("Merrywood")
 
Aston at Cinco Ranch
 
228
 
Katy, TX
RRE Sunset Ridge Holdings, LLC ("Sunset Ridge")
 
Sunset Ridge
 
324
 
San Antonio, TX
RRE Parkridge Place Holdings, LLC ("Parkridge Place")
 
Calloway at Las Colinas
 
536
 
Irving, TX
RRE Spring Hill Holdings, LLC ("Spring Hill")
 
N/A
 
N/A
 
N/A
RRE Woodmoor Holdings, LLC ("Woodmoor")
 
Woodmoor
 
208
 
Austin, TX

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


RRE Gilbert Holdings, LLC ("Springs at Gilbert")
 
Springs at Gilbert Meadows
 
459
 
Gilbert, AZ
RRE Bonita Glen Holdings, LLC ("Bonita")
 
N/A
 
N/A
 
N/A
 
N/A - Not Applicable
(a) - Discontinued operations
(b) - Sold prior to 2015
(c) - Sold in 2015
(d) - Subsidiary holds a portion of the Williamsburg parking lot    
(e) - Wholly-owned subsidiary of RRE Charlemagne Holdings, LLC
All intercompany accounts and transactions have been eliminated in consolidation.
The consolidated financial statements reflect the Company's accounts and the accounts of the Company's majority-owned and/or controlled subsidiaries. The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,” and accordingly consolidates entities that are variable interest entities (“VIEs”) where it has determined that it is the primary beneficiary of such entities. Once it has been determined that the Company holds a variable interest in a VIE, management performs a qualitative analysis to determine (i) if the Company has the power to direct the matters that most significantly impact the VIE's financial performance; and (ii) if the Company has the obligation to absorb the losses of the VIE that could potentially be significant to the VIE or the right to receive the benefits of the VIE that could potentially be significant to the VIE. If the Company's interest possesses both of these characteristics, the Company is deemed to be the primary beneficiary and would be required to consolidate the VIE. The Company will continually assess its involvement with VIEs and re-evaluate the requirement to consolidate them. Noncontrolling interests are presented and disclosed as a separate component of stockholders' equity (not as a liability or other item outside of stockholders' equity). Consolidated net income (loss) includes the noncontrolling interests’ share of income (loss). All changes in the Company’s ownership interest in a subsidiary are accounted for as stockholders' equity transactions if the Company retains its controlling financial interest in the subsidiary. The portions of these entities that the Company does not own are presented as noncontrolling interests as of the dates and for the periods presented in the consolidated financial statements. The consolidated financial statements include the accounts of the Company's majority-owned and/or controlled subsidiaries as follows:
Subsidiary
 
Ownership %
 
Apartment Complex
 
Number
of Units
 
Property Location
Springhurst Housing Partners, LLC
 
70.0%
 
Champion Farms
 
264
 
Louisville, KY
Glenwood Housing Partners I, LLC
 
83.0%
 
Fieldstone
 
266
 
Woodlawn, OH
FPA/PRIP Conifer, LLC
 
42.5%
 
Conifer Place
 
420
 
Norcross, GA
DT Stone Ridge, LLC
 
77.7%
 
Stone Ridge
 
188
 
Columbia, SC
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Assets Held for Sale

The Company presents the assets and liabilities of any rental properties which have been sold, or otherwise qualify as
held for sale, separately in the Consolidated Balance Sheets. Real estate assets held for sale are measured at the lower of carrying amount or fair value less cost to sell. Both the real estate and the corresponding liabilities are presented separately in the Consolidated Balance Sheets. Subsequent to classification of an asset as held for sale, no further depreciation is recorded. At December 31, 2014, the Company had three rental properties included in assets held for sale. At March 31, 2015, there were no rental properties included in assets held for sale.


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


Rental Properties
The Company records acquired rental properties at fair value. The Company considers the period of future benefit of an asset to determine its appropriate useful life and depreciates using the straight line method.  The Company anticipates the estimated useful lives of its assets by class as follows:
Buildings
27.5 years
Building improvements
3.0 to 27.5 years
Tenant improvements
Shorter of lease term or expected useful life
Impairment of Long Lived Assets
When circumstances indicate the carrying value of a property may not be recoverable, the Company reviews the asset for permanent impairment.  This review is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition.  The review also considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors.
An impairment loss will be recorded to the extent that the carrying value exceeds the estimated fair value of a property to be held and used.  For properties held for sale, the impairment loss would be the adjustment to fair value less the estimated cost to dispose of the asset.  There were no impairment charges during the three months ended March 31, 2015 and 2014.
Loans Held for Investment, Net
The Company records acquired performing loans held for investment at cost and reviews them for potential impairment at each balance sheet date.  The Company considers a loan to be impaired if one of two conditions exists.  The first condition is, if based on current information and events, management believes it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  The second condition is if the loan is deemed to be a troubled-debt restructuring (“TDR”) where a concession has been given to a borrower in financial difficulty.  A TDR may not have an associated specific loan loss allowance if the principal and interest amount is considered recoverable based on current market conditions, expected collateral performance and/or guarantees made by the borrowers.
The amount of impairment, if any, is measured by comparing the recorded amount of the loan to the present value of the expected cash flows or, as a practical expedient, the fair value of the collateral.  If a loan is deemed to be impaired, the Company records a reserve for loan losses through a charge to income for any shortfall.    
Interest income from performing loans held for investment is recognized based on the contractual terms of the loan agreement.  Fees related to any buy down of the interest rate are deferred as prepaid interest income and amortized over the term of the loan as an adjustment to interest income.  The initial investment made in a purchased performing loan includes the amount paid to the seller plus fees.  The initial investment frequently differs from the related loan’s principal amount at the date of the purchase.  The difference is recognized as an adjustment of the yield over the life of the loan.  Closing costs related to the purchase of a performing loan held for investment are amortized over the term of the loan and accreted as an adjustment to interest income.
The Company may acquire real estate loans at a discount due to the credit quality of such loans and the respective borrowers under such loans.  Revenues from these loans are recorded under the effective interest method.  Under this method, an effective interest rate (“EIR”) is applied to the cost basis of the real estate loan held for investment.  The EIR that is calculated when the loan held for investment is acquired remains constant and is the basis for subsequent impairment testing and income recognition.  However, if the amount and timing of future cash collections are not reasonably estimable, the Company accounts for the real estate receivable on the cost recovery method.  Under the cost recovery method of accounting, no income is recognized until the basis of the loan held for investment has been fully recovered.
Preferred Equity Investment
The Company records preferred equity investments at cost and evaluates the collectibility of both interest and principal at each balance sheet date. A preferred equity investment is considered impaired, when based on current information and events, it is probable that the Company will not be able to collect all amounts due according to existing contractual terms. When an investment is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to its

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


estimated fair value. Fees paid, net of expenses, are deferred and recognized as an adjustment to interest and dividend income earned over the term of the agreement.
Dividend income is recognized based on the contractual terms of the preferred equity agreement. 
Allocation of the Purchase Price of Acquired and Foreclosed Assets
The cost of rental properties acquired directly as fee interests and through foreclosing on a loan are allocated to net tangible and intangible assets based on their relative fair values.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and to identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships. Fair value estimates are based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  In addition, the Company may obtain independent appraisal reports. The information in the appraisal reports along with the aforementioned information available to the Company's management is used in allocating the purchase price. The independent appraisers have no involvement in management's allocation decisions other than providing market information.
In allocating the purchase price, management also includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up period.  Management also estimates costs to execute similar leases, including leasing commissions and legal and other related expenses, to the extent that such costs have not already been incurred in connection with a new lease origination as part of the transaction.
The Company records above-market and below-market in-place lease values for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.  The Company amortizes any capitalized above-market or below-market lease values as an increase or reduction to rental income over the remaining non-cancelable terms of the respective leases.    
The Company measures the aggregate value of other intangible assets acquired based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if it were vacant.  Management’s estimates of value are made using methods similar to those used by independent appraisers (e.g., discounted cash flow analysis).  Factors to be considered by management in its analysis include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions and costs to execute similar leases.
The total amount of other intangible assets acquired is further allocated to customer relationship intangible values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant.  Characteristics to be considered by management in allocating these values include the nature and extent of the Company’s existing relationships with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors.
The Company amortizes the value of in-place leases to expense over the average remaining term of the respective leases.  The value of customer relationship intangibles are amortized to expense over the initial term and any renewal periods in the respective leases, but in no event will the amortization periods for the intangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, the unamortized portion of the in-place lease value and customer relationship intangibles associated with that tenant would be charged to expense in that period.
The determination of the fair value of assets and liabilities acquired requires the use of significant assumptions with regard to current market rental rates, discount rates and other variables.  The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.  Initial purchase price allocations are subject to change until all information is finalized, which is generally within one year of the acquisition date.
Goodwill

The Company records the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed as goodwill. Goodwill is not amortized but is tested for impairment

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


at a level of reporting referred to as a reporting unit during the fourth quarter of each calendar year, or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Revenue Recognition
The Company recognizes minimum rent, including rental abatements and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related lease and includes amounts expected to be received in later years in deferred rents.  The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes and other recoverable costs in the period in which the related expenses are incurred.
The future minimum rental payments to be received from noncancelable operating leases are $46.9 million and $354,000 for the 12 month periods ending March 31, 2016 and 2017, respectively, and none thereafter. The future minimum rental payments to be received from noncancelable operating leases for commercial rental properties and antenna rentals are $224,000, $185,000, $96,000, $4,000 and $0 for the 12 month periods ending March 31, 2016, 2017, 2018, 2019 and thereafter, respectively.
Tenant Receivables
Tenant receivables are stated in the financial statements as amounts due from tenants net of an allowance for uncollectible receivables.  Payment terms vary and receivables outstanding longer than the payment terms are considered past due.  The Company determines its allowance by considering a number of factors, including the length of time receivables are past due, security deposits held, the Company’s previous loss history, the tenants’ current ability to pay their obligations to the Company, the condition of the general economy and the industry as a whole.  The Company writes off receivables when they become uncollectible.  At March 31, 2015 and December 31, 2014, there were allowances for uncollectible receivables of $31,785 and $57,300, respectively.
Income Taxes
To maintain its REIT qualification for U.S. federal income tax purposes, the Company is generally required to distribute at least 90% of its taxable net income (excluding net capital gains) to its stockholders as well as comply with other requirements, including certain asset, income and stock ownership tests.  As a REIT, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year.  If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it is subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which it fails its REIT qualification.  Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its stockholders.
The dividends-paid deduction of a REIT for qualifying dividends to its stockholders is computed using the Company’s taxable income as opposed to net income reported on the financial statements.  Generally, taxable income differs from net income reported on the financial statements because the determination of taxable income is based on tax provisions and not financial accounting principles.
The Company may elect to treat certain of its subsidiaries as taxable REIT subsidiaries (“TRS”). In general, the Company’s TRSs may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business.  A TRS is subject to U.S. federal, state and local corporate income taxes.  As of March 31, 2015 and December 31, 2014, the Company had no TRSs.
The Company evaluates the benefits from tax positions taken or expected to be taken in its tax return. Only the largest amount of benefits from tax positions that will more likely than not be sustainable upon examination are recognized by the Company.  The Company does not have any unrecognized tax benefits, nor interest and penalties, recorded in its consolidated financial statements and does not anticipate significant adjustments to the total amount of unrecognized tax benefits within the next 12 months.
The Company is subject to examination by the U.S. Internal Revenue Service and by the taxing authorities in other states in which the Company has significant business operations.  The Company is not currently undergoing any examinations by taxing authorities.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


