Pacific Oak Strategic Opportunity REIT : INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Form 8-K

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF MARCH 31, 2024

UNAUDITED

U.S. DOLLARS IN THOUSANDS

INDEX

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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the interimcondensedconsolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

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NOTE 1: GENERAL INFORMATION

These financial statements have been prepared in a condensed format as of March 31, 2024, and for the three months period then ended ("interim condensed consolidated financial statements"). These interim condensed consolidated financial statements should be read in conjunction with the Company's annual financial statements as of December 31, 2023, and for the year then ended and the accompanying notes ("annual financial statements").

The Company and its subsidiaries (the "Group") operate in the investment real estate segment in the United States, which includes mainly investment in office and residential real estate and undeveloped lands. In addition, the Company invests in real estate equity securities. The Company has three reporting segments: 1) strategic opportunistic properties 2) residential homes and 3) hotel.

As of March 31, 2024, the Company consolidated nine office complexes, encompassing, in the aggregate, approximately 3.2 million rentable square feet and these properties were 67% occupied. In addition, the Company owned one residential home portfolio consisting of 2,168 residential homes, and two apartment properties containing 609 units, which were 94% and 95% occupied, respectively. The Company also owned one hotel property with 196 rooms, four investments in undeveloped land with approximately 581 developable acres, and one office/retail development property, three investments in unconsolidated joint ventures and two financial assets at fair value through profit or loss.

Due to rising interest rates, we may experience restrictions in our liquidity based on certain financial covenant requirements, our inability to refinance maturing debt in part or in full as it comes due and higher debt service costs and reduced yields relative to cost of debt. If we are unable to find alternative credit arrangements or other funding in a high interest environment, our business needs may not be adequately met. Based on interest rates as of March 31, 2024, if interest rates were 100 basis points higher or lower during the three months ending March 31, 2024, the annualized interest expense on our variable rate debt would increase or decrease by $2.4 million and $2.5 million, respectively.

In addition, tenants and potential tenants of the Company's properties may be adversely impacted by inflation and rising interest rates, which could negatively impact the Company's tenants' ability to pay rent and the demand for the Company's properties. Such adverse impacts on the Company's tenants may cause increased vacancies, which may add pressure to lower rents and increase the Company's expenditures for re-leasing.

As of March 31, 2024, the Company had a working capital shortfall amounting to $266.0 million, primarily attributed to loans maturing in the year following the date of the statement of financial position. The Company intends to refinance loans as they come due, given the relatively low leverage of the Company's properties, the Company's relationship with third-party lenders and its past experience placing debt on its properties. There are no significant limitations on the Company's ability to withdraw funds from the Company's subsidiaries, except for restricted cash. The Company expects to generate cash flow from additional asset sales in the current year and subsequent to March 31, 2024, the Company issued Series D Bonds for 288.1 million Israeli new shekels (approximately $76.2 million as of April 24, 2024) par value through a public offering. Refer to note 7 for additional details. Accordingly, the Company and the board of directors does not view the working capital shortfall as a liquidity problem.

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NOTE 2: SIGNIFICANT ACCOUNTING POLICY

Basis of presentation of the interim condensed consolidated financial statements:

The interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for the preparation of financial statements for interim periods, as prescribed in IAS 34, "Interim Financial Reporting", and in accordance with the disclosure requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the annual consolidated financial statements.

Disclosures of new standards in the period prior to their adoption:

IFRS 18 "Presentation and Disclosures in Financial Statements":

On April 9, 2024, the IASB issued IFRS 18 "Presentation and Disclosures in Financial Statements" to set out requirements for the presentation and disclosure of information in general purpose financial statements. The standard is effective for annual periods beginning on or after January 2027. The Company is assessing the impact of the new standard, including the impact of amendments to other accounting standards, as a result of the new standard on the consolidated financial statements.

NOTE 3: INVESTMENT IN JOINT VENTURES

As of March 31, 2024, the Company's investment in joint ventures was composed of the following (dollars in thousands):

_____________________

(1)The 110 William Joint Venture is governed by an amended and restated limited liability company agreement, dated July 5, 2023. In July 2023, the 110 William Joint Venture entered into debt and equity restructuring agreements and as a result, the Company committed to funding up to $105.0 million (the "Capital Commitments") to the 110 William Joint Venture in exchange for 77.5% of preferred interest in the joint venture. As of March 31, 2024, the Company owned 100% of the common interest and 77.5% of preferred interest in the joint venture, and based on a tiered waterfall.

(2)In April 2024, the Company received a distribution of capital of $1.5 million from the Pacific Oak Opportunity Zone Fund I.

(3)The Company's investment in the 353 Sacramento Joint Venture is limited to the investment balance, as such, the Company does not guarantee any debt or other obligations associated with the joint venture.

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NOTE 3: INVESTMENT IN JOINT VENTURES (Cont.)

The equity in profit (loss) of joint ventures for the three months ended March 31, 2024 and 2023 and the year ended December 31, 2023 was as follows (in thousands):

110 William Joint Venture:

Summarized information about the statements of financial position and the statements of profit or loss of Pacific Oak SOR SREF III 110 William, LLC (100%) (in thousands):

Pacific Oak Opportunity Zone Fund I:

Summarized information about the statements of financial position and the statements of profit or loss of Pacific Oak Opportunity Zone Fund 1, LLC (100%) (in thousands):

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NOTE 3: INVESTMENT IN JOINT VENTURES (Cont.)

