Pacific Oak Strategic Opportunity REIT II, Inc. to Merge with Pacific Oak Strategic Opportunity REIT, Inc. to Create a $2.6[1] Billion REIT Focused on Opportunistic Real Estate

February 19, 2020

LOS ANGELES, CA (February 19, 2020) – Pacific Oak Strategic Opportunity REIT, Inc. (“POSOR I”) and Pacific Oak Strategic Opportunity REIT II, Inc. (“POSOR II”) announced today that the companies have entered into a definitive agreement to merge in a stock-for-stock transaction, creating a combined company with approximately $2.6 billion in gross real estate and real estate-related assets.

The transaction is expected to close in the second half of 2020, subject to certain closing conditions, including the approval of the merger by POSOR II stockholders.  The combined company after the merger will retain the name “Pacific Oak Strategic Opportunity REIT, Inc.”  The merger is intended to qualify as a tax-free reorganization.

The merger agreement was negotiated on behalf of POSOR I and POSOR II by their respective special committees, each of which is composed exclusively of independent directors.  Each special committee was advised by separate independent financial and legal advisors. The board of directors of POSOR I and the board of directors of POSOR II each unanimously approved the merger.

The proposed merger is expected to deliver enhanced value to all stockholders and allow each company’s stockholders to participate in a larger, stronger and more diversified combined company. If the merger were to occur today, the combined company’s portfolio would consist of 12 office properties with 5.0 million rentable square feet and 80.0% leased occupancy (based on data as of September 30, 2019), two hotel properties, two apartment properties, one residential home portfolio consisting of 993 single-family rental homes, three investments in undeveloped land with approximately 1,000 developable acres, an investment in an office/retail property redevelopment and investments in real estate equity securities.

Potential Strategic Benefits

• Through this transaction, the gross value of real estate and real-estate related assets will be a combined $2.6 billion.  This increased scale will improve the portfolio’s diversification and should reduce risks, provide opportunities to optimize the portfolio and pursue higher-growth investments, strengthen the balance sheet and expand access to capital.
• The combined company would currently have a capital structure of 48% debt (net of cash and marketable securities) vs. 52% equity. The merger is expected to result in improved interest coverage, debt covenant compliance and ratings on bond issuances for POSOR I, the surviving entity.
• As a result of certain economies of scale from the proposed merger, the parties expect general and administrative expenses to decline as a percentage of net operating income and as a percentage of stockholders’ equity.  The external advisor to POSOR I and POSOR II agreed to waive the receipt of acquisition fees and disposition fees in the merger.

Transaction Terms

Under the terms of the merger agreement, in exchange for each share of POSOR II common stock owned, POSOR II stockholders will receive 0.9643 shares of POSOR I common stock. Upon completion of the merger, current POSOR I stockholders will own approximately 69% and current POSOR II stockholders will own approximately 31% of the combined company, on a fully diluted basis.

POSOR I and POSOR II expect to suspend payment of distributions until the joint proxy statement/prospectus for the merger has been filed with the SEC, which is expected to occur in mid- to late April 2020.  Following the filing of the joint proxy statement/prospectus, both POSOR I and POSOR II are expected to declare a “catch up” distribution to make up for this brief suspension of regular distributions and then to resume paying distributions generally in accordance with past practices. 

Each of POSOR I and POSOR II will also suspend all redemptions under their respective share redemption programs.  After the filing of the joint proxy statement/prospectus, POSOR I and POSOR II are expected to resume processing redemptions requested in the event of a stockholder’s death, qualifying disability or determination of incompetence. 

The merger agreement includes a 45-day “go-shop” provision that allows the special committee of the board of directors of POSOR II and its advisors to solicit and negotiate with other potential acquirers to determine whether they are interested in making a proposal to acquire all or part of POSOR II. Accordingly, POSOR II will solicit competing acquisition proposals through April 4, 2020.

Advisors

Houlihan Lokey acted as financial advisor to POSOR I’s special committee of the board of directors and SunTrust Robinson Humphrey, Inc. acted as financial advisor to POSOR II’s special committee of the board of directors.  Morrison & Foerster LLP acted as legal counsel to POSOR I’s special committee of the board of directors, Rogers & Hardin LLP acted as legal counsel to POSOR II’s special committee of the board of directors and DLA Piper LLP (US) acted as legal counsel to POSOR I.

About Pacific Oak Strategic Opportunity REIT, Inc. and Pacific Oak Strategic Opportunity REIT II, Inc.

Pacific Oak Strategic Opportunity REIT, Inc. and Pacific Oak Strategic Opportunity REIT II, Inc. are public, non-traded corporations headquartered in Los Angeles, California, that have elected to be taxed and currently qualify as real estate investment trusts and invest in opportunistic real estate and other real estate-related investments.