Earnings Per Share
Basic earnings per share are computed by dividing income available to common stockholders by the weighted-average common shares outstanding during the period.  Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted to common stock.  None of the 50,000 shares of convertible stock (discussed in Note 15) are included in the diluted earnings per share calculations, as the actual number of shares of common stock that will be issuable upon conversion of the convertible stock, if any, is indeterminable at March 31, 2015 and would be anti-dilutive for the three months ended March 31, 2014 due to the net loss for the period. For the purposes of calculating earnings per share, all common shares and per common share information in the financial statements have been adjusted retroactively for the effect of seven 1.5% stock distributions, two 0.75% stock distributions, one 0.585% stock distribution and two 0.5% stock distributions issued to stockholders. Common stock shares issued on the Consolidated Balance Sheets have also been adjusted retroactively for the effect of these 12 distributions.    
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. The impact of the reclassifications made to prior period financial statements are not material and did not affect net income (loss).
Adoption of New Accounting Standards
Accounting Standards Issued But Not Yet Effective
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”)("ASU No. 2014-09"), “Revenue from Contracts with Customers”, which will replace most existing revenue recognition guidance in GAAP.  The core principle of ASU No. 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services.  ASU No. 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. FASB voted to propose a one year deferral to this guidance in April 2015. ASU No. 2014-09 will be effective for the Company beginning January 1, 2017, including interim periods in 2017, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this guidance on the Company’s consolidated financial position, results of operations and cash flows.
In August 2014, FASB issued ASU No. 2014-15, "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern." Under the new guidance, an entity should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of the new requirements is not expected to have a material impact on the Company's consolidated financial statements.
In January 2015, FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items" (“ASU No. 2015-01”). The amendments in ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendment will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU No. 2015-01 to have a significant impact on its consolidated financial statements.
In February 2015, FASB issued ASU 2015-02, "Consolidation (Topic 810): Amendments to the Consolidation Analysis" (“ASU 2015-02”), which makes certain changes to both the variable interest model and the voting model, including changes to (1) the identification of variable interests (fees paid to a decision maker or service provider), (2) the variable interest entity characteristics for a limited partnership or similar entity and (3) the primary beneficiary determination. ASU 2015-02 is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-02 to have a significant impact on its consolidated financial statements.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


In April 2015, FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, the Company will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance is effective for the Company beginning January 1, 2016. The Company is continuing to evaluate this guidance; however, it does not expect the adoption of ASU 2015-03 to have a significant impact on its consolidated financial statements.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
The following table presents supplemental cash flow information (in thousands):
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
 
 
 
Non-cash financing and investing activities:
 
 
 
Stock issued from the distribution reinvestment plan
$
7,183

 
$
4,712

Stock distributions issued
—

 
3,333

Cash distributions on common stock declared but not yet paid
10,516

 
2,248

Deferred financing costs and escrow deposits funded directly by mortgage note and revolving credit facility
229

 
—

 
 
 
 
Assets and liabilities assumed in acquisitions:
 
 
 
Other assets assumed
—

 
3,231

Debt assumed
12,862

 
133,882

Other liabilities assumed
99

 
2,646

Noncontrolling interests
—

 
18,901

Rental properties, net
12,961

 
152,198

 
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
4,573

 
$
1,778

NOTE 4 - RENTAL PROPERTIES, NET
The Company’s investments in rental properties consisted of the following (in thousands):
 
March 31,
2015
 
December 31,
2014
Land
$
136,185

 
$
122,137

Building and improvements
715,894

 
666,912

Furniture, fixtures and equipment
23,917

 
21,495

Construction in progress
2,030

 
3,005

 
878,026

 
813,549

Less: accumulated depreciation
(46,994
)
 
(38,295
)
 
$
831,032

 
$
775,254

Depreciation expense for the three months ended March 31, 2015 and March 31, 2014 was $8.8 million and $6.9 million, respectively.
During the three months ended December 31, 2014, the Company entered into agreements to sell three rental properties, The Alcove, Cityside Crossing and The Redford, with a total net book value of $36.8 million. The Company confirmed the intent and ability to sell all three properties in their present condition and all three properties qualified for held for sale accounting

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


treatment upon meeting all applicable criteria on or prior to December 31, 2014, at which time depreciation ceased. As such, the assets associated with these properties are separately classified and included as assets held for sale on the Company's consolidated balance sheets at December 31, 2014. However, the anticipated sale of these properties did not qualify for discontinued operations, and, therefore, the operations for all periods presented continue to be classified within continuing operations on the Company's consolidated statements of operations. The Company completed the sales of The Alcove, Cityside Crossing and The Redford on January 26, 2015, February 27, 2015 and March 2, 2015, respectively (see Note 8).
Loss on disposal of assets. During the three months ended March 31, 2015 and 2014, the Company had a $1.1 million and $1.6 million loss, respectively, on the disposal of assets due to the replacement of appliances at its rental properties in conjunction with unit upgrades.
NOTE 5 - LOANS HELD FOR INVESTMENT AND PREFERRED EQUITY INVESTMENT, NET
The following table presents the components of loans held for investment and preferred equity investment, net (in thousands):
 
March 31, 2015
 
December 31, 2014
Loans held for investment, net
$
1,522

 
$
1,523

Preferred equity investment, net
3,467

 
3,462

 
$
4,989

 
$
4,985

Loans held for investment:    
On March 15, 2011, the Company purchased, at a discount, two non-performing promissory notes (the "Oberlin Note” and the "Heatherwood Note”) and two performing promissory notes (the "Peterson Note” and the "Trail Ridge Note”), collectively referred to as the “Notes”, each of which was secured by a first priority mortgage on multifamily rental apartment communities. The contract purchase price for the Notes was a total of $3.1 million, excluding closing costs. Both the Oberlin and Peterson Notes were resolved in prior years.

On August 18, 2011, the Company was the successful bidder at a foreclosure sale of the property collateralizing the Heatherwood Note. Possession of the Heatherwood Apartments was obtained in February 2012 and the property was subsequently sold in April 2013. On April 18, 2013, in connection with the sale of the Heatherwood Apartments, the Company originated an $800,000 mortgage loan (the "Heatherwood Sale Note") to the purchaser of the Heatherwood Apartments on the same date.

The face value of the performing notes, the Heatherwood Sale Note and the Trail Ridge Note, as of both March 31, 2015 and December 31, 2014 was $1.9 million. The performing notes were purchased net of discounts and the unamortized accretable discounts totaled $254,000 and $261,000 and unamortized loan origination costs of $13,000 and $13,000 at March 31, 2015 and December 31, 2014, respectively.
Preferred equity investment:    
On November 12, 2014, the Company, through its wholly owned subsidiary, RRE Spring Hill Holdings, LLC, made a $3.5 million preferred equity investment in Spring Hill Investors Limited Partner, LLC (the “Investment Vehicle”) and became the Preferred Member. An unaffiliated limited liability company owns the common equity and acts as the managing member of the Investment Vehicle. The Company is obligated to fund up to an additional $1.5 million in increments of $150,000 as long as no triggering event has occurred. Examples of triggering events include loan defaults, failure of the managing member to make payments to Preferred Member, and unauthorized managing member interest transfers.

The Investment Vehicle is the sole member of Spring Hill Investors GP, LLC, which is the general partner of Spring Hill Investors, LP, the owner of a 606-unit multifamily residential apartment community commonly known as Spring Hill Apartments (“Spring Hill”) and located in Dallas, Texas. The Company’s preferred equity investment will be predominately utilized for capital improvements and deferred maintenance projects.


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


The Company is to be paid a dividend equal to 12% of the total amount invested, 7% of which must be paid monthly and the remaining accrues and is to be paid when the property cash flow allows for the repayment. The mandatory redemption date for the investment is the earliest of (i) April 2017, (ii) any earlier date that the mortgage loan secured by Spring Hill Apartments becomes due and payable as a result of the acceleration of the loan maturity date by the lender, or (iii) the date on which a defeasance is effected pursuant to the loan documents.

The preferred equity balance is presented net of nonrefundable origination fees and net of origination expenses, of $33,000, which are being amortized over the term of the investment as an adjustment to interest and dividend income.
The following table provides the aging of the Company’s loans held for investment and preferred equity investment(dollars in thousands):
 
 
March 31, 2015
 
December 31, 2014
 
 
Loans held for investment
 
Preferred equity investments
 
Total
 
Loans held for investment
 
Preferred equity investments
 
Total
Current
 
$
1,522

 
$
3,467

 
$
4,989

 
$
1,523

 
$
3,462

 
$
4,985

 
 
 
 
 
 
 
 
 
 
 
 
 
Delinquent:
 
 

 
 

 
 
 
 

 
 

 
 
30−89 days
 
—

 
—

 
—

 
—

 
—

 
—

90−180 days
 
—

 
—

 
—

 
—

 
—

 
—

Greater than 180 days
 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
1,522

 
$
3,467

 
$
4,989

 
$
1,523

 
$
3,462

 
$
4,985

The following table provides information about the credit quality of the Company’s loans held for investment, net and preferred equity investment (in thousands):
 
March 31,
2015
 
December 31,
2014
 
 
 
 
Performing
$
4,989

 
$
4,985

Nonperforming
—

 
—

Total
$
4,989

 
$
4,985

The following table provides information about the terms of the Company's loans held for investment (dollars in thousands):
 
 
Trail Ridge
Note
 
Heatherwood
Sale Note
Original face value
 
$
1,058

 
$
800

Current principal balance at March 31, 2015
 
991

 
772

Maturity date
 
10/28/2021

 
5/17/2016

Interest rate
 
7.5
%
 
4.0
%
Average monthly payment
 
$
8

 
$
4

The Company has individually evaluated each loan for impairment and determined that, as of March 31, 2015, the two loans held for investment and the preferred equity investment were not impaired. 
There were no charge-offs for the three months ended March 31, 2015 and 2014.


RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


NOTE 6 - ACQUISITIONS AND FORECLOSURES
Real Estate Investments
As of March 31, 2015, the Company owned interests in 36 properties. The Company estimated the fair values of certain of the acquired assets and liabilities based on preliminary valuations at the date of purchase. The Company has received final appraisals for all recent acquisitions and has completed the purchase price allocations.
The table below summarizes the Company's wholly-owned acquisitions during the three months ended March 31, 2015 and the respective fair values assigned (dollars in thousands):
Multifamily
Community Name
 
City and State
 
Date of
Acquisition
 
Purchase
Price (1)
 
 
Land

 
Building and
Improvements
 
Furniture, Fixture and Equipment
 
Intangible Assets
 
Other Assets
 
Other
Liabilities
 
Fair Valued
Assigned
Springs at Gilbert Meadows
 
Gilbert, AZ
 
3/19/2015
 
$
36,000

 
 
$
8,487

 
$
25,867

 
$
716

 
$
931

 
$
—

 
$
(152
)
 
$
35,849

Woodmoor
 
Austin, TX
 
2/26/2015
 
24,000

 
 
5,586

 
17,493

 
291

 
629

 
—

 
(12,961
)
 
11,038

 
(1)
Purchase price excludes closing costs and acquisition expenses.
Acquisitions
The Company acquired two properties during the three months ended March 31, 2015. In order to finalize the fair values of the acquired assets and liabilities, the Company obtained third-party appraisals. The Company has up to 12 months from the date of acquisition to finalize the valuation for each property. All valuations have been finalized as of March 31, 2015.

The table below summarizes the total revenues, net losses, and acquisition costs of the Company's acquisitions during the three months ended March 31, 2015 (dollars in thousands):

Multifamily Community
     Total Revenues
 
     Net Loss
 
     Acquisition Costs
Woodmoor
$
217

 
$
460

 
$
692

Springs at Gilbert Meadows
130

 
841

 
1,005

 
$
347

 
$
1,301

 
$
1,697


On March 23, 2015, the Company entered into an agreement to purchase a 295 unit multifamily community in Chula Vista, California for $49.1 million. The transaction is expected to be completed in June 2015.

NOTE 7 - MEASUREMENT PERIOD ADJUSTMENTS
The Company obtains third party appraisals for all of its acquisitions. If the appraisals are not finalized in the period in which the property or interest was acquired, a measurement period adjustment is recorded. For the The Estates at Johns Creek (formerly known as Addison Place) acquisition, which was completed in the three months ended March 31, 2014, the measurement period adjustment was finalized during the three months ended June 30, 2014. For the Paladin acquisition, which was completed in the three months ended March 31, 2014, the measurement period adjustments were finalized during the three months ended December 31, 2014.
Changes in the Paladin and The Estates at Johns Creek acquisitions are reflected in the tables below (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


Paladin
 
January 28, 2014
(As initially reported)
 
Measurement
period adjustment (1)
 
January 28, 2014
(As adjusted)
Land
$
44,292

 
$
(19,420
)
 
$
24,872

Building
149,155

 
18,364

 
167,519

Personal property
—

 
3,530

 
3,530

Intangible assets
5,861

 
(96
)
 
5,765

Other assets
3,231

 
(9
)
 
3,222

Goodwill
6,412

 
(5,148
)
 
1,264

Liabilities
(140,970
)
 
4,442

 
(136,528
)
Total net identifiable net assets
$
67,981

 
$
1,663

 
$
69,644

 
(1)
Remaining balance ($1.7 million) of measurement period adjustments adjusted the noncontrolling interest balance.      