The Company does not attach the financial statements related to the investment in joint ventures, as the reports do not add more information to the contained above.

353 Sacramento Joint Venture:

Summarized information about the statements of financial position and the statements of profit or loss of 353 Sacramento Street, Pacific Oak SOR Acquisition XXIX, LLC (100%) (in thousands):

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NOTE 3: INVESTMENT IN JOINT VENTURES (Cont.)

The Company does not attach the financial statements related to the investment in joint ventures, as the reports do not add more information to the contained above.

NOTE 4: FINANCIAL INSTRUMENTS

The following were the fair values of the Company's financial instruments as of March 31, 2024 and 2023, and December 31, 2023 (in thousands):

The Series B bonds contain the following covenants: (i) Consolidated Equity Capital of the Company (not including minority rights) shall not be less than USD 475 million; (ii) the Net Adjusted Financial Debt to Net Adjusted Cap (shall not exceed a rate of 75%); (iii) Adjusted NOI shall be no lower than USD 35 million; and (iv) the consolidated scope of the projects for development of the Company shall not exceed 10% of the adjusted balance. As of March 31, 2024, the Company was in compliance with all covenants under the deed of trust of the Series B Bonds; (i) Consolidated Equity Capital of the Company as of March 31, 2024 was $694.6 million; (ii) the Net Adjusted Debt to Net Adjusted Cap was 62%; (iii) the Adjusted NOI was $64.8 million for the trailing twelve months ended March 31, 2024; and (iv) the consolidated scope of projects was $0 as of March 31, 2024.

The Series C bonds contain the following covenants: (i) Consolidated Equity Capital of the Company (not including minority rights) shall not be less than USD 450 million; (ii) the Net Adjusted Financial Debt to Net Adjusted Cap (shall not exceed a rate of 75%); (iii) and the Loan to Collateral Ratio shall not exceed a rate of 75%. As of March 31, 2024, the Company was in compliance with all covenants under the deed of trust of the Series C bonds; (i) Consolidated Equity Capital of the Company as of March 31, 2024 was $694.6 million; (ii) the Net Adjusted Debt to Net Adjusted Cap was 62%; (iii) and the Loan to Collateral Ratio as of March 31, 2024 was 48%.

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NOTE 4: FINANCIAL INSTRUMENTS (Cont.)

The Company's investments in real estate equity securities are carried at their estimated fair value based on quoted market prices (Level 1) for the securities. Unrealized gains and losses are reported in finance loss from financial assets at fair value through profit or loss.

NOTE 5: SEGMENT INFORMATION

The operating segments are identified on the basis of information that is reviewed by the chief operating decision maker ("CODM") to make decisions about resources to be allocated and asses its performance. All corporate related costs are included in the strategic opportunistic properties segment to align with how financial information is presented to the CODM. The selected financial information for the reporting segments as of and for the three months ended March 31, 2024 and 2023 and as of and the year ended December 31, 2023 is as follows (in thousands):

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NOTE 5: SEGMENT INFORMATION (Cont.)

NOTE 6: SIGNIFICANT EVENTS DURING THE REPORTING PERIOD

Series B Bond Payment

In January 2024, the Company made the first principal installment payment of 388.1 million Israeli new Shekels (approximately $106.6 million as of January 31, 2024) in connection with the Company's Series B bonds. Subsequent to the first installment payment, two additional Series B Bond installments remain, each, due on January 31, 2025 and 2026, respectively.

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NOTE 6: SIGNIFICANT EVENTS DURING THE REPORTING PERIOD (Cont.)

Eight & Nine Corporate Centre Loan

In January 2024, the Company obtained an interest-only mortgage loan with a maximum principal amount of $23.5 million, of which $20.0 million was funded at the time of closing. The loan is secured by the Eight & Nine Corporate Centre office complex, has a contractual interest rate of the greater of 8.90% or a floating rate of 490 basis points over the one-month SOFR rate, has an initial maturity date of February 9, 2026, and three one-year extension options.

Sale of Financial Assets

During the three months ended March 31, 2024 the Company sold a partial interest in one of the Company's financial assets (real estate equity securities) for gross sale proceeds of approximately $14.3 million.

Park Highlands Land

In March 2024, the Company, through indirect wholly owned subsidiaries, entered into a purchase and sale agreement for the sale of approximately 454 developable acres of Park Highlands undeveloped land, from the Company's strategic opportunistic properties segment, for gross sale proceeds of approximately $195.0 million, before net closing costs, credits and taxes. A portion of the acres to be sold are pledged as collateral for an offering of Series C bonds. There can be no assurance that the Company will complete the sale. The purchaser is not affiliated with the Company or the Advisor.

NOTE 7: SUBSEQUENT EVENTS

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

Series D Bonds

In April 2024, the Company issued 288.1 million Israeli new shekels (approximately $76.2 million as of April 24, 2024) of Series D bonds (the "Series D Bonds") to Israeli investors pursuant to offerings registered with the Israeli Securities Authority. The Series D Bonds bear interest of 9.5% and have principal installment payments equal to 33.33% of the face amount due on February 28th from 2027 to 2029.

Dividend Approval

On May 16, 2024, the Company's board of directors approved a distribution of dividend in the amount of $5.0 million to the owner.

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