The results of operations for the three months ended March 31, 2014 include an additional $867,000 of depreciation and amortization and net income attributable to noncontrolling interests has been decreased by $249,000 to reflect the adjustments that would have been included in the three months ended March 31, 2014, as originally issued, had the final appraisals for the Paladin properties been received and recorded during that period.
The Estates at Johns Creek
 
March 28, 2014
(As initially reported)
 
Measurement
period adjustment
 
March 28, 2014
(As adjusted)
Land
$
18,137

 
$
(11,784
)
 
$
6,353

Building
51,843

 
10,406

 
62,249

Personal property
—

 
509

 
509

Intangible assets
520

 
869

 
1,389

Total net identifiable net assets
$
70,500

 
$
—

 
$
70,500

The measurement period adjustment for The Estates at Johns Creek had no impact on depreciation and amortization for the three months ended March 31, 2014.
NOTE 8 - DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

2014 Dispositions    
The Company sold the Campus Club Apartments on June 16, 2014 for $10.5 million and recognized a gain of approximately $2.6 million on the disposition.
The Company sold its 49% interest in one of the Paladin joint ventures, Parkhill Partners I, LLC ("Hilltop Village"), on July 1, 2014 to its joint venture partner for no consideration and recognized a loss on the sale of $493,000.
The Company sold the Arcadia at Westheimer Apartments on September 19, 2014 for $18.1 million and recognized a gain of approximately $8.3 million on the disposition.     
2015 Dispositions
On January 26, 2015, the Company sold The Alcove Apartments, located in Houston, Texas, for $11.1 million and recognized a gain of $3.8 million on the disposition.
On January 29, 2015, the Company sold 107th Avenue Apartments, located in Omaha, Nebraska, for $250,000 and recognized a gain of $50,000 on the disposition.
On February 27, 2015, the Company sold the Redford Apartments, located in in Houston, Texas, for $33.0 million and recognized a gain of $15.3 million on the disposition.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


On March 2, 2015, the Company sold the Cityside Apartments, located in Houston, Texas, for $24.5 million and recognized a gain of $10.0 million on the disposition.
As of March 31, 2015, included in Accounts receivable - other on the consolidated balance sheet is $24.1 million from property dispositions, which is currently being held by a transfer agent to be used for future property purchases.
NOTE 9 - IDENTIFIED INTANGIBLE ASSETS, NET
Identified intangible assets, net, consist of rental and antennae leases. The value of the acquired in-place leases totaled $2.2 million and $2.1 million as of March 31, 2015 and December 31, 2014, respectively, net of accumulated amortization of $27.1 million and $26.5 million, respectively.  The weighted-average remaining life of the existing rental leases was six months and five months as of March 31, 2015 and December 31, 2014, respectively.  Expected amortization for the antennae leases at the Vista Apartment Homes is $16,000 annually through 2025.  Amortization of the rental and antennae leases for the three months ended March 31, 2015 and 2014 was $1.5 million and $5.0 million, respectively.
Expected amortization for the rental and antennae leases for the next five years ending March 31, and thereafter, is as follows (in thousands): 
2016
$
2,014

2017
16

2018
16

2019
16

2020
16

Thereafter
94

 
$
2,172
































RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


NOTE 10 - MORTGAGE NOTES PAYABLE
The following is a summary of the mortgage notes payable (in thousands, except percentages):
 
 
March 31, 2015
 
December 31, 2014
 
 
 
 
 
 
Collateral
 
Outstanding Borrowings
 
Fair Value Adjustment
 
Net Book Value
 
Net Book Value
 
Maturity
Date
 
Annual
Interest Rate
 
Average
Monthly Debt
Service
Vista Apartment Homes
 
$
15,839

 
$
—

 
$
15,839

 
$
15,900

 
1/1/2022
 
2.47%
(1)(5) 
$
63

Cannery Lofts
 
8,190

 
—

 
8,190

 
8,190

 
9/1/2020
 
3.48%
(1)(3) 
36

Deerfield
 
10,530

 
—

 
10,530

 
10,530

 
11/1/2020
 
4.66%
(2)(3) 
53

Ivy at Clear Creek
 
8,538

 
—

 
8,538

 
8,574

 
11/1/2023
 
2.59%
(1)(4) 
29

Trailpoint at the Woodlands
 
19,255

 
—

 
19,255

 
19,335

 
11/1/2023
 
2.59%
(1)(4) 
66

Verona Apartment Homes
 
22,731

 
—

 
22,731

 
22,843

 
1/1/2019
 
3.60%
(2)(5) 
106

Skyview Apartment Homes
 
18,355

 
—

 
18,355

 
18,446

 
1/1/2019
 
3.60%
(2)(5) 
85

The Nesbit Palisades
 
20,298

 
—

 
20,298

 
20,298

 
7/1/2024
 
2.13%
(1)(3) 
52

Maxwell Townhomes
 
14,028

 
—

 
14,028

 
14,089

 
1/1/2022
 
4.32%
(2)(5) 
71

Champion Farms
 
16,350

 
232

 
16,582

 
16,634

 
7/1/2016
 
6.14%
(2)(3) 
85

Fieldstone
 
15,686

 
—

 
15,686

 
15,804

 
6/26/2016
 
2.58%
(1)(4) 
73

Pinehurst
 
4,186

 
21

 
4,207

 
4,239

 
1/1/2016
 
5.58%
(2)(5) 
28

Pheasant Run
 
6,250

 
142

 
6,392

 
6,407

 
10/1/2017
 
5.95%
(2)(3) 
32

Retreat of Shawnee
 
13,230

 
225

 
13,455

 
13,522

 
2/1/2018
 
5.58%
(2)(5) 
78

Conifer Crossing
 
27,448

 
123

 
27,571

 
27,762

 
9/1/2015
 
5.96%
(2)(3) 
171

Coursey Place
 
27,862

 
141

 
28,003

 
28,117

 
8/1/2021
 
5.07%
(2)(5) 
154

Pines of York
 
15,459

 
(412
)
 
15,047

 
15,097

 
12/1/2021
 
4.46%
(2)(5) 
80

The Estates at Johns Creek
 
50,000

 
—

 
50,000

 
50,000

 
7/1/2020
 
3.38%
(2)(3) 
201

Chisholm Place
 
11,587

 
—

 
11,587

 
11,587

 
6/1/2024
 
2.57%
(1)(3) 
35

Perimeter 5550
 
14,141

 
—

 
14,141

 
14,211

 
7/1/2019
 
3.42%
(2)(5) 
64

Perimeter Circle
 
17,918

 
—

 
17,918

 
18,007

 
7/1/2019
 
3.42%
(2)(5) 
81

Aston at Cinco Ranch
 
24,063

 
—

 
24,063

 
24,162

 
10/1/2021
 
4.34%
(2)(5) 
120

Sunset Ridge 1
 
20,424

 
385

 
20,809

 
20,930

 
10/1/2020
 
4.58%
(2)(5) 
113

Sunset Ridge 2
 
3,041

 
52

 
3,093

 
3,109

 
10/1/2020
 
4.54%
(2)(5) 
16

Calloway at Las Colinas
 
36,214

 
—

 
36,214

 
36,375

 
12/1/2021
 
3.87%
(2)(5) 
171

Woodmoor
 
12,862

 
—

 
12,862

 
—

 
8/1/2019
 
3.64%
(2)(5) 
59

Springs at Gilbert Meadows
 
26,280

 
—

 
26,280

 
—

 
4/1/2025
 
2.06%
(1)(3) 
79

 
 
$
480,765

 
$
909

 
$
481,674

 
$
444,168

 
 
 
 
 
 

(1)
Variable rate based on one-month LIBOR of 0.1763% (as of March 31, 2015) plus a fixed margin.
(2)
Fixed rate.
(3) Monthly interest-only payment currently required.
(4) Monthly fixed principal plus interest payment required.
(5) Fixed monthly principal and interest payment required.
Loans assumed as part of the Woodmoor, Paladin, Sunset Ridge and Maxwell acquisitions were recorded at their fair value. The fair value adjustments are amortized over the remaining term of the loans and included in interest expense. For the three months ended March 31, 2015 and 2014, interest expense was reduced by $190,069 and $352,012, respectively, for the amortization of the fair value adjustments.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


All mortgage notes are collateralized by a first mortgage lien on the assets of the respective property as named in the table above. The amount outstanding on the mortgages may be prepaid in full during the entire term with a prepayment penalty on the majority of mortgages held.
As of March 31, 2015 and December 31, 2014, the Company had $6.3 million and $6.9 million of restricted cash related to escrow deposits held by mortgage lenders for real estate taxes, insurance and capital reserves.
Annual principal payments on the mortgage notes payable, excluding the amortization of the fair value adjustments, for each of the next five years ending March 31, and thereafter, are as follows (in thousands):
2016
 
$
37,333

2017
 
37,850

2018
 
26,233

2019
 
45,496

2020
 
47,513

Thereafter
 
286,340

 
 
$
480,765

The mortgage notes payable are recourse only with respect to the properties that secure the notes, subject to certain limited standard exceptions, as defined in each mortgage note. The Company has guaranteed the mortgage notes by executing a guarantee with respect to the properties.  These exceptions are referred to as “carveouts.”  In general, carveouts relate to damages suffered by the lender for a borrower’s failure to pay rents, insurance or condemnation proceeds to lender, failure to pay water, sewer and other public assessments or charges, failure to pay environmental compliance costs or to deliver books and records, in each case as required in the loan documents.  The exceptions also require the Company to guarantee payment of audit costs, lender’s enforcement of its rights under the loan documents and payment of the loan if the borrower voluntarily files for bankruptcy or seeks reorganization, or if a related party of the borrower does so with respect to the subsidiary. The Company has also guaranteed the completion and payment of costs of completion of no less than $7.0 million of renovations to The Estates at Johns Creek by July 1, 2018.
For the Fieldstone mortgage, beginning with the calendar quarter ended December 31, 2014, the property must maintain a certain level of debt service coverage. The Company was in compliance with all debt covenants for the Fieldstone mortgage at March 31, 2015.
NOTE 11 - CREDIT FACILITIES
The following is a summary of the credit facilities (in thousands, except percentages):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Interest Rate for the
 
 
Balance
Outstanding at
 
Current
Availability at
 
Balance
Outstanding at
 
Maturity
Date
 
Interest Rate Basis (1)
 
Current
Interest Rate
 
Three months ended March 31,
Lender
 
March 31, 2015
 
December 31, 2014
 
 
 
 
2015
 
2014
Bank of America
 
$
—

 
$
24,364

 
10,086

 
5/23/2017
 
LIBOR plus 3%
 
3.18
%
 
3.17
%
 
3.12
%
US Bank
 
23,000

 
—

 
23,000

 
12/27/2017
 
LIBOR plus 1.95%
 
2.13
%
 
2.11
%
 
2.14
%
PNC Bank
 
12,500

 
—

 
12,500

 
12/20/2018
 
LIBOR plus 2%
 
2.18
%
 
2.17
%
 
2.16
%
 
 
$
35,500

 
$
24,364

 
$
45,586

 
 
 
 
 
 
 
 
 
 

(1)
Variable rate based on one-month LIBOR of 0.1763% (as of March 31, 2015).
On December 2, 2011, the Company, through its operating partnership, entered into a secured revolving credit facility (the “Bank of America Credit Facility”) with Bank of America, N.A. (“Bank of America”).  On May 23, 2013 the Company

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


amended the Bank of America Credit Facility to increase the amount it may borrow under the Bank of America Credit Facility from $25.0 million to $50.0 million (the “Facility Amount”). Draws under the Bank of America Credit Facility are secured by certain of the Company's properties with an aggregate value of $51.8 million and are guaranteed by the Company.  
      The Bank of America Credit Facility, as amended, matures on May 23, 2017, and may be extended to May 23, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Bank of America Credit Facility.  The Company is required to make monthly interest-only payments.  The Company also may prepay the Bank of America Credit Facility in whole or in part at any time without premium or penalty.
The operating partnership's obligations with respect to the Bank of America Credit Facility are guaranteed by the Company, pursuant to the terms of a guaranty dated as of December 2, 2011, or the Guaranty.  The Bank of America Credit Facility and the Guaranty contain restrictive covenants for maintaining a certain tangible net worth and a certain level of liquid assets, and for restricting the securing of additional debt as follows:
•
the Company must maintain a minimum tangible net worth equal to at least (i) 200% of the outstanding principal amount of the Bank of America Credit Facility and (ii) $20.0 million;
•
the Company must also maintain unencumbered liquid assets with a market value of not less than the greater of (i) $5.0 million or (ii) 20% of the outstanding principal amount of the Bank of America Credit Facility; and
•
the Company may not incur any additional secured or unsecured debt without Bank of America's prior written consent and approval, which consent and approval is not to be unreasonably withheld.
The Company was in compliance with all such covenants at March 31, 2015.  
On December 20, 2013, the Company, through a wholly-owned subsidiary, entered into a secured credit facility, ("Jefferson Point Credit Facility") with PNC Bank, National Association for $15 million.  Draws under the Jefferson Point Credit Facility are secured by the assets of Tech Center Square Apartments (formerly known as the Jefferson Point Apartments). The Company provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance.) The Company paid certain closing costs in connection with the Jefferson Point Credit Facility, including loan fees totaling $75,000.
The Jefferson Point Credit Facility includes both a debt service coverage covenant and a tangible net worth covenant. In November 2014, the Company amended the Jefferson Point Credit Facility. In accordance with the amendment, the debt service coverage covenant is only required to be complied with as of December 31, 2015 and periods thereafter. The Company was in compliance with all covenants at March 31, 2015.
On December 27, 2013, the Company, through a wholly-owned subsidiary, entered into a secured credit facility ("Brentdale Credit Facility") with U.S. Bank National Association for $29.7 million.  Draws under the Brentdale Credit Facility are secured by the assets of The Westside Apartments (formerly known as the Brentdale Apartments). The Company provided a $6.5 million repayment guarantee. The Brentdale Credit Facility matures on December 27, 2017, and may be extended to December 27, 2019 subject to satisfaction of certain conditions and payment of an extension fee equal to 0.25% of the amount committed under the Brentdale Credit Facility. The Company paid certain closing costs in connection with the Brentdale Credit Facility, including loan fees totaling $222,000.
The Brentdale Credit Facility includes a net worth covenant, a liquidity and leverage covenant and a property debt service coverage covenant. The Company was in compliance with all covenants at March 31, 2015.
Annual principal payments on the credit facilities for each of the next five years ending March 31 and thereafter are as follows (in thousands):
    

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


2016
$
—

2017
449

2018
23,323

2019
11,728

2020
—

Thereafter
—


$
35,500

NOTE 12 - DEFERRED FINANCING COSTS
Deferred financing costs incurred to obtain financing are amortized over the term of the related debt.  During the three months ended March 31, 2015 and March 31, 2014, $413,000 and $188,000, respectively, of amortization of deferred financing costs was included in interest expense. Accumulated amortization as of March 31, 2015 and December 31, 2014 was $1.9 million and $1.5 million, respectively.  Estimated amortization of the existing deferred financing costs for the next five years ending March 31, and thereafter, is as follows (in thousands):
2016
$
1,550

2017
1,411

2018
1,123

2019
879

2020
636

Thereafter
1,012

 
$
6,611

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in each component of accumulated other comprehensive loss for the three months ended March 31, 2015 (in thousands):
 
Net unrealized loss
on derivatives
January 1, 2015
$
(266
)
Unrealized loss on designated derivative
(84
)
March 31, 2015
$
(350
)

NOTE 14 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In the ordinary course of its business operations, the Company has ongoing relationships with several related parties. 
Relationship with RAI
Substantially all of the receivables from related parties represents escrow funds held by RAI for self insurance. The Company's properties participate in insurance pools with other properties directly and indirectly managed by RAI for both property insurance and general liability. RAI holds the escrow funds related to the insurance pool on its books. The insurance pool covers losses up to $2.5 million for property losses and up to the first $25,000 per incident for general liability losses. Catastrophic insurance would cover property losses in excess of the insurance pool up to $85.0 million. Therefore, unforeseen or catastrophic losses in excess of the Company's insured limits could have a material adverse effect on the Company's financial condition and operating results.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


Relationship with the Advisor
In September 2009, the Company entered into an advisory agreement (the “Advisory Agreement”) pursuant to which the Advisor provides the Company with investment management, administrative and related services.  The Advisory Agreement was amended in January 2010 and further amended in January 2011 and March 2015.  The Advisory Agreement has a one-year term and renews for an unlimited number of successive one-year terms upon the approval of the conflicts committee of the Company's board of directors.  The Company renewed the Advisory Agreement for another year on September 15, 2014. Under the Advisory Agreement, the Advisor receives fees and is reimbursed for its expenses as set forth below:
Acquisition fees. The Company pays the Advisor an acquisition fee of 2.0% of the cost of investments acquired on behalf of the Company, plus any capital expenditure reserves allocated, or the amount funded by the Company to acquire loans, including acquisition expenses and any debt attributable to such investments. 
Asset management fees. The Company pays the Advisor a monthly asset management fee equal to one-twelfth of 1.0% of the higher of the cost or the independently appraised value of each asset, without deduction for depreciation, bad debts or other non-cash reserves.  The asset management fee is based only on the portion of the costs or value attributable to the Company’s investment in an asset if the Company does not own all or a majority of an asset and does not manage or control the asset.  
Disposition fees. The Advisor earns a disposition fee in connection with the sale of a property equal to the lesser of one-half of the aggregate brokerage commission paid, or if none is paid, 2.75% of the contract sales price.
Debt financing fees. The Advisor earns a debt financing fee equal to 0.5% of the amount available under any debt financing obtained for which it provided substantial services.
Expense reimbursements. The Company also pays directly or reimburses the Advisor for all of the expenses paid or incurred by the Advisor or its affiliates on behalf of the Company or in connection with the services provided to the Company in relation to its public offering, including its ongoing distribution reinvestment plan offering.  This includes all organization and offering costs of up to 2.5% of gross offering proceeds.
Reimbursements also include expenses the Advisor incurs in connection with providing services to the Company, including the Company’s allocable share of costs for Advisor personnel and overhead, out of pocket expenses incurred in connection with the selection and acquisition of properties or other real estate related debt investments, whether or not the Company ultimately acquires the investment.  However, the Company will not reimburse the Advisor or its affiliates for employee costs in connection with services for which the Advisor earns acquisition or disposition fees.
Relationship with Resource Real Estate Opportunity Manager
Resource Real Estate Opportunity Manager, LLC (the “Manager”), an affiliate of the Advisor, manages the Company's real estate properties and real estate-related debt investments and coordinates the leasing of, and manages construction activities related to, some of the Company’s real estate properties pursuant to the terms of the management agreement with the Manager.
Property management fees. The Manager earns 4.5% of the gross receipts from our properties, provided that for properties that are less than 75% occupied, the manager receives a minimum fee for the first 12 months of ownership, for performing certain property management and leasing activities. 
Construction management fees. The Manager earns a construction management fee of 5.0% of actual aggregate costs to construct improvements, or to repair, rehab or reconstruct a property.
Debt servicing fees. The Manager earns a debt servicing fee of 2.75% on payments received from loans held by the Company for investment.  
Expense reimbursement. During the ordinary course of business, the Manager or other affiliates of RAI may pay certain shared operating expenses on behalf of the Company. 
Relationship with Other Related Parties
The Company has also made payment for legal services to the law firm of Ledgewood P.C. (“Ledgewood”).  Until 1996, the Chairman of RAI was of counsel to Ledgewood.  In connection with the termination of his affiliation with Ledgewood and its

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


redemption of his interest, the Chairman continues to receive certain payments from Ledgewood.  Until March 2006, a current executive of RAI was the managing member of Ledgewood.  This executive remained of counsel to Ledgewood through June 2007, at which time he became an Executive Vice President of RAI.  In connection with his separation, this executive was entitled to receive payments from Ledgewood through 2013. 
The Company utilizes the services of a printing company, Graphic Images, LLC (“Graphic Images”), whose principal owner is the father of RAI’s Chief Financial Officer.  
The amounts payable and the fees earned/expenses paid to such related parties are summarized in the following tables (in thousands):
 
March 31,
2015
 
December 31,
2014
Receivables from related parties:
 
 
 
RAI and affiliates
$
729

 
$
1,148

 
 
 
 
Payables to related parties:
 
 
 
Advisor:
 
 
 
Operating expense reimbursements
$
713

 
$
327

 
 
 
 
Resource Real Estate Opportunity Manager, LLC:
 
 
 
Property management fees
381

 
436

Operating expense reimbursements
648

 
743

 
 
 
 
  Other
8

 
124

 
$
1,750

 
$
1,630

 
Three Months Ended
 
March 31,
 
2015
 
2014
Fees earned / expenses paid to related parties:
 
 
 
Advisor:
 
 
 
Acquisition fees (1)
$
1,482

 
$
2,723

Asset management fees (2)
$
2,247

 
$
1,250

Disposition fees (3)
$
761

 
$
—

Debt financing fees (4)
$
196

 
$
—

Overhead allocation (5)
$
888

 
$
351

 
 
 
 
Resource Real Estate Opportunity Manager LLC:
 
 
 
Property management fees (2)
$
1,208

 
$
696

Construction management fees (6)
$
1,107

 
$
229

Debt servicing fees (2)
$
5

 
$
—

 
 
 
 
Other:
 
 
 
Ledgewood
$
61

 
$
30

Graphic Images
$
3

 
$
33


(1)    Included in Acquisition costs on the consolidated statements of operations and comprehensive loss.
(2)    Included in Management fees on the consolidated statements of operations and comprehensive loss.
(3)    Included in Net gain on dispositions on the consolidated statements of operations and comprehensive loss.
(4)    Included in Deferred financing costs, net on the consolidated balance sheets.
(5)    Included in General and administrative costs on the consolidated statements of operations and comprehensive loss.
(6)    Included in Rental Properties, net on the consolidated balance sheets.

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)



NOTE 15 - EQUITY
Preferred Stock
The Company’s charter authorizes the Company to issue 10.0 million shares of its $0.01 par value preferred stock.  As of March 31, 2015 and December 31, 2014, no shares of preferred stock were issued and outstanding.
Common Stock
As of March 31, 2015, the Company had issued an aggregate of 70,225,096 shares, of its $0.01 par value common stock as follows (dollars in thousands):
 
 
Shares Issued
 
Gross Proceeds
Shares issued through private offering

1,263,727


$
12,582

Shares issued through primary public offering (1)

62,485,461


622,077

Shares issued through stock distributions

2,132,266


—

Shares issued through distribution reinvestment plan

4,328,142


41,117

Shares issued in conjunction with the Advisor's initial investment,
net of 4,500 share conversion

15,500


155

    Total
 
70,225,096

 
$
675,931

Shares redeemed
 
(373,006
)
 
 
Total shares outstanding as of March 31, 2015
 
69,852,090

 
 
 
(1)    Includes 276,056 shares issued to the Advisor.
Convertible Stock
As of March 31, 2015 and December 31, 2014, the Company had 50,000 shares of $0.01 par value convertible stock outstanding of which the Advisor and affiliated persons own 49,063 shares and outside investors own 937 shares.  The convertible stock will convert into shares of the Company’s common stock upon the occurrence of (a) the Company having paid distributions to common stockholders that in the aggregate equal 100% of the price at which the Company originally sold the shares plus an amount sufficient to produce a 10% cumulative, non-compounded annual return on the shares at that price; or (b) if the Company lists its common stock on a national securities exchange and, on the 31st trading day after listing, the Company’s value based on the average trading price of its common stock since the listing, plus prior distributions, combine to meet the same 10% return threshold.
Each of these two events is a “Triggering Event.”  Upon a Triggering Event, the Company's convertible stock will, unless its advisory agreement has been terminated or not renewed on account of a material breach by its Advisor, generally be converted into a number of shares of common stock equal to 1/50,000 of the quotient of:
•
(A) the lesser of
◦
(i) 25% of the amount, if any, by which
▪
(1) the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then outstanding shares of its common stock exceeds
▪
(2) the sum of the aggregate issue price of those outstanding shares plus a 10% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, or
◦
(ii) 15% of the amount, if any, by which
▪
(1) the value of the Company as of the date of the event triggering the conversion plus the total distributions paid to its stockholders through such date on the then outstanding shares of its common stock exceeds

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


▪
(2) the sum of the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares as of the date of the event triggering the conversion, divided by
•
(B) the value of the Company divided by the number of outstanding shares of common stock, in each case, as of the date of the event triggering the conversion.      
Redemption of Securities
During the three months ended March 31, 2015, the Company redeemed 158,170 of its common shares. The Company will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12 month period immediately prior to the effective date of redemption. The Company's board of directors will determine at least quarterly whether it has sufficient excess cash to repurchase shares. Generally, the cash available for redemptions will be limited to proceeds from the Company's distribution reinvestment plan plus, if the Company has positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year. All redemption requests tendered were honored during the three months ended March 31, 2015.
The Company's Board of Directors, in its sole discretion, may suspend, terminate or amend the Company's share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in the Company's best interest. The Company's board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund the Company's share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon a stockholder's death, qualifying disability or confinement to a long-term care facility.
Distributions
For the three months ended March 31, 2015, the Company paid aggregate distributions of $10.4 million, including $3.2 million of distributions paid in cash and $7.2 million of distributions reinvested in shares of common stock through the Company's distribution reinvestment plan, as follows (in thousands):
Record Date
 
Per Common
Share
 
Distribution Date
 
Distributions
Invested in
Shares of
Common Stock
 
Aggregate
Cash
Distribution
 
Total
Aggregate
Distribution
January 29, 2015
 
$
0.05

 
January 30, 2015
 
$
2,391

 
$
1,070

 
$
3,461

February 26, 2015
 
0.05

 
February 27, 2015
 
2,392

 
1,081

 
3,473

March 30, 2015
 
0.05

 
March 31, 2015
 
2,400

 
1,080

 
3,480

 
 
 
 
 
 
$
7,183

 
$
3,231

 
$
10,414

On March 24, 2015, the Company's Board of Directors authorized cash distributions of $0.05 per common share to stockholders of record as of the close of business on April 29, 2015, May 28, 2015 and June 29, 2015 to be paid on April 30, 2015, May 29, 2015 and June 30, 2015, respectively. All three distributions, aggregating $10.5 million, are included in the consolidated balance sheets in Distributions payable at March 31, 2015.
Since its formation, the Company's Board of Directors has declared a total of seven quarterly stock distributions of 0.015 shares each, two quarterly stock distributions of 0.0075 shares each, one quarterly stock distribution of 0.00585 shares each, and two quarterly stock distributions of 0.005 shares each of its common stock outstanding. In connection with these stock distributions, the Company had increased its accumulated deficit by $21.3 million as of March 31, 2015.
NOTE 16 - FAIR VALUE MEASURES AND DISCLOSURES
In analyzing the fair value of its investments accounted for on a fair value basis, the Company follows the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company determines fair value based on quoted prices when available or, if quoted prices are not available, through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. The fair value of cash, tenant receivables and accounts

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


payable, approximate their carrying value due to their short nature.  The hierarchy followed defines three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date. 
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability.
Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the assumptions that market participants would use in the pricing of the asset or liability and are consequently not based on market activity, but rather through particular valuation techniques.
The determination of where an asset or liability falls in the hierarchy requires significant judgment.  The Company evaluates its hierarchy disclosures each quarter; depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter.  However, the Company expects that changes in classifications between levels will be rare.
Rental properties obtained through a foreclosed note are measured at fair value on a non-recurring basis.  The fair value of rental properties is usually estimated based on information obtained from a number of sources, including information obtained about each property as a result of pre-acquisition due diligence, marketing and leasing activities.  The Company allocates the purchase price of properties to acquired tangible assets, consisting of land, buildings, fixtures and improvements, and identified intangible lease assets and liabilities, consisting of the value of above-market and below-market leases, as applicable, the value of in-place leases and the value of tenant relationships, based in each case on their fair values.
Derivatives (interest rate caps) which are reported at fair value in the consolidated balance sheets are valued by a third-party pricing agent using an income approach with models that use, as their primary inputs, readily observable market parameters. This valuation process considers factors including interest rate yield curves, time value, credit and volatility factors. (Level 2)
The following table presents information about the Company's assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2015
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$
—

 
$
122

 
$
—

 
$
122

 
$
—

 
$
122

 
$
—

 
$
122

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Interest rate caps
$
—

 
$
114

 
$
—

 
$
114

 
$
—

 
$
114

 
$
—

 
$
114

The carrying and fair values of the Company’s loans held for investment, net, mortgage note payable and revolving credit facilities were as follows (in thousands):
 
March 31, 2015
 
December 31, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Loans held for investment and preferred equity investments, net
$
4,989

 
$
5,190

 
$
4,985

 
$
4,985

 
 
 
 
 
 
 
 
Mortgage notes payable
$
(481,674
)
 
$
(486,009
)
 
$
(444,168
)
 
$
(450,269
)
 
 
 
 
 
 
 
 
Credit facilities
$
(35,500
)
 
$
(35,500
)
 
$
(45,586
)
 
$
(45,586
)

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


The fair value of the loans held for investment and preferred equity investments, net, was estimated using rates available to the Company for debt with similar terms and remaining maturities. (Level 3)
The fair value of the mortgage notes payable was estimated using rates available to the Company for debt with similar terms and remaining maturities. (Level 3)
The fair values of the two credit facilities equal the carrying amounts because the interest rate of each of the credit facilities is variable. (Level 3)
NOTE 17 - DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
As a condition to certain of the Company’s financing facilities, from time to time the Company may be required to enter into certain derivative transactions as may be required by the lender. These transactions would generally be in line with the Company’s own risk management objectives and also served to protect the lender.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company entered into a total of six interest rate caps that were designated as cash flow hedges during 2013, 2014 and 2015. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2015 and the year end December 31, 2014, such derivatives were used to hedge the variable cash flows, indexed to USD-LIBOR, associated with existing variable-rate loan agreements. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2015, the Company did not record any hedge ineffectiveness in earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
As of March 31, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (dollars in thousands):
Interest Rate Derivative
 
Number of Instruments
 
Notional
Amount
 
Maturity Dates
Interest Rate Caps
 
6
 
$
102,013

 
January 1, 2018 to April 1, 2019

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in prepaid expenses and other assets on the Balance Sheet as of March 31, 2015 and December 31, 2014 (in thousands):

RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MARCH 31, 2015
(unaudited)


Asset Derivatives
 
Liability Derivatives
March 31, 2015
 
December 31, 2014
 
March 31, 2015
 
December 31, 2014
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
 
Balance Sheet
 
Fair Value
Interest rate caps
 
$
122

 
Interest rate caps
 
$
114

 
—

 
$
—

 
—

 
$
—


NOTE 18 - OPERATING EXPENSE LIMITATION
Under its charter, the Company must limit its total operating expenses to the lesser of 2% of its average invested assets or 25% of its net income for the four most recently completed fiscal quarters, unless the conflicts committee of the Company’s board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors.  Operating expenses for the four quarters ended March 31, 2015 were in compliance with the charter imposed limitation.
NOTE 19 - SUBSEQUENT EVENTS
    On April 28, 2015, the Company entered into a purchase and sale agreement to purchase a 400 unit multifamily apartment complex in southern California for $118.0 million. The purchase is expected to be completed in June 2015.
On April 30, 2015, the Company entered into an agreement to sell its interest in One Hundred Chevy Chase Apartments, located in Lexington, Kentucky, for $13.5 million with an expected closing date in June 2015. The Company expects to recognize a gain on the sale in the three months ended June 30, 2015.
The Company has evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the accompanying financial statements of Resource Real Estate Opportunity REIT, Inc. and the notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2014. As used herein, the terms “we,” “our” and “us” refer to Resource Real Estate Opportunity REIT, Inc., a Maryland corporation, and, as required by context, Resource Real Estate Opportunity OP, LP, a Delaware limited partnership, and to their subsidiaries.
Overview
We were formed on June 3, 2009.  We commenced active real estate operations on September 7, 2010 when we raised the minimum offering amount in our initial public offering.
We have acquired a diversified portfolio of discounted U.S. commercial real estate and real estate-related debt that has been significantly discounted due to the effects of recent economic events and high levels of leverage on U.S. commercial real estate, including properties that may benefit from extensive renovations that may increase their long-term values. Following years of unprecedented appreciation in commercial real estate values fueled by readily available and inexpensive credit, the commercial real estate market began a significant decline in late 2007 as a result of the massive contraction in the credit and securitization markets. We believe that this decline produced an attractive environment to acquire commercial real estate and real estate-related debt at significantly discounted prices. We have a particular focus on operating multifamily assets and we intend to target this asset class while also purchasing interests in other types of commercial property assets consistent with our investment objectives. Our targeted portfolio will consist of commercial real estate assets, principally (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”). However, we are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate and, accordingly, we may invest in other real estate assets or debt secured by real estate assets. We currently anticipate holding approximately 25% of our total assets in categories (i) and 75% of our total assets in category (ii), however, that may change depending on market and economic conditions.
We may make adjustments to our target portfolio based on real estate market conditions and investment opportunities. We will not forego a good investment because it does not precisely fit our expected portfolio composition. Thus, to the extent our Advisor presents us with investment opportunities that allow us to meet the requirements to be treated as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") and to maintain our exclusion from regulation as an investment company pursuant to the Investment Company Act, our portfolio composition may vary from what we have initially disclosed.
The primary portion of our initial public offering commenced on June 16, 2010 and closed on December 13, 2013. We continue to offer shares to our existing stockholders pursuant to our distribution reinvestment plan. We describe these offerings further in “Liquidity and Capital Resources” below.
Results of Operations
 As of March 31, 2015, we owned interests in a total of 36 multifamily properties. During the three months ended March 31, 2015, we acquired interests in two multifamily properties and disposed of four properties. Our management is not aware of any material trends or uncertainties, favorable, or unfavorable, other than national economic conditions affecting our targeted portfolio, the multifamily residential housing industry and real estate generally, which may reasonably be expected to have a material impact on either capital resources or the revenues or incomes to be derived from the operation of such assets or those that we expect to acquire.
On March 23, 2015, we entered into an agreement to purchase a 295 unit multifamily community in Chula Vista, California for $49.1 million. The transaction is expected to be completed in June 2015.
The results of operations for the three months ended March 31, 2014 have been remeasured to include an additional $867,000 of depreciation and amortization and net income attributable to noncontrolling interests has been decreased by $249,000 for the measurement period adjustment related to the Paladin acquisition. These adjustments would have been included in the results of operations as originally reported for the three months ended March 31, 2014 had the final appraisals for the Paladin properties been received and recorded during that period.


 
Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014
The following table sets forth the results of our operations (in thousands):
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
 
 
 
 
(Remeasured)
Revenues:
 
 
 
 
Rental income
 
$
27,571

 
$
20,669

Interest and dividend income
 
163

 
163

Total revenues
 
27,734

 
20,832

 
 
 
 
 
Expenses:
 
 
 
 
Rental operating
 
14,632

 
12,027

Acquisition costs
 
1,701

 
2,500

Management fees
 
3,461

 
2,109

General and administrative
 
4,050

 
2,294

Loss on disposal of assets
 
1,109

 
1,627

Depreciation and amortization expense
 
10,297

 
11,946

Total expenses
 
35,250

 
32,503

Loss before other expenses
 
(7,516
)
 
(11,671
)
 
 
 
 
 
Other (expense) income:
 
 

 
 

Net gains on dispositions
 
29,175

 
—

Interest expense
 
(4,867
)
 
(2,387
)
Insurance proceeds in excess of cost basis
 
247

 
—

Income (loss) from continuing operations
 
17,039

 
(14,058
)
 
 
 
 
 
Discontinued operations:
 
 
 
 
Income from discontinued operations
 
—

 
2

Net income (loss)
 
17,039

 
(14,056
)
Net income attributable to noncontrolling interest
 
(11
)
 
(555
)
Net income (loss) attributable to stockholders
 
$
17,028

 
$
(14,611
)
Fluctuations in all operating activities is primarily due to the increased average number of operating properties in which we owned interests to 36 at March 31, 2015 from 31 at March 31, 2014. The following table presents the number of rental properties held at each month end for the three months ended March 31, 2015 and 2014:

2015
 
2014
January 31
36
 
24
February 28
36
 
33
March 31
36
 
35
 
 
 
 
Average number of properties held
36
 
31

Revenues: During the three months ended March 31, 2015 and 2014, our income was primarily from rents from our multifamily properties. The increase in rental income is due to the increased average number of operating properties in which we owned interests.
Expenses:  Our rental operating expenses increased for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 primarily due to the increased average number of operating properties in which we owned interests. Accordingly, we also incurred increased management fees.  





◦
General and administrative expenses increased by $1.8 million from $2.3 million for the three months ended March 31, 2014 to $4.1 million for the three months ended March 31, 2015, primarily related to a $539,000 increase in salary and benefits allocated to us by our Advisor due to the increased properties under management, a $238,000 increase in professional fees related to investor relations and a $388,000 increase in franchise taxes primarily related to the gains on sales of properties located in Texas.
◦
The $29.2 million net gain on dispositions included in other (expense) income for the three months ended March 31, 2015 reflects the sale of four properties during the period:
▪
Alcove Apartments - Sold on January 26, 2015 for $11.1 million and recognized a gain of approximately $3.8 million on the disposition.
▪
107th Avenue Apartments - Sold on January 29, 2015 for $250,000 and recognized a gain of approximately $50,000 on the disposition.
▪
Redford Apartments - Sold on February 27, 2015 for $33.0 million and recognized a gain of approximately $15.3 million on the disposition.
▪
Cityside Apartments - Sold on March 2, 2015 for $24.5 million and recognized a gain of approximately $10.0 million on the disposition.
◦
The $2.5 million increase in interest expense is due to borrowings under 10 additional mortgage loans into which we entered subsequent to March 31, 2014.
The following table presents the results of operations separated into two categories: the results of operations of the 18 properties that we owned for the entirety of both periods presented and all other properties (including company level expenses to aid in comparability) for the three months ended March 31, 2015 and 2014 (in thousands):




 
For the three months ended
 
For the three months ended
 
March 31, 2015
 
March 31, 2014
 
Properties owned both periods
 
All other
 
Total
 
Properties owned both periods
 
All other
 
Total
Revenues:
 
 
 
 
 
 
 
 
(Remeasured)
 
 
Rental income
$
12,538

 
$
15,033

 
$
27,571

 
$
11,961

 
$
8,708

 
$
20,669

Interest income
1

 
162

 
163

 
1

 
162

 
163

Total revenues
12,539

 
15,195

 
27,734

 
11,962

 
8,870

 
20,832

 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
Rental operating
7,364

 
7,268

 
14,632

 
7,244

 
4,783

 
12,027

Acquisition costs
—

 
1,701

 
1,701

 
17

 
2,483

 
2,500

Management fees
561

 
2,900

 
3,461

 
515

 
1,594

 
2,109

General and administrative
928

 
3,122

 
4,050

 
857

 
1,437

 
2,294

Loss on disposal of assets
198

 
911

 
1,109

 
1,585

 
42

 
1,627

Depreciation and amortization expense
4,782

 
5,515

 
10,297

 
6,978

 
4,968

 
11,946

Total expenses
13,833

 
21,417

 
35,250

 
17,196

 
15,307

 
32,503

Loss before other expenses
(1,294
)
 
(6,222
)
 
(7,516
)
 
(5,234
)
 
(6,437
)
 
(11,671
)
 
 
 
 
 
 
 
 
 
 
 
 
Other (expense) income:
 
 
 
 
 
 
 
 
 
 
 
Net gains on dispositions
—

 
29,175

 
29,175

 
—

 
—

 
—

Interest expense
(1,455
)
 
(3,412
)
 
(4,867
)
 
(1,287
)
 
(1,100
)
 
(2,387
)
Insurance proceeds in excess of cost
—

 
247

 
247

 
—

 
—

 
—

(Loss) income from continuing operations
(2,749
)
 
19,788

 
17,039

 
(6,521
)
 
(7,537
)
 
(14,058
)
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net
—

 
—

 
—

 
—

 
2

 
2

Net (loss) income
(2,749
)
 
19,788

 
17,039

 
(6,521
)
 
(7,535
)
 
(14,056
)
Net income attributable to noncontrolling interests
—

 
(11
)
 
(11
)
 
—

 
(555
)
 
(555
)
Net (loss) income attributable to stockholders
$
(2,749
)
 
$
19,777

 
$
17,028

 
$
(6,521
)
 
$
(8,090
)
 
$
(14,611
)
Revenues: The $577,000 increase in rental revenue for the 18 properties we owned during both the three months ended March 31, 2015 and the three months ended March 31, 2014 was primarily comprised of:
Multifamily Community Name
 
Rental Income Increase (in thousands)
 
Increase in Occupancy
One Hundred Chevy Chase
 
$
145

 
2.05
%
Ivy at Clear Creek
 
113

 
3.69
%
The Westside
 
96

 
3.15
%
Williamsburg
 
91

 
3.18
%
All other
 
132

 
 
 
 
$
577

 
 

    


Expenses: Our rental operating expenses for the 18 properties we owned during both the three months ended March 31, 2015 and the three months ended March 31, 2014 decreased primarily due to decreases in loss on disposal of assets and depreciation and amortization expense.
◦
The $1.4 million decrease in loss on disposal of assets is due to the replacement of appliances at Maxwell and Meridian Point during the three months ended March 31, 2014, in conjunction with unit upgrades.
◦
The $2.2 million decrease in depreciation and amortization expense is due to intangible assets related to in-place leases becoming fully amortized prior to the three months ended March 31, 2015.
Liquidity and Capital Resources
We have derived the capital required to purchase real estate investments and conduct our operations from the proceeds of our private and public offerings, secured or unsecured financings from banks, proceeds from the sale of real estate, and cash flows generated by our real estate and real estate-related investments.
We have allocated a portion of the funds we raised in our initial public offering to preserve capital for our investors by supporting the maintenance and viability of the properties we have acquired and those properties that we may acquire in the future.  If these allocated amounts and any other available income become insufficient to cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties or liquidating our investment in one or more properties, debt investments or other assets we may hold.  We cannot assure you that we will be able to access additional funds upon acceptable terms when we need them.
Capital Expenditures.
We deployed a total of $7.7 million during the three months ended March 31, 2015 for capital expenditures. The properties in which we deployed the most capital during the the three months March 31, 2015 ended are listed separately and the capital expenditures made on all other properties are aggregated in "All other properties" below (in thousands):
 
 
Capital deployed
during the
three months ended
 
Remaining capital
budgeted
Property
 
March 31, 2015
 
The Estates at Johns Creek
 
$
1,191

 
$
5,646

Maxwell Townhomes
 
742

 
$
576

Verona Apartment Homes
 
610

 
$
322

Calloway at Las Colinas
 
550

 
$
7,992

The Nesbit Palisades
 
484

 
$
4,683

All other properties
 
4,132

 
$
41,201

 
 
$
7,709

 
 
An estimated additional $13.4 million in capital is budgeted to be deployed over the next two years for improvements to Woodmoor and The Springs at Gilbert Meadows, which were purchased during the three months ended March 31, 2015.
Initial Public Offering
The primary portion of our initial public offering closed on December 13, 2013.  On December 26, 2013, the unsold primary offering shares were deregistered and, on December 30, 2013, the registration of the shares issuable pursuant to the distribution reinvestment plan was continued pursuant to a Registration Statement on Form S-3.
We continue to offer up to 7.5 million shares of common stock pursuant to our distribution reinvestment plan under which our stockholders may elect to have distributions reinvested in additional shares at $9.50 per share. 
Gross offering proceeds
As of March 31, 2015, an aggregate of 70.2 million shares of our $0.01 par value common stock have been issued as follows (dollars in thousands):



 
 
Shares Issued
 
Gross Proceeds
Shares issued through private offering
 
1,263,727

 
$
12,582

Shares issued through primary public offering (1)
 
62,485,461

 
622,077

Shares issued through stock distributions
 
2,132,266

 
—

Shares issued through distribution reinvestment plan
 
4,328,142

 
41,117

Shares issued in conjunction with the Advisor's initial investment,
net of 4,500 share conversion
 
15,500

 
155

    Total
 
70,225,096

 
$
675,931

Shares redeemed
 
(373,006
)
 
 
Total shares outstanding at March 31, 2015
 
69,852,090

 
 
 
(1)    Includes 276,056 shares issued to the Advisor.
Credit Facilities
The following is a summary of our credit facilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Interest Rate for the
 
 
Balance
Outstanding at
 
Current
Availability at
 
Balance
Outstanding at
 
Maturity
Date
 
Interest Rate Basis
 
Current
Interest Rate
 
Three months ended March 31,
Lender
 
March 31, 2015
 
December 31, 2014
 
 
 
 
2015
 
2014
Bank of America
 
$
—

 
$
24,364

 
$
10,086

 
5/23/2017
 
LIBOR plus 3%
 
3.18
%
 
3.17
%
 
3.12
%
US Bank
 
23,000

 
—

 
23,000

 
12/27/2017
 
LIBOR plus 1.95%
 
2.13
%
 
2.11
%
 
2.14
%
PNC Bank
 
12,500

 
—

 
12,500

 
12/20/2018
 
LIBOR plus 2%
 
2.18
%
 
2.17
%
 
2.16
%
 
 
$
35,500

 
$
24,364

 
$
45,586

 
 
 
 
 
 
 
 
 
 
Draws under the Bank of America Credit Facility are secured by certain of our properties with an aggregate value of $51.8 million and are guaranteed by us. We were in compliance with all covenants under this facility as of March 31, 2015.
Draws under the Jefferson Point Credit Facility are secured by the assets of Tech Center Square Apartments (formerly known as Jefferson Point Apartments). We provided a repayment guarantee of all interest and scheduled monthly principal payments (excluding the final payment at maturity for the outstanding balance.) The Jefferson Point Credit Facility includes both a debt service coverage covenant and a tangible net worth covenant. In November 2014, we amended the Jefferson Point Credit Facility. In accordance with the amendment, the debt service coverage covenant is only required to be complied with as of December 31, 2015 and periods thereafter. We were in compliance with all covenants under this facility at March 31, 2015.
Draws under the Brentdale Credit Facility are secured by the assets of The Westside Apartments (formerly known as Brentdale Apartments). We provided a $6.5 million repayment guarantee. We were in compliance with all covenants under this facility as of March 31, 2015.
Mortgage Debt


The following is a summary of our mortgage notes payable (in thousands, except percentages):
 
 
Outstanding Borrowings
 
Fair Value Adjustment
 
Net Book Value
 
Net Book Value
 
Maturity
Date
 
Annual
Interest Rate
 
 
 
 
 
 
 
 
 
 
Average
Monthly Debt
Service
Collateral
 
March 31, 2015
 
December 31, 2014
 
 
 
Vista Apartment Homes
 
$
15,839

 
$
—

 
$
15,839

 
$
15,900

 
1/1/2022
 
2.47%
(1)(5) 
$
63

Cannery Lofts
 
8,190

 
—

 
8,190

 
8,190

 
9/1/2020
 
3.48%
(1)(3) 
36

Deerfield
 
10,530

 
—

 
10,530

 
10,530

 
11/1/2020
 
4.66%
(2)(3) 
53

Ivy at Clear Creek
 
8,538

 
—

 
8,538

 
8,574

 
11/1/2023
 
2.59%
(1)(4) 
29

Trailpoint at the Woodlands
 
19,255

 
—

 
19,255

 
19,335

 
11/1/2023
 
2.59%
(1)(4) 
66

Verona Apartment Homes
 
22,731

 
—

 
22,731

 
22,843

 
1/1/2019
 
3.60%
(2)(5) 
106

Skyview Apartment Homes
 
18,355

 
—

 
18,355

 
18,446

 
1/1/2019
 
3.60%
(2)(5) 
85

The Nesbit Palisades
 
20,298

 
—

 
20,298

 
20,298

 
7/1/2024
 
2.13%
(1)(3) 
52

Maxwell Townhomes
 
14,028

 
—

 
14,028

 
14,089

 
1/1/2022
 
4.32%
(2)(5) 
71

Champion Farms
 
16,350

 
232

 
16,582

 
16,634

 
7/1/2016
 
6.14%
(2)(3) 
85

Fieldstone
 
15,686

 
—

 
15,686

 
15,804

 
6/26/2016
 
2.58%
(1)(4) 
73

Pinehurst
 
4,186

 
21

 
4,207

 
4,239

 
1/1/2016
 
5.58%
(2)(5) 
28

Pheasant Run
 
6,250

 
142

 
6,392

 
6,407

 
10/1/2017
 
5.95%
(2)(3) 
32

Retreat of Shawnee
 
13,230

 
225

 
13,455

 
13,522

 
2/1/2018
 
5.58%
(2)(5) 
78

Conifer Crossing
 
27,448

 
123

 
27,571

 
27,762

 
9/1/2015
 
5.96%
(2)(3) 
171

Coursey Place
 
27,862

 
141

 
28,003

 
28,117

 
8/1/2021
 
5.07%
(2)(5) 
154

Pines of York
 
15,459

 
(412
)
 
15,047

 
15,097

 
12/1/2021
 
4.46%
(2)(5) 
80

The Estates at Johns Creek
 
50,000

 
—

 
50,000

 
50,000

 
7/1/2020
 
3.38%
(2)(3) 
201

Chisholm Place
 
11,587

 
—

 
11,587

 
11,587

 
6/1/2024
 
2.57%
(1)(3) 
35

Perimeter 5550
 
14,141

 
—

 
14,141

 
14,211

 
7/1/2019
 
3.42%
(2)(5) 
64

Perimeter Circle
 
17,918

 
—

 
17,918

 
18,007

 
7/1/2019
 
3.42%
(2)(5) 
81

Aston at Cinco Ranch
 
24,063

 
—

 
24,063

 
24,162

 
10/1/2021
 
4.34%
(2)(5) 
120

Sunset Ridge 1
 
20,424

 
385

 
20,809

 
20,930

 
10/1/2020
 
4.58%
(2)(5) 
113

Sunset Ridge 2
 
3,041

 
52

 
3,093

 
3,109

 
10/1/2020
 
4.54%
(2)(5) 
16

Calloway at Las Colinas
 
36,214

 
—

 
36,214

 
36,375

 
12/1/2021
 
3.87%
(2)(5) 
171

Woodmoor
 
12,862

 
—

 
12,862

 
—

 
8/1/2019
 
3.64%
(2)(5) 
59

Springs at Gilbert Meadows
 
26,280

 
—

 
26,280

 
—

 
4/1/2025
 
2.06%
(1)(3) 
79

 
 
$
480,765

 
$
909

 
$
481,674

 
$
444,168

 
 
 
 
 
 

(1)
Variable rate based on one-month LIBOR of 0.1763% (as of March 31, 2015).
(2)
Fixed rate.
(3) Monthly interest-only payment currently required.
(4) Monthly fixed principal plus interest payment required.
(5) Fixed monthly principal and interest payment required.
At March 31, 2015, the weighted average interest rate of all our outstanding indebtedness was 3.73% .
Based on current lending market conditions, we expect that the debt financing we incur, on a total portfolio basis, will not exceed 50% to 55% of the cost of our real estate investments (before deducting depreciation or other non-cash reserves) plus the value of our other assets (48% as of March 31, 2015). We may also increase the amount of debt financing we use with respect to an investment over the amount originally incurred if the value of the investment increases subsequent to our acquisition and if credit market conditions permit us to do so. Our charter limits us from incurring debt such that our total liabilities may not exceed 75% of the cost (before deducting depreciation or other non-cash reserves) of our tangible assets, although we may exceed this limit under certain circumstances. We expect that our primary liquidity source for acquisitions and long-term funding will include proceeds from dispositions and, to the extent we co-invest with other entities, capital from any future joint venture partners. We may also pursue a number of potential other funding sources, including mortgage loans, portfolio level credit lines and government financing.



Operating Costs
In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make payments to our Advisor. During our acquisition stage, we expect to make payments to our Advisor in connection with the acquisition of real estate investments. In addition, we expect to continue to make payments to our Advisor for the management of our assets and costs incurred by our Advisor in providing services to us. We describe these payments in more detail in Note 14 of the notes to our consolidated financial statements.
Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the conflicts committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended March 31, 2015 did not exceed the charter imposed limitation.
Distributions
For the three months ended March 31, 2015, we paid aggregate distributions of $10.4 million, including $3.2 million of distributions paid in cash and $7.2 million of distributions reinvested in shares of common stock through our distribution reinvestment plan, as follows (in thousands, except per share data):
Record Date
 
Per Common
Share
 
Distribution Date
 
Distributions
Invested in
Shares of
Common Stock
 
Net Cash
Distribution
 
Total
Aggregate
Distribution
January 29, 2015
 
$
0.05

 
January 30, 2015
 
$
2,391

 
$
1,070

 
$
3,461

February 26, 2015
 
0.05

 
February 27, 2015
 
2,392

 
1,081

 
3,473

March 30, 2015
 
0.05

 
March 31, 2015
 
2,400

 
1,080

 
3,480

 
 
 
 
 
 
$
7,183

 
$
3,231

 
$
10,414

On March 24, 2015, our Board of Directors authorized cash distributions of $0.05 per common share to stockholders of record as of the close of business on April 29, 2015, May 28, 2015 and June 29, 2015 to be paid on April 30, 2015, May 29, 2015 and June 30, 2015, respectively. All three distributions, aggregating $10.5 million, are included in the consolidated balance sheets in Distributions payable at March 31, 2015.
Distributions declared, distributions paid and cash flows used in operating activities were as follows for the three months ended March 31, 2015 (dollars in thousands):     
 
Distributions Paid
 
 
 
Distributions Declared
 
Sources of Distributions Paid
2015
Cash
Distributions Reinvested (DRIP)
Total
 
Cash Provided By (Used In) Operating Activities- QTD
 
Total
Per Share
 
Amount Paid from Operating Activities/Percent of Total Distributions Paid
Amount Paid from Debt Financing/Percent of Total Distributions Paid
First Quarter
$
3,231

$
7,183

$
10,414

 
$
(1,924
)
 
$
20,930

$0.05
 
$- / -%
$10,414/100%
Our net income attributable to common stockholders' for the three months ended March 31, 2015 was $17.0 million and net cash used in operating activities of continuing operations was $2.2 million. Our cumulative cash distributions and net loss from inception through March 31, 2015 were $59.9 million and $66.6 million, respectively. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with cash flows from operating activities, proceeds from disposal of real estate and proceeds from debt financing. To the extent that we pay distributions from sources other than our cash flow from operating activities or gains from asset sales, we will have fewer funds available for investment in commercial real estate and real estate-related debt, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.



Funds from Operations, Modified Funds from Operations and Adjusted Funds from Operations
Funds from operations, or FFO, is a non-GAAP financial performance measure that is widely recognized as a measure of REIT operating performance.  We use FFO as defined by the National Association of Real Estate Investment Trusts to be net income (loss), computed in accordance with GAAP excluding extraordinary items, as defined by GAAP, and gains (or losses) from sales of property (including deemed sales and settlements of pre-existing relationships), plus depreciation and amortization on real estate assets, and after related adjustments for unconsolidated partnerships, joint ventures and subsidiaries and noncontrolling interests.  We believe that FFO is helpful to our investors and our management as a measure of operating performance because it excludes real estate-related depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared year to year, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses, and interest costs, which are not immediately apparent from net income.  Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate and intangibles diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting alone to be insufficient.  As a result, our management believes that the use of FFO, together with the required GAAP presentations, is helpful for our investors in understanding our performance.  Factors that impact FFO include start-up costs, fixed costs, delay in buying assets, lower yields on cash held in accounts, income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses.  In addition, FFO will be affected by the types of investments in our targeted portfolio which will consist of, but are not limited to: (i) multifamily rental properties purchased as non-performing or distressed loans or as real estate owned by financial institutions and (ii) multifamily rental properties to which we can add value with a capital infusion (referred to as “value add properties”). We are not limited in the types of real estate and real estate-related assets in which we may invest or whether we may invest in equity or debt secured by real estate assets.
Since FFO was promulgated, GAAP has adopted several new accounting pronouncements, such that management and many investors and analysts have considered the presentation of FFO alone to be insufficient. Accordingly, in addition to FFO, we use modified funds from operations, or MFFO, as defined by the Investment Program Association, or IPA.  MFFO excludes from FFO the following items:
(1)
acquisition fees and expenses;
(2)
straight-line rent amounts, both income and expense;
(3)
amortization of above- or below-market intangible lease assets and liabilities;
(4)
amortization of discounts and premiums on debt investments;
(5)
impairment charges;
(6)
gains or losses from the early extinguishment of debt;
(7)
gains or losses on the extinguishment or sales of hedges, foreign exchange, securities and other derivatives holdings except where the trading of such instruments is a fundamental attribute of our operations;
(8)
gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting, including interest rate and foreign exchange derivatives;
(9)
gains or losses related to consolidation from, or deconsolidation to, equity accounting;
(10)
gains or losses related to contingent purchase price adjustments; and
(11)
adjustments related to the above items for unconsolidated entities in the application of equity accounting.
We believe that MFFO is helpful in assisting management assess the sustainability of operating performance in future periods and, in particular, after our acquisition stage is complete, primarily because it excludes acquisition expenses that affect property operations only in the period in which the property is acquired.  Although MFFO includes other adjustments, the exclusion of acquisition expenses is the most significant adjustment to us at the present time, as we are currently in our acquisition stage.  Thus, MFFO provides helpful information relevant to evaluating our operating performance in periods in which there is no acquisition activity.    
As explained below, management’s evaluation of our operating performance excludes the items considered in the calculation based on the following economic considerations.  Many of the adjustments in arriving at MFFO are not applicable to us.  Nevertheless, we explain below the reasons for each of the adjustments made in arriving at our MFFO definition:
•
Acquisition expenses. In evaluating investments in real estate, including both business combinations and investments accounted for under the equity method of accounting, management’s investment models and analysis differentiate costs to acquire the investment from the operations derived from the investment. Prior to 2009, acquisition costs for both of these types of investments were capitalized under GAAP; however, beginning in 2009, acquisition costs


related to business combinations are expensed.  Both of these acquisition costs will continue to be funded from the proceeds of debt financing and not from operations.  We believe by excluding expensed acquisition costs, MFFO provides useful supplemental information that is comparable for each type of real estate investment and is consistent with management’s analysis of the investing and operating performance of our properties.  Acquisition expenses include those paid to our Advisor or third parties.
•
Adjustments for straight-line rents and amortization of discounts and premiums on debt investments.  In the proper application of GAAP, rental receipts and discounts and premiums on debt investments are allocated to periods using various systematic methodologies. This application will result in income recognition that could be significantly different than underlying contract terms. By adjusting for these items, MFFO provides useful supplemental information on the realized economic impact of lease terms and debt investments and aligns results with management’s analysis of operating performance.
•
Adjustments for amortization of above or below market intangible lease assets.  Similar to depreciation and amortization of other real estate related assets that are excluded from FFO, GAAP implicitly assumes that the value of intangibles diminishes predictably over time and that these charges be recognized currently in revenue.  Since real estate values and market lease rates in the aggregate have historically risen or fallen with market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the performance of the real estate.
•
Impairment charges, gains or losses related to fair-value adjustments for derivatives not qualifying for hedge accounting and gains or losses related to contingent purchase price adjustments.  Each of these items relates to a fair value adjustment, which is based on the impact of current market fluctuations and underlying assessments of general market conditions and specific performance of the holding which may not be directly attributable to current operating performance.  As these gains or losses relate to underlying long-term assets and liabilities, management believes MFFO provides useful supplemental information by focusing on the changes in our core operating fundamentals rather than changes that may reflect anticipated gains or losses. In particular, because GAAP impairment charges are not allowed to be reversed if the underlying fair values improve or because the timing of impairment charges may lag the onset of certain operating consequences, we believe MFFO provides useful supplemental information related to current consequences, benefits and sustainability related to rental rate, occupancy and other core operating fundamentals.
•
Adjustment for gains or losses related to early extinguishment of hedges, debt, consolidation or deconsolidation and contingent purchase price.  Similar to extraordinary items excluded from FFO, these adjustments are not related to continuing operations.  By excluding these items, management believes that MFFO provides supplemental information related to sustainable operations that will be more comparable between other reporting periods and to other real estate operators.
By providing MFFO, we believe we are presenting useful information that also assists investors and analysts in the assessment of the sustainability of our operating performance after our acquisition stage is completed.  We also believe that MFFO is a recognized measure of sustainable operating performance by the real estate industry.  MFFO is useful in comparing the sustainability of our operating performance after our acquisition stage is completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities or as affected by other MFFO adjustments.  However, investors are cautioned that MFFO should only be used to assess the sustainability of our operating performance after our acquisition stage is completed, as it excludes acquisition costs that have a negative effect on our operating performance and the reported book value of our common stock and stockholders’ equity during the periods in which properties are acquired.
As an opportunity REIT, a core element of our investment strategy and operations is the acquisition of distressed and value-add properties and the rehabilitation and renovation of such properties in an effort to create additional value in such properties.  As part of our operations, we intend to realize gains from such value-add efforts through the strategic disposition of such properties after we have added value through the execution of our business plan.  As we do not intend to hold any of our properties for a specific amount of time, we intend to take advantage of opportunities to realize gains from our value-add efforts on a regular basis during the course of our operations as such opportunities become available, in all events subject to the rules regarding "prohibited transactions" of real estate investment trusts of the Internal Revenue Code.  Therefore, we also use adjusted funds from operations, or AFFO, in addition to FFO and MFFO when evaluating our operations.  We calculate AFFO by adding/subtracting gains/losses realized on sales of our properties from MFFO.  We believe that AFFO presents useful information that assists investors and analysts in the assessment of our operating performance as it is reflective of the impact that regular, strategic property dispositions have on our continuing operations.


Core to our business plan is the acquisition of distressed assets at deep discounts.  These assets are operationally distressed at the time of purchase. Such assets often require substantial investments of capital and increased operating costs after acquisition to convert these assets into stable, cash flowing properties.  These capital expenditures are central to our revitalization strategy and are critical to creating value and restoring assets to their optimal performance.  These planned expenditures are necessary primarily during the first 12 to 24 months after we take operating control of an asset and often result in negative, or reduced, net operating income, MFFO and AFFO during this turnaround stage. We believe that the presentation of the MFFO and AFFO attributed to our stabilized assets and the MFFO and AFFO attributed to our unstabilized assets allows investors to better understand the operating performance of our stabilized assets as compared to those assets for which we have yet to complete the stabilization process. Stabilized assets are defined as assets that produced a positive MFFO during the three months ended March 31, 2015 and 2014, respectively.
Stabilized assets during the three months ended March 31, 2015 included: 107th Avenue, The Redford, Cityside Crossing (all three of which were sold in January and February 2015), Vista Apartment Homes, Cannery Lofts, Williamsburg, Deerfield, Mosaic, The Reserve at Mt. Moriah, The Alcove, Ivy at Clear Creek, Retreat at Rocky Ridge, Trailpoint at the Woodlands, Affinity at Winter Park, The Westside Apartments, Verona Apartment Homes, Skyview Apartment Homes, The Nesbit Palisades, Meridian Pointe, Chisholm Place, Aston at Cinco Ranch, Pines of York, Evergreen at Coursey Place, Stone Ridge, Conifer Place, Retreat at Shawnee, Pheasant Run, Pinehurst, Champion Farms, Fieldstone, The Estates at Johns Creek, Perimeter 5550, Perimeter Circle, Aston at Cinco Ranch, Sunset Ridge, and Calloway at Las Colinas. Unstabilized assets during the three months ended March 31, 2015 included: One Hundred Chevy Chase Apartments, Tech Center Square, Maxwell Townhomes, The Woodmoor and Springs at Gilbert. Non-property assets and corporate overhead, which consists primarily of general and administrative expenses at the company level, are allocated between stabilized and unstabilized assets based on the percentage of the total purchase price of all of our assets that the aggregate purchase prices of our stabilized and unstabilized assets respectively represent.
Stabilized assets during the three months ended March 31, 2014 included: 107th Avenue, Arcadia (which was sold in September 2014), Vista Apartment Homes, Campus Club (which was sold in June 2014), Cannery Lofts, Williamsburg, The Redford, Cityside Crossing, Deerfield, The Reserve at Mt. Moriah, The Alcove, Ivy at Clear Creek, Retreat at Rocky Ridge, Verona Apartment Homes, Trailpoint at the Woodlands, Affinity at Winter Park, The Westside, Skyview Apartment Homes, Nesbit Palisades, The Estates at Johns Creek, Pines of York, Evergreen at Coursey Place, Stone Ridge, Conifer Place, Hilltop Village, Retreat at Shawnee, Pheasant Run, Pinehurst and Fieldstone. Unstabilized assets during the three months ended March 31, 2014 consisted of Mosaic, One Hundred Chevy Chase Apartments, Tech Center Square, Maxwell Townhomes, Meridian Pointe and Champion Farms. Non-property assets and corporate overhead, which consists primarily of general and administrative expenses at the company level, are allocated between stabilized and unstabilized assets based on the percentage of the total purchase price of all our assets that the aggregate purchase prices of stabilized and unstabilized assets respectively represent.
Neither FFO, MFFO nor AFFO should be considered as an alternative to net income (loss), nor as an indication of our liquidity, nor are any of these measures indicative of funds available to fund our cash needs, including our ability to fund distributions.  In particular, as we are currently in the acquisition phase of our life cycle, acquisition costs and other adjustments that are increases to MFFO and AFFO are, and may continue to be, a significant use of cash.  Accordingly, FFO, MFFO and AFFO should be reviewed in connection with other GAAP measurements.  Our FFO, MFFO and AFFO as presented may not be comparable to amounts calculated by other REITs.
The following section presents our calculation of FFO, MFFO and AFFO and provides additional information related to our operations (in thousands, except per share amounts).  Amounts reported in the table below include adjustments attributable to noncontrolling interests. For the three months ended March 31, 2014, such amounts reflect the adjustments that would have been included as originally issued had the final appraisals for the Paladin properties been received and recorded during that period.
    




 
Three Months Ended
 
March 31,
 
2015
 
2014
 
 
 
(Remeasured)
Net income (loss) attributable to stockholders – GAAP
$
17,028

 
$
(14,611
)
Net gains on dispositions
(29,175
)
 
—

Depreciation expense
8,635

 
6,248

FFO
(3,512
)
 
(8,363
)
Adjustments for straight-line rents
(129
)
 
(154
)
Amortization of intangible lease assets
1,468

 
4,539

Debt premium amortization
(125
)
 
(216
)
Acquisition costs
1,701

 
2,500

MFFO
$
(597
)
 
$
(1,694
)
Net gains on dispositions
29,175

 
—

AFFO
$
28,578

 
$
(1,694
)
 
 
 
 
Basic and diluted income (loss) per common share - GAAP
$
0.25

 
$
(0.22
)
FFO per share
$
(0.05
)
 
$
(0.12
)
MFFO per share
$
(0.01
)
 
$
(0.03
)
AFFO per share
$
0.41

 
$
(0.03
)
 
 
 
 
Weighted average shares outstanding (1)
69,485

 
67,364

 
(1)    Excludes any dilution from the potential conversion of convertible stock, as the actual number of shares of common stock, if any, that will be issuable upon conversion of convertible stock is indeterminable at March 31, 2015.

 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
MFFO and AFFO Attributed to Stabilized Assets
 
MFFO and AFFO Attributed to Unstabilized Assets
 
Total
 
MFFO and AFFO Attributed to Stabilized Assets
 
MFFO and AFFO Attributed to Unstabilized Assets
 
Total
 
 
 
 
 
 
 
(Remeasured)
Net income (loss) attributable to stockholders- GAAP
$
19,248

 
$
(2,220
)
 
$
17,028

 
$
(7,824
)
 
$
(6,787
)
 
$
(14,611
)
Net gains on dispositions
(29,175
)
 
—

 
(29,175
)
 
—

 
—

 
—

Depreciation expense
7,840

 
795

 
8,635

 
5,191

 
1,057

 
6,248

FFO
(2,087
)
 
(1,425
)
 
(3,512
)
 
(2,633
)
 
(5,730
)
 
(8,363
)
Adjustments for straight-line rents
(100
)
 
(29
)
 
(129
)
 
(154
)
 
—

 
(154
)
Amortization of intangible lease assets
1,341

 
127

 
1,468

 
3,871

 
668

 
4,539

Debt premium amortization
(125
)
 
—

 
(125
)
 
(163
)
 
(53
)
 
(216
)
Acquisition costs
1,429

 
272

 
1,701

 
204

 
2,296

 
2,500

MFFO
458

 
(1,055
)
 
(597
)
 
1,125

 
(2,819
)
 
(1,694
)
Net gains on dispositions
29,175

 
—

 
29,175

 
—

 
—

 
—

AFFO
$
29,633

 
$
(1,055
)
 
$
28,578

 
$
1,125

 
$
(2,819
)
 
$
(1,694
)




Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and cost and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to certain accrued liabilities.  We base our estimates on historical experience and on various other assumptions that we believe reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
For a discussion of our critical accounting policies and estimates, see the discussion in our Annual Report on Form 10-K for the year ended December 31, 2014 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”
Off-Balance Sheet Arrangements
As of March 31, 2015 and December 31, 2014, we did not have any off-balance sheet arrangements or obligations.
Subsequent Events
On April 28, 2015, we entered into a purchase and sale agreement to purchase a 400 unit multifamily apartment complex in southern California for $118.0 million. The purchase is expected to be completed in June 2015.
On April 30, 2015, we entered into an agreement to sell our interest in One Hundred Chevy Chase Apartments, located in Lexington, Kentucky, for $13.5 million with an expected closing date in June 2015. We expect to recognize a gain on the sale in the three months ended June 30, 2015.
We have evaluated subsequent events and determined that no events have occurred, other than those disclosed above, which would require an adjustment to or additional disclosure in the consolidated financial statements.

43

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted as permitted under rules applicable to smaller reporting companies.

ITEM 4.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon, and as of the date of, that evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this quarterly report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


PART II.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sale of Equity Securities
All securities sold by us during the three months ended March 31, 2015 were sold in an offering registered under the Securities Act of 1933, as amended (the "Securities Act").
Redemption of Securities
During the three months ended March 31, 2015, we redeemed shares of our common stock as follows:
Period
 
Total Number
of Shares
Redeemed (1)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of a
Publicly Announced
Plan or Program (2)
 
Approximate Dollar
Value of Shares
Available That May
Yet Be Redeemed
Under the Program
January 2015
 
35,889
 
$9.77
 
35,889
 
(3)
February 2015
 
—
 
—
 
—
 
(3)
March 2015
 
122,281
 
$9.62
 
122,281
 
(3)
 
 
158,170
 
 
 
 
 
 
 
(1)
All redemptions of equity securities in the three months ended March 31, 2015 were made pursuant to our share redemption program.
(2)
The share redemption program commenced on June 16, 2010 and was subsequently amended on September 29, 2011.
(3)
We currently limit the dollar value and number of shares that may be redeemed under the program as described below.
All redemption requests tendered were honored during the three months ended March 31, 2015.
We will not redeem in excess of 5% of the weighted-average number of shares outstanding during the 12-month period immediately prior to the effective date of redemption. Our board of directors will determine at least quarterly whether it has sufficient excess cash to redeem shares. Generally, the cash available for redemptions will be limited to proceeds from our distribution reinvestment plan plus, if we have positive operating cash flow from the previous fiscal year, 1% of all operating cash flow from the previous year.
Our board of directors, in its sole discretion, may suspend, terminate or amend our share redemption program without stockholder approval upon 30 days' notice if it determines that such suspension, termination or amendment is in our best interest. Our board may also reduce the number of shares purchased under the share redemption program if it determines the funds otherwise available to fund our share redemption program are needed for other purposes. These limitations apply to all redemptions, including redemptions sought upon the stockholder's death, qualifying disability or confinement to a long-term care facility.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
(a)
There have been no defaults with respect to any of our indebtedness.
(b)
Not applicable.



ITEM 6.
EXHIBITS
Exhibit No.
 
Description
2.1
 
Agreement and Plan of Merger, dated July 18, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.2
 
Second Amendment to Agreement and Plan of Merger, dated September 13, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to the Company’s Post-Effective Amendment No. 13 to the Registration Statement on Form S-11 (No. 333-163411) filed September 16, 2013)
2.3
 
Third Amendment to Agreement and Plan of Merger, dated December 16, 2013, by and among Paladin Realty Income Properties, Inc., Paladin Realty Income Properties, L.P., Resource Real Estate Opportunity OP, LP, and RRE Charlemagne Holdings, LLC (incorporated by reference to Post-Effective Amendment No. 15 to the Company's Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
3.1
 
Amended and Restated Articles of Incorporation (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
3.2
 
Bylaws (incorporated by reference to Pre-Effective Amendment No. 3 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed February 9, 2010)
4.1
 
Form of Distribution Reinvestment Plan Enrollment Form, included as Appendix B to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
4.2
 
Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed November 12, 2009)
4.3
 
Amended and Restated Distribution Reinvestment Plan, included as Appendix A to the prospectus (incorporated by reference to Post-Effective Amendment No. 15 to the Company’s Registration Statement on Form S-11 (No. 333-160463) filed December 30, 2013)
10.1
 
Amendment to Third Amended and Restated Advisory Agreement dated March 24, 2015 between Resource Real Estate Opportunity REIT, Inc. and Resource Real Estate Opportunity Advisor, LLC filed March 31, 2015 (incorporated by reference to the Company's Annual Report on Form 10-K filed March 31, 2015)
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of Chief Executive Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of Chief Financial Officer pursuant to Section 1350 18 U.S.C., as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
 
Amended and Restated Share Redemption Program (incorporated by reference to the Company's Quarterly Report on Form 10-Q filed November 14, 2011)
101.1
 
Interactive Data Files



SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
RESOURCE REAL ESTATE OPPORTUNITY REIT, INC.
 
 
 
May 15, 2015
By:
/s/ Alan F. Feldman
 
 
ALAN F. FELDMAN
 
 
Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
May 15, 2015
By:
/s/ Steven R. Saltzman
 
 
STEVEN R. SALTZMAN
 
 
Chief Financial Officer
 
 
(Principal Financial Officer and Principal Accounting Officer)


Resource Real Estate Opportunity REIT, Inc. Reports